CHAPTER: 1 INTRODUCTION OF FISCAL POLICY AND FOREIGN TRADE Introduction of fiscal policy In economics and political science, fiscal

policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and changes in the level and composition of taxation and government spending can affect the following variables in the economy: Aggregate demand and the level of economic activity; The distribution of income; The pattern of resource allocation within the government sector and relative to the private sector. Fiscal policy refers to the use of the government budget to influence economic activity. Stances of fiscal policy: The three main stances of fiscal policy are: Neutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.

 Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt. However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes. Therefore, for purposes of the above definitions, "government spending" and "tax revenue" are normally replaced by "cyclically adjusted government spending" and "cyclically adjusted tax revenue". Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance. Methods of funding: Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

Taxation Seigniorage, the benefit from printing money Borrowing money from the population or from abroad Consumption of fiscal reserves Sale of fixed assets (e.g., land)

MEANING OF FOREIGN TRADE: The definition of foreign trade is the export of all goods and services to foreign countries and the import of all goods and services to the home country. You will probably find a lot of data on the website of the Indian Government, especially the foreign affairs and economy departments. Foreign Trade Policy is about a country's decision on which other countries they will do business with. In the case of the U.S. we have NAFTA (North American Free Trade Agreement). Congress decides what countries we "trade" with, although the forethought of how much or little was apparently not addressed. This is why we have a huge deficit with China. They import more of their products to us than we export to them. So, they make more money on what they send to the U.S. but they do not buy an equal amount of what we send to them. This is where regulation should be interjected. President Clinton signed NAFTA into law with the idea it would be good for the U.S. to send products abroad, keeping the American worker on the job. However it backfired because of the cheap imports from countries like China, our workers were laid-off and companies went out of business because Americans were attracted to the low prices of goods coming from other countries. Wal-Mart is the best example of how China is crippling our economic situation. Wal-Mart is the largest importer of foreign products and is the largest customer to China. Look at 10 items in that store and 9, if not all 10 will have been made in China. As long as we buy Chinese goods, our workers will continue to suffer job losses. China's Foreign Trade Policy seems to be to sell a certain product under its cost, until and American company making the same product goes out of business due to retail price. Then, China raises the price of that same product knowing it will
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still sell, because the American company that used to make that product is no longer in business. This is an ingenious way to take over American businesses. Presidential candidate Barack Obama has promised to regulate NAFTA so that it is fair. He states he will forbid the outsourcing of automobiles to any other country and to only trade with countries that import and export equally. If this becomes the case, then for every dollar WalMart sends to China, then China will have to buy the same amount of dollars of our goods. Foreign Trade Policy does not in itself mean it has to be fair. It simply means two or more countries agree to trade goods from each country to the other. To understand the role of foreign trade in the Indian economy, you have to understand the importance of foreign trade for any country. I'll explain this with a simple example: Imagine that there are only two countries in the world, India and Denmark. Both countries have 1 000 citizens. These citizens eat only bananas and drink only milk (let's say they only eat banana-milkshakes). Each country needs 50 000 bananas and 50 000 litres of milk to feed it's population. In India, the weather is good, the sun shines a lot so bananas grow easily. Therefore, one Indian can produce 100 bananas per year. But India is also a dry country, so the cows in India don't produce much milk. Therefore one Indian can only produce 50 liters of milk per year. In Denmark, the weather isn't sunny, so bananas don't grow easily. Therefore, one Dane can only produce 50 bananas per year. On the other hand is Denmark a perfect place for cows, because it is a very green country. Therefore, one Dane can produce 100 litres of milk per year.
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Let's suppose that their is no foreign trade in our two-country-world. Denmark will produce 50 000 litres of milk and will use 500 inhabitants to do this. The other 500 Danes will be used to produce bananas, resulting in a production of 25 000 bananas (500 workers x 50 bananas per worker). So Denmark will come 25 000 bananas short to feed it's population. India will produce 50 000 bananas (using 500 workers) and 25 000 litres of milk (using the other 500 workers), and also India will not be able to feed it's population. So without foreign trade, both countries will not be able to produce enough food for the population. No suppose that there is foreign trade between India and Denmark. Now both countries can produce the goods that they are best in, bananas for India and milk for Denmark. The 1000 workers in India will be able to produce 100 000 bananas. They only need 50 000, so the other 50 000 will be exported to Denmark. The 1000 workers in Denmark will be able to produce 100 000 litres of milk. They only need 50 000 litres, so the other 50 000 litres will be exported to India. As a result of this foreign trade, both countries will have enough food to feed their population. This example makes two things clear. One: foreign trade is for the benefit of all countries. Two: when there is foreign trade, you will specialize in the production of those goods in which you have an advantage to produce them. Now let's focus on India. The role of foreign trade on the Indian economy is now easy to determine:
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First of all, foreign trade has made India richer. Products which are difficult to produce for India (engines,) can be imported, which is good for the Indian economy. Second of all, and this is without doubt the biggest influence on the Indian economy, the rise of foreign trade has forced India to specialise in the production of a few goods. These are mainly ores (the Indian mines), foodproducts and cheap products that are easily built using cheap labour. So India has been one of those countries which competes with other economies by producing labour intensive products. This has had a great influence on Indian economy, because it implies a partial shift from agriculture to industrial production.

