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FOREIGN TRADE POLICY FDI FII AND MNCS IN INDIA INTERNATIONAL INSTITUTIONS THE INDIAN ECONOMY

ANKITA SURESH BHAVANA B GAIKWAD MOHAMMED HISHAM S A PANCHAM CHANDA

POOJA PAHWA
SIDDHANT AGARWAL

CONTENTS
FOREIGN TRADE POLICY FDI FII AND MNCS IN INDIA INTERNATIONAL INSTITUTIONS THE INDIAN ECONOMY

Foreign Trade Policy

Foreign Trade Policy is about a country's decision on which other countries they will do business with. The Union Commerce Ministry, Government of India announces the integrated Foreign Trade Policy FTP in every five year. This is also called EXIM policy. The Foreign Trade Policy which was announced on August 28, 2009 is an integrated policy for the period 2009-14. This policy is updated every year with some modifications and new schemes. New schemes come into effect on the first day of financial year i.e. April 1, every year.

Objectives of Foreign Trade Policy 2009-14

Short term objective is to arrest and reverse declining trend of exports is the main aim of the policy. Long term objective is to Double India's exports of goods and services by 2014. To double India's share in global merchandise trade by 2020 as a long term aim of this policy.

Key Strategies
Reduce controls on trade and create an atmosphere of trust and transparency; Simplifying procedures and bringing down transaction costs; Neutralizing incidence of all levies on inputs used in export products; Facilitating development of India as a global hub for manufacturing, trading and services and upgrading the infrastructure network related to the entire foreign trade chain to international standards Identifying and nurturing focus areas to generate additional employment opportunities, particularly in semi-urban and rural areas

Facilitating technological and infrastructural up gradation of the Indian economy, especially through import of capital goods and equipment and ensuring that domestic sectors are not disadvantaged in trade agreements

Sectors as Focus for Expansion by FTP

The FTP has identified certain thrust sectors having prospects for export expansion and potential for employment generation. These thrust sectors include:
(i) Agriculture "Vishesh Krishi Upaj Yojana" to qualify exports of fruits, vegetables, flowers, minor forest produce and their value added products for duty free credit entitlement. Liberalization of import of seeds, bulbs, tubers and planting material and liberalization of the export of plant portions, derivatives and extracts to promote export of medicinal plants and herbal products. Handlooms & Handicrafts Enhancing to 5% of Free On Board value of exports, duty free import of trimmings and embellishments for handlooms and handicrafts. Exemption of samples from countervailing duty.

(ii)

(iii) Gems & Jewelry Permission for duty free import of consumables for metals other than gold and platinum up to 2% of Free On Board (f.o.b) value of exports and Increase in duty free import of commercial samples of jewellery to Rs.1 lakh (iv) Leather & Footwear Increase in the limit for duty free entitlements of import trimmings, embellishments and footwear components for leather industry to 3% of f.o.b value of exports and 5% for specified items of leather.

 More Share of GNP India's foreign trade has great significance for its GNP. In 2001-02 it constituted 23.4% of GNP. Less Percentage of World Trade India's share in world trade has been sliding down* Change in Composition of Exports Before; agricultural products and raw materials. Now: various types of finished products Change in the Composition of Imports Before: finished products of medicines, cloth, motor vehicles, etc. Now: petrol, machines, raw materials, steel, oil etc. Dependence on Few Ports Before: Bombay, Calcutta, Madras. Now: three more ports viz; Kandla, Cochin and Vishakhapatnam. Balance of Trade Before: Favorable. Now: Unfavorable. Foreign Trade by Government State Trading Corporation (1946), Minerals and Metal Trading Corporation (1963) Oceanic Trade About 68% of India's trade is by sea.

FDI
FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.

