INDIA’S FOREIGN TRADE AND INVESTMENT

UNIT 1

INTRODUCTION TO INDIA’S FOREIGN TRADE AND INVESTMENT

FOREIGN TRADE

MEANING

Foreign trade is exchange of capital, goods, and services across

international borders or territories. In most countries, it represents a

significant share of gross domestic product (GDP). All countries need

goods and services to satisfy wants of their people. Every country has

only limited resources. No country can produce all the goods and services

that it requires.

International or Foreign trade is recognized as the most significant

determinants of economic development of a country, all over the world.

The foreign trade of a country consists of inward (import) and outward

(export) movement of goods and services, which results into outflow and

inflow of foreign exchange. Thus it is also called EXIM Trade.

OBJECTIVES

The foreign trade policy of India is based on two major objectives, they

are as follows:

 To double the percentage share of global merchandise trade within

the next five years.

 To act as an effective instrument of economic growth by giving a

thrust to employment generation.

 FOREIGN TRADE POLICY (15-16)

 FTP 2015-20 provides a framework for increasing exports of goods and

services as well as generation of employment and increasing value

addition in the country, in line with the ‘Make in India’ programme.

 108 MSME clusters have been identified for focused interventions to

boost exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised

and repositioned to achieve the objectives of ‘Skill India’.

 FTP 2015-20 introduces two new schemes, namely ‘Merchandise

Exports from India Scheme (MEIS)’ for export of specified goods to

specified markets and ‘Services Exports from India Scheme (SEIS)’ for

increasing exports of notified services.

 E-Commerce exports of handloom products, books/periodicals, leather

footwear, toys and customised fashion garments through courier or

foreign post office would also be able to get benefit of MEIS (for values

up to INR 25,000).

 A number of steps have been taken for encouraging manufacturing and

exports under 100 per cent EOU/EHTP/STPI/BTP Schemes. The steps

include a fast track clearance facility for these units, permitting them to

share infrastructure facilities, permitting inter unit transfer of goods and

services, permitting them to set up warehouses near the port of export

and to use duty free equipment for training purposes. One of the major

objectives of new FTP is to move towards paperless working in 24x7

environments.
NEED FOR FOREIGN TRADE

In today’s global economy, international trade is at the heart of

development. Nations—developed or underdeveloped—trade with each

other because trade is mutually beneficial. In other words, the basic

motivation of trade is the gain or benefit that accrues to nations.

Benefits of international division of labour do not flow between nations.

It is advantageous for all the countries of the world to engage in

international trade. However, the gains from trade can never be the

same for all the trading nations. Thus, benefits or gains from trade may

be inequitable; but what is true is that “some trade is better than no

trade”.

PATTERN AND STRUCTURE OF INDIA’S FOREIGN TRAD

ANALYSIS OF THRUST EXPORT PRODUCTS AND MARKETS:

Indian exports have grown at a rebust annual average rate of 21.3% in

the last decades between 2003 and 2013; the average value of exports

rising from USD 52.7% billions in 2003 to 300.2% billion in 2013.

Exports have come to be regarded as an engine of economic growth in

the values of liberalization and structural reforms in the economy.

EXPORTS FROM INDIA:

 India exporters several agricultural products such as basmati rice,

wheat, cereal, spices, fresh fruits, dry fruits , buffalo meat, cotton,

tea ,coffee , cash crops . Particularly to the Middle East to the

south east and East Asian countries it ears about 10% of its exports

earning from this trade.

 Engineering industry in India is the largest subsector of its industry

GDP and is one of the three largest foreign countries. It includes

transport equipment, machines tools, capital goods, transformers,

switch gears, furnaces cart, forged simple to precision parts for

turbines, automobiles and railways.

 The engineering industry of India includes growing car, motorcycle

ad scooter industries, as well as productivity machineries tractors.

 India is the world’s largest producer of and largest market for

tractors accounting for 29% of world tractor production in 2013.

 India is the 12 th largest producer and the 7th largest consumer of

machine tools in the world.

 Tirupur has gained universal recognition as the leading source of

hosiery, garments, casual wear, and sportswear.

  Expanding textile centres such as ichalkaranji enjoy one of the

highest per captia income in the country.

 India’s cotton forms, fibre and textile industry provides

employment to million people in India.

 The service sector provides employment to 27% of the work forces.

 Since 2000, Indian Companies have expanded overseas ; investing

FDI and creating jobs outside India

 India’s major trading partners are the European Union, china, USA

& UAE.