CHAPTER: 2 Main Objectives of Fiscal Policy In India:

The fiscal policy is designed to achive certain objectives as follows :1. Development by effective Mobilization of Resources: The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilization of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by : Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. Private Savings : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial Resources: The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable. 3. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society. 4. Price Stability and Control of Inflation: One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. 6. Balanced Regional Development: Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc. 7. Reducing the Deficit in the Balance of Payment: Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export.

8. Capital Formation: The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending. 9. Increasing National Income: The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country. 10. Development of Infrastructure: Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings: Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

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CHAPTER: 3 Economic effects of fiscal policy:

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand, and decreasing spending & increasing taxes after the economic boom begins. Keynesians argue this method be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment. In theory, the resulting deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal. Governments can use a budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices. In the wake of the Great Recession that started in the United States after 2007, liberal economists have developed renewed arguments in favor of Rooseveltian economic policiesnotably a degree of federal stimulus spending across public infrastructures and social services that would benefit the nation as a whole and put America back on the path to long term growth. But economists still debate the effectiveness of fiscal stimulus. The argument mostly centers on crowding out: whether government borrowing leads to higher interest rates that may offset the
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stimulative impact of spending. When the government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or monetizing the debt. When governments fund a deficit with the issuing of government bonds, interest rates can increase across the market, because government borrowing creates higher demand for credit in the financial markets. This causes a lower aggregate demand for goods and services, contrary to the objective of a fiscal stimulus. Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective especially in a liquidity trap where, they argue, crowding out is minimal. Some classical and neoclassical economists argue that crowding out completely negates any fiscal stimulus; this is known as the Treasury View[citation needed], which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by some neoclassical economists up to the present. In the classical view, the expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income. When government borrowing increases interest rates it attracts foreign capital from foreign investors. This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return. In other words, companies wanting to finance projects must compete with their government for capital so they offer higher rates of return. To purchase bonds originating from a certain country, foreign investors must obtain that country's currency. Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for

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that country's currency increases. The increased demand causes that country's currency to appreciate. Once the currency appreciates, goods originating from that country now cost more to foreigners than they did before and foreign goods now cost less than they did before. Consequently, exports decrease and imports increase. Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who otherwise would have had a job, the stimulus is increasing labor demand while labor supply remains fixed, leading to wage inflation and therefore price inflation. (1) Fiscal Policy Affect the Macro Economy: Fiscal policy affects aggregate demand, the distribution of wealth, and the economys capacity to produce goods and services. In the short run, changes in spending or taxing can alter both the magnitude and the pattern of demand for goods and services. With time, this aggregate demand affects the allocation of resources and the productive capacity of an economy through its inuence on the returns to factors of production, the development of human capital, the allocation of capital spending, and investment in technological innovations. Tax rates, through their effects on the net returns to labor, saving, and investment, also inuence both the magnitude and the allocation of productive capacity.