MODES OF FDI
FDI

BY DIRECTION

BY TARGET

BY MOTIVE

INWARD

MERGERS AND ACQUISITIONS HORIZONTAL FDI

RESOURCESEEKING MARKETSEEKING EFFICIENCYSEEKING

OUTWARD

VERTICAL FDI

Advantages of FDI
Increase economic growth by dealing with different international products 1 million (1 Crore) employment will create in three years UPA Government Billion dollars will be invested in Indian market Spread import and export business in different countries Agriculture related people will get good price of their goods

Disadvantages of FDI
Will affect 50 million merchants in India Profit distribution, investment ratios are not fixed An economically backward class person suffers from price raise Retailer faces loss in business Market places are situated too far which increases traveling expenses Workers safety and policies are not mentioned clearly

Inflation may be increased

Again India become slaves because of FDI in retail sector

Factors Affecting FDI

Financial incentives (Funds from local Government)

Fiscal incentives (Exemption from import duties)

Indirect incentives (Provides land and other resources) Political stability (the government should not change often) Market potential & accessibility (stock exchange value and how easily they can release the product and demand of product)

Large economy (the size of the economy which depends on currency exchange etc.)
Market size(The demand for the product)

Foreign Direct Investment Policy (two types)

AUTOMATIC ROUTE
Allowed for Most sectors Limits : Sectorial caps/ stipulated sector specific guidelines Inward remittances(a payment of money sent to a person in another place) through proper banking channels Pricing valuations prescribed Post facto filing with 30 days of fund receipt Filings within 30 days of share allotment Includes Technical Collaboration/ Brand Name/ Royalty

GOVERNMENT ROUTE
Only for cases other than Automatic Route and those mentioned in sectorial policy Applies to cases with existing venture/ tie up in same filed Applies to investment over 24% in SSI reserved items

Prohibited Sectors In FDI

Gambling and betting Lottery Business Atomic Energy Retail Trading Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors and Plantations other than Tea Plantations)

FII
An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, (a flexible investment company for a small number of large investor)(usually the min investment is 1 million $) insurance companies, pension funds and mutual funds.

Entities/ Funds Eligible To Get Registered as FII:

Pension Funds Mutual Funds Insurance Companies Investment Trusts Banks Endowments

Foundations
Charitable Trusts / Charitable Societies

Foreign Institutional Investor

Foreign Institutional Investors can individually purchase up to 10% and collectively up to 24% of the paid up share capital of any company. This limit of 24% can be increased to sectorial cap/ statutory limit applicable to the Indian company by passing Board or shareholder resolution. FIIs can purchase shares through open offer/ private placement/ stock exchange. shares purchased by FII through stock exchange cant be sold through a private arrangement.

Parameters on which SEBI decides FII applicants eligibility

Applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in existence for at least one year) whether the applicant is registered regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI Whether the applicant is a fit & proper person.

Advantages And Disadvantages Of FII Advantages

Unavailability of Corporate Debt Increase Forex Reserve Increase Domestic Savings and Investments Large Availability of Capital

Disadvantages
Problem of inflation Reduces flexibility of Policy makers Hot Money False representation of Economy Cant be used for long term Problems for small investors

Differences
FDI FDI is when a foreign company brings capital into a company or economy to set up a production or some other facility. FDI gives some CONTROL in operation of foreign company to the foreign company FII

FII is when a foreign company buys equity in any company through stock market.

FII does not give any control in operation of foreign company

Role Of Mncs
Multinational Corporations carryout business with the ultimate object of profit making like any other domestic company. According to ILO report "for some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment; for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept. MNC's directly and indirectly help both the home country and the host country.

Advantages of MNC's for the host country

1. 2. 3. 4. 5. 6. 7. 8. The investment level, employment level, and income level of the host country increases due to the operation of MNC's. The industries of host country get latest technology from foreign countries through MNC's. The host country's business also gets management expertise from MNC's. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC's. MNC's break protectionism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness. Domestic industries can make use of R and D outcomes of MNC's. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment. Level of industrial and economic development increases due to the growth of MNC's in the host country.

Advantages of MNC's for the home country

1. 2. 3. 4. 5. MNC's create opportunities for marketing the products produced in the home country throughout the world. They create employment opportunities to the people of home country both at home and abroad. It gives a boost to the industrial activities of home country. MNC's help to maintain favourable balance of payment of the home country in the long run. Home country can also get the benefit of foreign culture brought by MNC's.

Disadvantages of MNC's for the host country

1. 2. 3. 4. 5. MNC's may transfer technology which has become outdated in the home country. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries. MNC's may kill the domestic industry by monpolising the host country's market. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment.
MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.

2.

3.

International Institutions
IMF WB ADB

International Monetary Fund

IMF is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. IMF is a forum of national economic policies, international monetary and financial systems, which involves active dialogue with each member country.