 In 2006-07, major export commodities includes engineering

goods, petroleum products, chemicals and pharmaceutical, gems

and jewellery, textiles and garments, agricultural products, iron

ore and other minerals.

 The Various other export commodities that India’s exports are

a. Petroleum products

b. Machinery

c. Iron and steel

d. Chemicals

e. Vehicles

f. Apparel

 India’s major export partners are UAE, US, China and Singapore

EXPORTS ENGINE OF ECONOMIC GROWTH:

 Exports have come to be regarded as a engine of economic growth

in the wave of liberalization and structural reforms in the

economy.
  The global economic scenario continues to be lie with India

witnessing slowdown in exports with our traditional partners.

 Under the circumstances, we need to set in motion strategies and

policy measures which analyze growth of export in several different

sectors as well as in newer markets.

 In view of art a remarkable achievements in foreign trade during

2004-2009, the foreign trade policy 2009-14 emerged as two

milestones.

 First, to double India’s export of goods and services in 2014 by

achieving an annual export growth of 15% as an annual export

target with US $ 200 million by march 2011 and achieving the

high export growth path of around 25% per annum in the

remaining three years . (i.e.) upto 2014.

 Secondly to double India’s share in global trade by 2020.

EXPORTS BY PRINCIPAL COMMODITIES:

 Exports are of the top four commodities during the period 2011-

12 (april-october) registered a share of 53.1% mainly due to

significant contribution in the exports of petroleum (crude and

products) , gems and jewellery ,transport equipment , machinery

and instruments .drugs , pharmaceutical and fine chemicals.

III. EXPORTS GROWTH

 Exports during Feb 2013 were valued at US $ 26259.42 million

during Feb 2012.

 Value of exports for the period of April-feb 2012 was US $

265946.37 million as against US $ 277124.56 million registering

 a negative growth of 4.03% in dollar terms over the same period

past years.

 Country wins pattern of exports of 2012-13 shows that the USA

became the biggest destination of India’s exports with a share of

14.4% , replacing UAE (13.4%) followed by china (5.1%), Singapore

(4.5%) and Hong Kong (4.2%).

 These five countries together accounted for around 41.6% of India’s

total exports during 2012-13.

 Major manufactured goods exported by India include engineering

goods, chemicals and related products, textiles and readymade

garments.

 Manufactured goods account for major share of exports (61.2% as

of FY13) followed by petroleum and crude products (26.1% in

FY13) and agricultural products (13.5% in FY13).

 Contribution of petroleum and crude products in India’s exports

basket has risen over the years; while that of manufactured goods

has declined other commodity groups have registered range

changes in share.

 Asia has always dominated as India’s exports partners over the

years; followed by Europe, America and Africa.

 However, exports to America and Africa have declined from FY 03

to FY 13 and increased with Asia instead.

FLOW OF FOREIGN TRADE INVESTMENTS IN INDIA

Foreign Trade Investments (FDI) is one of the most important sources

of foreign investment flows in developing countries like India. After the

announcement of new industrial policy, 1991 and the current policies of

liberalization India has been experiencing a flow of foreign investment

into the country.

During 1992-93 several additional measures more value by the

government to encourage investment flows; direct foreign investment,

portfolio investment, NRI investment and deposit and investment in

global depository receipts.

INDIA – AN INVESTMENT DESTINATION

Major initiatives, policy changes and a slew of reforms have put India on

the global industrial map as one of the fastest growing economies and as

one of the most attractive investment destinations in the world.

FASTEST GROWING ECONOMY

 With the International Monetary Fund (IMF) predicting that India

is likely to retain the status till 2020. With the Gross Domestic

Product (GDP) of the country growing at more than 7% since

2014, the IMF has kept projections for India’s growth in 2018-

2019 at 7.6%

 According to the World Bank, India is also the third-largest

economy in the world regarding its purchasing power parity with

the GDP of over USD 2.1 trillion

  India is the fastest growing large economy in the world today,

impressively overtaking China in 2015

 It was named amongst the top 10 Foreign Direct Investment (FDI)

destination in 2015

 In recent years, India has emerged as one of the most attractive

destinations not only for investments but also for Doing Business,

jumping by 12 places in Ease of Doing Business rankings between

2014 and 2015 (Source: Ease of Doing Business, World Bank)

 Foreign exchange reserves have been at a comfortable level over

recent years. Currently, India’s reserves stand at USD 371.279

billion (Source: Reserve Bank of India as on 9th September, 2016).