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Macroeconomics has long featured two general views of the economy and the ability of scal policy to stabilize or even affect economic activity. The equilibrium view sees the economy quickly returning to full capacity whenever disturbances displace it from full employment. Accordingly, changes in scal policy, or even in monetary policy for that matter, have little potential for stabilizing the economy. Instead, inevitable delays in recognizing economic disturbances, in enacting a scal response, and in the economys reacting to the change in policy can aggravate, rather than diminish, business-cycle uctuations. An alternative view sees critical market failures causing the economy to adjust with more difculty to these disturbances. If, for example, consumers were to reduce their current spending in order to consume more in the future, producers, who would not know the consumers future plans for want of the appropriate futures markets for goods and services, would see only an indenite drop in demand, and this might encourage them, in turn, to reduce their hiring and capital spending. In this world, changes in scal and monetary policyhave greater potential for stabilizing aggregate demand and economic activity. How the economy reacts to scal policy depends on whether it is at full employment or operating below its full capacity. (2) Effects of a Tax Cut on Consumer Spending: To illustrate the importance of the difference in these two views for scalpolicy stabilization, consider the effects of a cut in personal taxesa classic countercyclical scal-policy action. Lower taxes, everything else being constant, increase households disposable income, allowing consumers to increase their spending. The consequences of the cut-how much is spent or

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saved, and the response of economic activitydepend on the way households make their decisions and on prevailing macroeconomic conditions. For example, whether the tax cut is perceived to be temporary or permanent will inuence how much consumers save. A temporary cut when the economy is at full employment will alter households lifetime disposable income relatively little, and so might have little effect on consumption. If the cut is, instead, perceived to be permanent, then households will perceive a larger increase in their lifetime disposable income and so will likely increase their desired consumption by much more than they would if they thought the cut were temporary. So far, we have been considering the effect of a tax cut on households consumption expenditures with everything else held constant. However, lower taxes will increase the governments scal decit. Suppose that the economy tends to remain near full employment and that households do not expect their disposable income to rise any higher than it would have risen without the change in scal policy. Even if the tax cut is longlasting, many will conclude that future taxes will need to be higher than they otherwise would have been in order to retire the extra public debt resulting from the tax cut. In the extreme case, households will not feel that their disposable income has risen, because they have completely internalized the increase in the public debt arising from the tax cut, treating it as though it were equivalent to personal debt. Yet even in the full-employment view, consumption might increase as a result of the tax cut if capital markets are imperfect. Consumers who are liquidity constrained, living from paycheck to paycheck, will likely increase their spending even if they internalize the public debt. So the
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effect of the tax cut will depend on its incidence over different types of taxpayers. Consumption will also increase if the government can borrow at a lower rate of interest than the consumer. However, consumption can increase more signicantly when the economy is not at full employment and if the tax cut is seen as an instance of a continuing scal policy that stabilizes economic activity, or if the tax cut otherwise raises households expected income by increasing the economys future productive capacity. Although the tax cut entails an increase in public debt, higher current and future income diminishes the burden of servicing or repaying this debt. In this case, the tax cut is essentially an investment in a public good that redounds to the benet of households. (3) Effects on Interest Rates, Capital Formation, and International Capital Flows: Over time, an increase in the budget decit resulting from a tax cut will increase the public debt. That increase raises important issues concerning the long-run effects of the tax cut on interest rates, capital investment, and future economic welfare. The rich range of possible consequences makes this a very controversial and interesting topic. Fiscal policies that increase the decit will result in future taxes being higher than they otherwise would have been, but, depending on the policies effects on incentives for investing in human or physical capital, they might also raise future living standards. Policies that absorb slack resources or foster investment might reduce government saving, as reected in the greater budget decit, while they increase total saving, as reected in the greater rate of capital formation. This additional saving might be supplied by the increase in national income, or it

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might come from foreign sources. Policies that fail to raise income and investment not only reduce government saving, but also reduce total saving. When the economy is at full employment and a tax cut today is expected to be offset by a tax increase in the future, as discussed above, lower taxes do not necessarily increase consumption spending. In this extreme case, the increase in the governments decit will be matched by an increase in private saving. As a result, national saving, interest rates, and investment spending will be much the same as if there had been no change in scal policy. If, instead, consumers spend much of their additional disposable income while the economy is already at full employment, personal saving will not rise sufciently to offset the drop in public saving, interest rates will rise, and investment spending will decline, unless business saving (resulting from the additional consumption spending) or capital inows from abroad increase sufciently to make up the difference. If the economy is not at full employment, national income might expand as a result of the cut, providing additional income-tax receipts and saving, and thereby preventing a drop in national saving. In either case, a tax cut that increases the return on capital can increase business saving and attract, for a time, an inow of foreign saving sufcient to maintain total saving and investment. If, however, scal policy depresses investment, then both the capital stock and economic output will be lower in the future than they otherwise would have been. The lower capital stock will tend to be accompanied by real interest rates that are higher than they otherwise would have been. If capital inows from abroad increase sufciently to offset any drop in national saving resulting from a change in scal policy, then investment need not fall. In this case, the current account