As of end-August 2009, IMF's total quotas stood at SDR 217.4 billion (about $325 billion).
Five largest shareholders: United States, Japan, Germany, France, United Kingdom.

Purposes of the IMF

Promote international monetary cooperation. Expansion and balanced growth of international trade. Promote exchange rate stability. The elimination of restrictions on the international flow of capital. Help establish multilateral system of payments and eliminate foreign exchange restrictions.

Functions Of IMF
Surveillance (like a doctor) Gathering data and assessing economic policies of countries. Technical Assistance (like a teacher) Strengthening human skills and institutional capacity of countries. Financial Assistance (like a banker) Lending to countries to support reforms

How can the IMF help in crisis?

When a country imports more than it exports, it has a trade deficit. It can cause foreign exchange shortages. The international monetary fund help member countries cope with foreign exchange shortages caused by balance of payments problems

Every year the country borrows more money from foreign banks and friendly governments to finance a growing volume of imports.
The value of imports now far exceeds exports. So there isnt enough foreign exchange to pay the debt and buy the imports.

World Bank
The World Bank Group (WBG) was established in 1944 to rebuild post-World War II Europe under the International Bank for Reconstruction and Development (IBRD). Works as an International Organization that fights poverty by offering developmental assistance to middle income & low income countries. Give loans & offers advice. Training in both the private & public sectors. Aims to eliminate poverty by helping people. 184 countries are shareholders in the IBRD. To become a member a country must first join the International Monetary Fund (IMF)

Asian Development Bank (ADB)

Asian Development Bank (ADB) is a regional development bank established on 22 August 1966 The main motto is to facilitate economic development of countries in Asia. Its a members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East) and non-regional developed countries. From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside.

Asian Development Bank (ADB)

ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with member's capital subscriptions. At present, both the United States and Japan hold 1,656,189 shares each, the largest proportion of shares at 15.65% each. China holds 684,000 shares (6.46%), India holds 672,030 shares (6.35%), the 2nd and 3rd largest proportion of shares respectively.

The headquarters of the bank is at 6 ADB Avenue, Mandaluyong City, Metro Manila.

Region

Treaty

Countries

Asia

South Asian Free Trade Area (SAFTA)

India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, Maldives and Afghanistan (SAARC)
Thailand, Singapore and Malaysia

South East & East Asia

ASEAN Trade in Goods Agreement; Comprehensive Economic Cooperation Agreement (CECA) CECA

Oceania

Australia and New Zealand

Americas

Preferential Trade Agreements (PTA); CECA

Broad Based Trade and Investment Agreement (BTIA) PTA; FTAs

Mercosur (Mexico Economic Association: Argentina, Brazil, Paraguay, Uruguay, Venezuela) and Chile; Canada
European Union (27 Countries) & EFTA countries (Iceland, Norway, Liechtenstein and Switzerland). Southern African Customs Union (SACU); Gulf Cooperation Council (GCC) and Mauritius Bangladesh, China, India, the Republic of Korea, and Sri Lanka; Bangladesh, India, Myanmar, Sri Lanka, Thailand (BIMSTEC, 1997)

Europe

Middle East, Africa

Others

Asia Pacific Trade Agreement (APTA); FTA

Indian Economy
The Indian economy, the third largest economy in the world in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy.

This booming economy of today has to pass through many phases before it can achieve the current milestone of 9% GDP.

Industry and Infrastructure

The growth in the industrial sector as per the Index of Industrial Production (IIP) data for the month of January 2013 stands at 181.8, which is 2.4% higher as compared to January 2012. The cumulative growth for April-January 2012-13 compared to the previous year corresponding period stands at 1.0%. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for January 2013 stands at 134.0, 193.7 and 160.7 respectively, with the corresponding growth rates of (-) 2.9%, 2.7% and 6.4% as compared to January 2013. In terms of industries, the manufacturing sector have shown positive growth during the month of January 2013 as compared to the corresponding month of the previous year. The industry group electrical machinery and apparatus n.e.c. has shown the highest positive growth of 46.7%, followed by 19.8% in tobacco products and 18.1% in wearing apparel; dressing and dyeing of fur.

Eight Core Industries-January 2013

COAL CRUDE OIL NATURAL GAS PETROLEUM REFINARY PRODUCTS FERTILIZER STEEL ELECTRICITY CEMENT