DEMOGRAPHIC ADVANTAGE

 India is expected to have the share of youth in total population at

around 32.3% in 2030. The share reached its maximum in the

year 2010

 The proportion of working age population in India is likely to reach

more than 64% by 2021, with a large number of young people in

the 20-35 age group (Source: Economic Survey 2014)

 If India continues its recent growth trend, average household

incomes will triple over the next two decades and it will become

the world’s fifth largest consumer economy by the year 2025

 India is expected to be the largest supplier of university graduates

in the world by 2020

 FAVOURABLE POLICIES

 Major FDI policy reforms have been made in a number of sectors,

such as Defence, Construction Development, Pensions,

Broadcasting, Pharmaceutical and Civil Aviation

 Foreign investors can invest in India either on their own or as a

joint venture, as may be required in a few sectors

 Barring a few reserved sectors, 100% FDI is allowed through the

automatic route in several fields, without the need of Government

approval, namely Automobile, Food Processing, Construction, etc

 In the Union budget 2016-17, the Government has emphasized

the need to increase manufacturing as a percentage of GDP

 The Central and State Governments have sector specific policies,

incentives and subsidies to promote manufacturing

 Increased allocation in the budget to improve infrastructure, which

is critical in facilitating future growth

INDIA’S FOREIGN INVESTMENT POLICY AND FLOWS

Foreign Direct Investment (FDI) is one of the most important sources of

foreign investment flows in developing countries like India. After the

announcement of New Industrial Policy, 1991and the current policies of

liberalization, India has been experiencing an acceleration in the flow of

foreign investment into the country.

During 1992-93 several additional measures were taken by the

government to encourage investment flows: direct foreign investment,

portfolio investment, NRI investment and deposit and investment in

global depository receipts.

Some of these measures are given as follows:

1. The dividend-balancing condition earlier applicable to foreign

investment up to 51 per cent equity is no longer applied except for

consumer goods industries.

2. Existing companies with foreign equity can raise it to 51 per cent

subject to certain prescribed guidelines. Foreign direct investment has

also been allowed in exploration, production and refining of oil and

marketing of gas. Captive coal mines can also be owned and run by

private investors in power.

3. NRIs and overseas corporate bodies (OCBs) pre-dominantly owned by

them are also permitted to invest up to 100 per cent equity in high

priority Industries with reparability of capital and income. NRI

investment up to 100 per cent of equity is also allowed in export houses,

trading houses, hospitals, EOUs, sick industries, hotels and tourism

related industries.

4. Disinvestment of equity by foreign investors no longer needs to be at

prices determined by the Reserve Bank. It has been allowed at market

rates on stock exchanges from 15 September, 1992 will permission to

repatriate the proceeds of such investment.

5. India has signed the Multilateral Investment Guarantee Agency

Protocol for the protection of foreign investment on 13 April, 1992.

6. Provisions of the Foreign Exchange Regulation Act (FERA) have been

liberalized through an ordinance dated 9 January 1993, as a result of

which companies with more than 40 per cent of foreign equity are also

now treated at par with fully Indian owned companies.

7. Foreign Companies have been allowed to use their trade marks on

domestic sales from 14 May, 1992.

FDI INFLOWS IN INDIA

Economic Reforms introduced in India since 1991 has resulted in

acceleration in the flow of foreign investment into the country.

Accordingly, India has been experiencing a continuous flow of foreign

direct investment (FDI) in recent years. Table 8.4 gives a clear picture

about the actual inflows and approvals of FDI in India since 1991-92.

INDIAN INVESTMENT ABROAD - OVERSEAS DIRECT INVESTMENT BY

INDIAN COMPANIES

Analysis of the trends in direct investments over the last decade reveals

that while investment flows, both inward and outward, were rather

muted during the early part of the decade, they gained momentum

during the latter half.

While in the first half, overseas investments were directed to resource

rich countries such as Australia, UAE, and Sudan, in the latter half, OID

was channelled into countries providing higher tax benefits such as

Mauritius, Singapore, British Virgin Islands, and the Netherlands.

Indian firms invest in foreign shores primarily through Mergers and

Acquisition (M&A) transactions. With rising M&A activity,

companies will get direct access to newer and more extensive markets,

and better technologies, which would enable them to increase their

customer base and achieve a global reach.

Market size

According to the data provided by Reserve Bank of India (RBI), India’s

outward Foreign Direct Investment (OFDI) in equity, loan and

guaranteed issue stood at US$ 11.33 billion in 2017-18 and US$ 1.69

billion in February 2019.

Investments/Developments

In a recent development, UK announced that India has become the third

largest source of FDI for them as investments increased by 65 per cent in

2015 leading to over 9,000 new and safeguarded jobs.