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decit, which is equal to the quantity of capital inows from abroad, will increase at least enough to offset the increase in the budget decit less the induced increase in private saving. The future levels of the capital stock and real output will not fall, but future domestic consumption will be reduced because an increased share of the return to capital will accrue to foreign nationals unless the scal policy fosters a greater utilization of the stock of capital, greater capital formation, or greater net returns on capital to compensate for the outow. The concurrent large budget and current account decits that occurred in the early 1980s and again in the last few years have led many to believe that increases in the current account decit would generally accompany large increases in the budget decit, and gave rise to the term twin decits.

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CHAPTER: 4 FOREIGN TRADE POLICY: Export Performance and the Foreign Trade Policy (FTP): In the wake of global economic slowdown, Indias merchandise exports faced significant adverse impact. Exports, which had grown by 48.1% during April to September, 2008, suffered a decline during the next 12 months from October, 2008 to September, 2009, due to the shrinkage of the demand worldwide and particularly the contraction in demand in the traditional markets of our exports. In May, 2009, the exports declined by as high as 34.2% in US$ terms. The downward trend was arrested from October, 2009 onwards and our exports ended up with an export figure of US$ 178.75 billion in 2009-10 against US$ 185.30 billion in 2008-09, which indicates an overall decline of 3.5% in dollar terms. The growth in exports since October, 2009 can be attributed to growth in some sectors, but is primarily due to the lower base effect of the exports in the corresponding months of previous financial year. This year, exports have registered a growth of about 27% in US$ terms and it is expected that we exceed the merchandise export target of US$ 200 billion by the end of 2010-11. Foreign Trade Policy, 2009-14: The Foreign Trade Policy (FTP), 2009-14 was announced on 27th August, 2009 in the backdrop of a fall in Indias exports due to global slowdown. The immediate and the short term objective of the policy was to arrest and reverse the declining trend of exports as well as to provide additional support especially to those sectors

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which were hit badly by recession in the developed world. The Policy envisaged an annual export growth of 15 per cent with an annual export target of US $ 200 billion by March 2011 and to come back on the high export growth path of around 25 per cent per annum in the remaining three years of this Foreign Trade Policy i.e. up to 2014. The long term policy objective for the Government is to double Indias share in global trade by 2020. As an immediate relief, the Government provided a policy environment through a mix of measures including fiscal incentives, institutional changes, procedural rationalization, and efforts for enhanced market access across the world and diversification of export markets. Towards achieving these objectives, several steps were announced in the Policy. Some of the important steps includedaddition of new markets under the Focus Market Scheme, coverage of Africa, Latin America and large part of Oceania under Focus Market Scheme (FMS) and the Market Linked Focus Product Scheme (MLFPS), increase in incentives available under the Focus Market Scheme from 2.5% to 3% and for Focus Product Scheme (FPS) and MLFPS from 1.25% to 2%, introduction of EPCG Scheme at zero duty for specified sectors, and the grant of additional duty credit scrip to status holders.

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Union Minister of Commerce & Industry, Sh. Anand Sharma, Minister of State of Commerce & Industry, Sh. Jyotiraditya Scindia and Commerce Secretary, Dr. Rahul Khullar at the release of Foreign Trade Policy (2009-14) on 27th August, 2009

Thereafter, as promised in FTP, to continue regular interaction with stakeholders to maintain a close watch on the performance of the policy in the field, a number of interactions were held with members of Board of Trade, Open Houses with exporters and sectoral reviews with EPCs. Constant dialogues were held with all key stakeholders in industry and the exporting community for sectoral assessment of exports at regular intervals. The first review was undertaken in December 2009 and thereafter in February 2010, which demonstrated that some sectors were still facing difficulties. Need-based additional support measures were announced in January, 2010, March, 2010 and on 11th February, 2011 for certain product groups /
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products. The recovery has been fragile and economies around the world are still emerging out of the shadows of a grim recessionary period. The IMF projections indicate that the world economy is recovering at varying speeds for different regions. Though, there had been marginal improvement in some of the developed economies like US, UK, Germany, France, Japan etc., the nervousness continued in the markets about the fiscal situation and sovereign indebtedness in several high income countries of Europe. In this setting, it was expected that the developed countries would aim at economic recovery through consolidation and export led growth, which would pose a challenge to Indian exporters in accessing overseas markets for their products. The uncertainty surrounding Indian exporters prospects, therefore, continued to linger. Though the exports growth moved towards the positive trajectory from October, 2009 onwards, our exports were not yet out of the woods. Under this global situation of slow recovery, it was necessitated to take stock of the situation so as to make mid course corrections. Accordingly, sectoral reviews were continued in the current financial year 2010-11, and the first such review for 2010-11 was undertaken in July 2010. It was observed that despite the measures announced in the FTP and additional support extended in January and March, 2010, some sectors continued to face difficulties. It was also realized that there was a shroud of uncertainty continuing over the fragile nature of global economic recovery. Even as global economic rebalancing had been proceeding apace, it was not going to be an easy patch for Indian exporters. In view of resource constraints, it was not simply possible to sustain support to all sectors and there was need to calibrate the support measures appropriately. On the other hand, exports of certain products had been placed under restriction in view of domestic situation i.e. inflationary pressures and unemployment. It was
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also essential to be conscious of the need for and the inevitability of fiscal consolidation. Keeping all these factors in mind and based on the sectoral review held in July, 2010, need based additional initiatives were undertaken in the Annual Supplement 2010-11 to FTP 200914, announced on 23rd August, 2010. While emphasis on stability of policy regime was continued, additional measures were announced to support exports particularly for the labour intensive sectors. In order to promote technological upgradation, zero duty EPCG and Status Holder Incentive Schemes were expanded and validity extended. It will add to expansion and modernization of production base at a time when investment is drying up in export industry

The Commerce Secretary, Dr. Rahul Khullar briefing the press after releasing the Strategy Paper for the growth of Auto and Auto Component Exports: 2010-2014, in New Delhi on April 28, 2010.

A new facility of Annual EPCG authorization was introduced. While exports have shown a rising trend during the last few months, certain sectors are still not out of woods. Further, fragile
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economic recovery and consequent slower demand growth in the developed markets has necessitated greater emphasis on improving the competitiveness of our exports. To access the export performance of various sectors, second sectoral performance review was conducted during November-December, 2010. Accordingly, to enhance competitiveness for products which are labour intensive, technology intensive and value added, further export incentives were undertaken on 11th February, 2011 for more than 600 products for sectors viz. Agriculture, Chemicals, Carpets, Engineering, electronics and plastics. In addition, as a continuing endeavor for procedural simplification and trade facilitation, a few measures were taken. Trade Policy Measures taken under Foreign Trade Policy 2009-14 and thereafter: A. Market and product diversification and expansion of markets: 1. Measures undertaken in FTP 2009-14, January / March, 2010 and in Annual Supplement, 2010-11: 27 new markets added under Focus Market Scheme (FMS) with incentive of duty credit scrip @ 3% of exports. Market Linked Focus Product Scheme (MLFPS) with incentive of duty credit scrip @ 2%, has been significantly broadened by inclusion of a large number of products linked to their markets. Full Africa, Latin America and large part of Oceania covered under FMS & MLFPS (13 countries added in MLFPS at the time of release of FTP, 2009-14 in August, 2009 and 2 countries added in January, 2010).
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 The incentive available under FMS has been raised from 2.5% to 3%; and for Focus Product Scheme (FPS) & MLFPS from 1.25% to 2%; and Special Focus Products Scheme @ 5%. Additional benefit of 2% bonus, over and above the existing benefits of 5% / 2% under FPS, allowed for about 135 existing products, which had suffered due to recession in exports. Major sectors include all Handicrafts items, Silk Carpets, Toys and Sports Goods (all of which were earlier eligible for 5% benefits), Leather Products and Leather Footwear, Handloom Products and some of the Engineering Items including Bicycle parts and Grinding Media Balls (all of which were earlier eligible for 2% benefit). 256 new products added under FPS (at 8 digit level), which became entitled for benefits @ 2% of FOB value of exports to all markets. Major Sectors / Product Groups covered are Engineering, Electronics, Rubber & Rubber Products, Other Oil Meals, Finished Leather, Packaged Coconut Water and Coconut Shell worked items. Instant Tea and CSNL Cardinol included for benefits under Vishesh Krishi and Gram Udyog Yojana (VKGUY) @ 5% of FOB value of exports. Nearly 300 products (at 8 digit level) from the readymade garment sector incentivised under MLFPS for further 6 months from October, 2010 to March, 2011 for exports to 27 EU countries.