INDIA’S JOINT VENTURES IN FOREIGN COUNTRY AND THEIR

OPERATIONS

Joint Ventures with Foreign Companies

A Joint Venture is a way of putting togeth er or combining the

resources and expertise of two companies that are otherwise

unrelated. A foreign company as defined in Section 2(42) of the

Companies Act 1956, is any company or body corporate

incorporated outside India which:

 Has a place of business in India, whether by itself or

through an agent, physically or through an electronic mode

and

 Conducts any business activity in India in any other

manner.

For an Indian company to venture partnership with a foreign

company, a Joint Venture Agreement is to b e entered into by

both the parties. Such an agreement also contains terms relating

to confidentiality and non-disclosure of information before the

commencement of negotiation of the Joint Venture.

The following criteria should be met for the successful

establishment of an International Joint Venture -

 In areas like telecommunication, drugs and pharmaceuticals,

advertising and hotel and tourism, investment up to 74

percent in a Joint Venture without the approval of RBI.

 More than 74 percent of the total equity in any Joint

Venture company, if that’s the case, permission of the

Foreign Investment Promotion Board (FIPB) or the

Secretariat of Industrial Approvals (SIA) must be obtained.

Ranked as the world’s 6th largest economy by Gross Domestic

Product (GDP) in 2017, India also enjoys the world’s 3rd highest

purchasing power parity as per World Bank statistics. While this

country is home to subsidiaries of various MNCs, another

substantial number of companies are now envisaging upfront in

setting up of Joint Ventures in India.

India has witnessed several successful cases of International Joint

Ventures flourishing since the post -independence.

 VISTARA AND AIR ASIA

A Joint Venture between Indian corporate giant Tata Sons

and Singapore Airlines (SIA) Vistara is an excellent example

of a Joint Venture with a foreign company. While Tata Sons

 holds a 51% stake, SIA controls the rest 49% in the carrier

airlines. Initiated in 2015, Vistara is the first airline to

operate a domestic flight from Chhatrapati Shivaji

International Airport’s Terminal-2. As one of the most

successful Joint Ventures in India, Vistara holds around

4.5% share of the nation’s domestic aviation market Air

Asia recently has been ranked 4th largest Low -Cost Carrier

(LCC) in India.

 BRAHMOS AEROSPACE

Russia and India came together to make the world’s fastest cruise

missile that can fly at a supersonic speed of Mach -2.8 to Mach-

3. The word Brahmos was coined using names of Brahmaputra

river of India and Russian capital city, Moscow. As a Joint

Venture between Defence Research and Development

Organization (DRDO) of India and its counterpart in Russia, India

worked its entry in the supersonic missile club thro ugh Brahmos.

 INSURANCE SECTOR

Bharti Enterprises, India leading business group, entered into a

Joint Venture with French insurance major AXA, bringing in the

phenomenal Bharti AXA General Insurance Corporation Limited.

As a leading insurance corporation, Bharti AXA has been

operating since 2008, subject to the guidelines of the Insurance

Regulatory and Developmental Authority of India (IRDAI). Bharti

AXA indulges in and provides a comprehensive range of products

and services related to insurance covering he alth, vehicle, travel,

and education to name a few. The Japanese insurance company,

Mitsui’s Sumitomo Insurance Corporation Ltd., entered into a

Joint Venture with India’s Max Life Insurance Co. Ltd., provides a

good range of schemes including life, health , retirement and also

investment schemes of various kinds

HINDUSTAN AERONAUTICS LIMITED (HAL)

India’s aerospace and defense company Hindustan Aeronautics

Limited (HAL) is one of the significant economic boosters of the

nation. The company is headquartered in Bangalore, Karnataka.

HAL has the highest number of Joint Ventures among all Indian

companies. The subject of such ventures ranges from aircraft

engines, helicopters, aerostructures and defense systems, and

other related products. Joint Ventures of HAL include those with

Mikoyan Gurevich (MIG) of Russia, Rolls Royce Holdings Ltd.

Other Joint Ventures between India and foreign companies

include Tata Starbucks Pvt. Ltd Mahindra-Renault among others.

Through a Joint Venture, companies, local or foreign combine

their respective expertise to provide better products and services

pan-world. The number of successful Joint Ventures is escalating

every day coupled with a few unsuccessful ones like Tata DoCoMo

( a joint venture between Tata Teleservices and Japa n’s NT

DoCoMo) which could not make enough profits. Nevertheless,

Joint Ventures aid in consolidating the position of the nation as

an economic power and industrial major