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II. Additional measures announced on 11th February, 2011: Under Market Linked Focus Product Scheme (MLFPS):- 335 New Products incentivised under MLFPS at 8 digit level, eligible for benefits @ 2% of FOB value of exports to 15 specified markets like Agricultural Tractors of more than 1800 cc, all inorganic chemicals and inorganic / organic compounds of metals, Flexible Intermediate Bulk Containers and Narrow Woven Fabrics; 71 new products of Chapter 63 (Textile Made ups) at 8 digit level for exports to EU (27 Countries). Under Focus Product Scheme (FPS):- 147 products incentivised for Bonus Benefits (additional 2%) under FPS at 8 digit level, henceforth eligible for benefits @ 4% or 7% of FOB value of exports to all markets. These includes Engineering items, Electronic items, Stationery items, Handmade carpets and other Floor Coverings under Chapter 57 (7%); 57 New products incentivised under FPS at 8 digit level, eligible for benefits @ 2% of FOB value of exports to all markets. These include products from Sectors viz. Engineering, Chemical, paper products etc. Under Special Focus Products Scheme (SFPS), Egg powder included for benefit @ 5% of FOB value of exports. Under Vishesh Krishi and Gram Udyog Yojana (VKGUY), 6 New products (Castor Oil Meal Defatted Variety and Instant Coffee)

incentivised under VKGUY at 8 digit level, eligible for benefits @ 5% of FOB value of exports to all markets.
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B. Support for Technological up-gradation Zero duty Export Promotion Ca pital Goods (EPCG) scheme and Status Holder Incentive Scrip (SHIS) scheme introduced in 2009 for limited sectors and valid for only 2 years initially, extended by one more year till 31.3.2012 and the benefit of the scheme expanded to additional sectors. 3 Additional Towns of Export Exce llence (TEEs) announced, bringing the list upto 24.

C. Availability of concessional Export Credit: Interest subvention of 2 per cent extended upto March 2011 for certain labourintensive sectors of exports namely handloom, handicrafts, carpet, SMEs and a few products from the sectors namely engineering, textiles, leather and jute. Interest rates on export credit in foreign currency reduced to LIBOR + 200 basis points in February 2010 from the earlier LIBOR+350 basis points.

D. EOUs / STPIs: Section 10A and 10B (Sunset clauses for STPI and EOU schemes respectively), extended for the financial year 2010-2011. Anomaly removed in Section 10AA relating to taxation benefit of unit vis-a-vis assessee. E. Services:

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 FTP also provided fillip to services sector (Hotels) by doubling duty free entitlement under Served From India Scheme (SFIS) from 5% to 10% of foreign exchange earnings.

F. Others: Duty Entitlement Passbook (DEPB) scheme extended beyond 31.12.2010 till 30.06.2011. Time period of export realization for non-status holder exporters increased to 12 months, at par with the Status holders. This facility has been extended upto 31.3.2011. Advance Authorization for Annual Requirement now exempted from payment of Antidumping & Safeguard duty. The Scheme has been made more flexible for import of required inputs. Value limit on duty free import of commercial samples enhanced from Rs. 1 lakh to Rs. 3 lakh per annum. DEPB and Freely Transferable Incentive Schemes provisionally allowed without awaiting receipt of Bank Realisation Certificate (BRC). Export Obligation Period under Advance Authorization Scheme enhanced from 24 months to 36 months without payment of composition fee. To facilitate tracing and tracking of pharmaceutical products and hence to provide assurance about the quality of Indian pharma products to prospective importers, requirement of affixing bar codes has been made mandatory w.e.f. 01.07.11. A new facility of Input combination for pharma products manufactured trough NonInfringing process, allowing actual quantum of duty free inputs required for
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manufacturing such export product, has been introduced. This will facilitate pharma manufacturers to work towards getting a major share of exports of such products to potential regulated markets such as US or EU. Facilitation of Trade through various Electronic Data Interchange (EDI) initiatives taken on online message exchange facility. Additional facility of filing online application for obtaining IEC introduced.

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CHAPTER: 5 ADVANTAGE AND DISADVANTAGE OF FISCAL POLICY AND FOREIGN TRADE: (a) The Advantage and Disadvantage of fiscal policy: Following are some important merits or contributions of fiscal policy of Government of India. Capital formation: Fiscal policy has played a very important role in raising the rate of capital in country-in private as well as public sector. A major part of budgetary resources has been invested in Public Sector enterprises which have resulted in increase in gross domestic capital formation as percent of GDP from 10.2 percent in 1950-51 to 22.9 in 1997-98 and to 23.7 percent in 2001-02. Resource Mobilisation: - Fiscal policy has helped to mobilize resources through taxes, savings, public debt etc. for economic development of the country. Resources mobilisation which was 70% in 1965-66 has increased to 90% in 20012002. Incentives to Private Sector: - Private sector has been encouraged under fiscal policy for investment and production. Tax concessions, such subsidies exemptions in taxes have been given as incentives to private sector units set up in backward areas and expert oriented units. Similarly subsidies and tax concessions have also been given to encourage imports and as a result it has affected exports and imports of the country. Encourage Savings: - Various incentives have been given to raise the rate of savings in household and corporate sector. To encourage savings in household

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sector various concessions and tax benefits have been given on fixed deposits, life insurance schemes, Kisan Vikas Patras (KVPs), National Saving Certificates (NSCs), provident funds etc. savings have been encourage in corporate sector by offering them tax concessions and tax exemptions. Poverty alleviation and Employment Generation: -To fulfill one of its major objectives of providing full employment, allocation of huge amount has been made in fiscal policy to eradicate poverty and generate employment. For this a huge amount has been spent on different schemes like twenty point programme, Integrated Rural Development Programme (IRDP), Jawahar Rpzgar Yojana (JRY) etc. Reduction in Inequality of Income and Wealth: -Fiscal Policy of the country has been making constant endeavour to reduce inequality of income and wealth. Resources have been mobilized from rich class to poor by way of progressive taxes, wealth tax, corporation tax and capital gain tax etc. and this money has been utlised for the welfare of poor people. Export Promotion: - Export has been encouraged by way of providing subsidies, concessions, tax exemptions, cash subsidies etc. Exports have shown a rise from 4.5 percent in 1960-61 to 23.4 percent in 2001-2002. Import duty on raw material and capital goods used for production of goods meant for export has also reduced with a view to encourage exports.

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 Drawbacks/shortcomings/Limitations of fiscal policy: No doubt fiscal policy acts as an important tool for price control, control over Government expenditure but still the smooth functioning of fiscal policy is not possible in countries like India because of following limitations. Lack of Elasticity: - In countries like India tax system is not that elastic as it is supposed to be. Moreover in these economies because of huge tax evasion, it is difficult to earn revenue from taxes. The spread of tax is very few. Non Monetised Sector: - Although each and every activity is now awarded in terms of money, but still a major part of economy of UDC's like India is not monetised. In this part fiscal policy remains unaffected. Inadequate Statistics: - In the countries like India adequate and reliable date is not available. Because of non-availability of reliable and accurate data, the area of fiscal policy remains unaffected. Illiteracy: - Most of the population of India is either illiterate or not in a position to understand economic policies and is implications, that is why they are not able to evaluate the importance of fiscal policy and, therefore, they also try to evade taxes. Limited Sector: - Fiscal policy only affects a few sectors of the economy. Most of the sectors remain untouched e.g. burden of taxes on salaried person whereas big businessmen hardly pay any taxes in spite of high income levels.

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Delay in decision: - Fiscal policy decision needs approval by the Government. A lot of time required for approvals, that is why decisions are not taken at proper time.

Limitations regarding full employment: - As a result of fiscal policy in connection with full employment wage rate increases. Increases in wage rate results into increase in prices instead of increase in production. Employment multiplier decreases and desired increase in employment does not take place. Structural unemployment cannot be tackled by fiscal policy.

Defective Tax Structure: - The country been relying more on indirect taxes ultimately affecting poor persons. Contribution to direct taxes has been declining and that of indirect taxes rising.

Inflation: - As a result of increase of public expenditure on non-development heads and deficit financing pull inflation has taken place. Also high rate of indirect taxes has resulted in cost push inflation. High rate of direct taxes and increase of black money in the country has given rise to parallel economy and increase in inflation.

Huge investment with negative return in public sector: - Huge investments in public sector have become sunk money now because of failure of public sector. Investment of Rs.2,04,054 crore was made in public sector enterprises in 1998 and Rs.3,03,400 crore in 2001. Return on this investment has been very low. Also takeover of sick textile mills by government has further increased public

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expenditure. Huge amount has to be spent to keep such undertakings going thus making the resources of country scarce. (b) The advantages and disadvantages of foreign trade: The trade between two or more nations is termed as foreign trade or international trade. It involves exchange of goods and services between the trades of two countries. Foreign trade consists of import trade, export trade and entrepot trade. In the early stages of human civilization, production was confined as per consumption. Human wants were limited. Now-adays, human wants are increasing and as such no man was considered to be self-dependent. Like this no country can live in isolation and claimed the status to be self-sufficient. Because of this reason countries have trade relationships with each other. The primary objective of foreign trade is to increase foreign trade and increase the standard of living of its people. There is an increasing demand for foreign trade because of the following reasons: The natural resources are unevenly distributed. The presence of specialization and division of labour. Different countries have difference in economic growth rate. The presence of the theory of comparative cost.

The following are some of the advantages of foreign trade: Optimum use of Resources: Foreign trade helps in the optimum use of natural resources and avoid wastages of resources.

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Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. It tries to equalise the world price.

Availability of all types of goods: It enables a country to import those goods which it cannot produce.

Increased Standard of living: It ensures more production to meet the demand of the people of different countries. By increased production, it becomes possible to increase income and the standard of living of its people. It also increase the standard of living by increasing more employment opportunities.

Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market. Large scale production also ensures a great deal of internal economies which reduces the cost of production.

Foreign trade is not free from difficulties. The following are some of the important difficulties of foreign trade: It is a long distance trade and as such it becomes difficult to maintain close relationship between the buyer and the seller. Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade. Foreign trade involves preparation of a number of documents which also creates difficulties in the way of foreign trade.
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Some restrictions are imposed on export and import of commodities. These restrictions stands on the progress of foreign trade.

Foreign trade involves a great deal of risks because trade takes place over a long distance. Though the risks are covered through insurance, it involves extra cost of production becuase insurance cost is added to cost.

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CHAPTER: 6 CONCLUSION: This project assesses the effects of fiscal policy on economic activity in India over the last decade and half and finds that fiscal policy can play an effective countercyclical role. The results also have implications for the design of fiscal consolidation plans going forward. In particular, our finding suggest that expenditure reform aimed at curtailing the growth of spending may be preferable to tax increases because the latter may have larger (negative)effects on growth over the longer term. The findings also shed light on the nature of crowding out and the need for careful dynamic scoring of fiscal plans. The inclusion of debt in the empirical models and further analysis of the effects on fiscal shocks and announced fiscal measures on aggregate demand components are important issues for future research.

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CHAPTER: 7 Recommendation:
Duty enabled passbook scheme needs to be continued especially for chemicals and pharmaceuticals sectors and suggested that tax holidays for EoUs which are set to be withdrawn from 2009-10 ought to be continued to maintain the viability and competitiveness of EoUs in the international market. The procedures can be simplified through more use of automation and information technology. It is also essential to have better coordination among different government agencies dealing with exports and imports. Modern best practice calls for a system, which ensures selfcompliance and maintenance of records (payment of tax, fees etc.) by exporters and importers for posttransaction audits of records. Recommends measures to cut high transaction costs by streamlining infrastructure in the existing EoUs with SEZs. It has suggested that there should be a provision in FTP for transfer of utilities from EoUs to SEZs to create common facilities which would reduce transaction costs. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.

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CHAPTER: 8 Bibliography:

Website: http://commerce.nic.in http://www.indianexpress.com http://www.publishyourarticles.net/knowledge-hub/business-studies http://business.mapsofindia.com/india-policy/foreign-trade-policy.html http://en.wikipedia.org/wiki/Fiscal_policy http://www.google.com

BOOKS AND NEWSPAPERS: Newspapers Magazines (4P, Business India) Times of india

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