Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India growth story has a ‘beneficial ownership’ hurdle

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian Foreign Exchange Management (Non-debt Instruments) Rules

Mains level: Challenges with the Recent Amendment

Why in the news?

To achieve a $5 trillion economy by 2025-26, India must eliminate obstacles hindering foreign investments and facilitate smoother processes for companies and investors.

Indian Foreign Exchange Management (Non-debt Instruments) Rules

  • The Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019, commonly referred to as FEMA NDI, regulate foreign investments in Indian companies. These rules are critical for overseeing the flow of foreign capital into the country, ensuring that investments align with national interests and do not pose security risks.
  • The amendment to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“FEMA NDI”) through the press note number 3 of 2020

Introduction of Press Note 3 (PN3) Requirement:

  • What it Means: This amendment requires prior government approval for any investments from entities or individuals in countries that share a land border with India. This rule applies if the investment comes directly from these countries or if the beneficial owner (the real person who ultimately owns or controls the investment) is a citizen or resident of these countries.
  • Purpose: Implemented during the COVID-19 pandemic, the rule aims to prevent opportunistic takeovers of struggling Indian companies by neighbouring countries

Challenges with the Recent Amendment

  • Undefined ‘Beneficial Owner’: The term ‘beneficial owner’ isn’t clearly defined in the PN3 Requirement, leading to confusion. Different laws define the term differently, making it hard for companies to know which standards to follow.
  • Regulatory Uncertainty: Since the latter half of 2023, the Reserve Bank of India (RBI) has adopted a stricter interpretation of these rules. This shift has caused anxiety among investors and companies, as practices previously deemed acceptable are now being scrutinized.
  • Regulatory Burden: Companies now face significant delays and a high rate of rejection when seeking approval for investments. According to some officials, proposals worth ₹50,000 crore have been stalled or rejected in the past three years, with 201 applications being turned down.
  • Severe Fines: Non-compliance with the PN3 Requirement can result in fines up to three times the amount of the investment. For many startups, this could mean financial ruin, as the fines could exceed their revenue or assets.
  • Legal Battles: Violations could lead to lengthy and costly legal disputes, further burdening the already slow judicial system in India.

What can be the better solution? (Way forward) 

  • Ownership Thresholds: Define beneficial ownership with clear thresholds, such as 10% to 25% ownership stakes. This would help companies understand whether they need to seek approval.
  • Control-Conferring Rights: Specify which rights indicate control, such as the ability to influence board decisions or veto significant operational changes. Exclude rights that merely protect investor interests, such as veto powers over mergers.
  • Investor Representations: Allow Indian companies to require foreign investors to provide assurances about their compliance with the PN3 Requirement, backed by indemnities.It would provide a safety net for Indian companies.
  • Time-Bound Reviews: Introduce a system where companies can seek timely advice from regulatory authorities on whether specific clauses in their investment agreements confer control. This would be similar to mechanisms in competition law, offering clarity and reducing the risk of penalties for inadvertent non-compliance.

Mains PYQ:

Q Foreign Direct Investment (FDI) in the defence sector is now set to be liberalized: What influence this is expected to have on Indian defence and economy in the short and long run? (UPSC IAS/2014)

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Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Netherlands becomes India’s 3rd Largest Export Destination in 2023-24

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Key facts and figures about Indian exports

PC: LiveMinit

Why in the News?

During fiscal year 2023-24, the Netherlands emerged as India’s third-largest export market, with a trade surplus expanding to $17.4 billion.

India’s Trade with the Netherlands

  • Key Export Commodities: Notable export items to the Netherlands include petroleum products ($14.29 billion), electrical goods, chemicals, and pharmaceuticals, showcasing robust growth in these sectors.
  • Continual Expansion: India’s exports to the Netherlands have steadily risen by approximately 3.5% to reach $22.36 billion in 2023-24, illustrating sustained growth momentum.
  • Mutual Investment: The Netherlands is a significant investor in India, with foreign direct investment (FDI) amounting to about $5 billion during the last fiscal.
  • Corporate Presence: Over 200 Dutch companies, including industry giants like Philips, Akzo Nobel, and KLM, operate in India, while Indian firms like TCS, HCL, and Sun Pharmaceuticals have a substantial presence in the Netherlands.

Shift in Trade Dynamics

  • Outpacing Major Destinations: The Netherlands has surpassed traditional trade partners such as the U.K., Hong Kong, Bangladesh, and Germany in terms of India’s export focus.
  • Long-term Growth: Export figures have shown consistent growth since 2000-01 when India’s exports to the Netherlands were a mere $880 million.

Significance: Gateway to Europe

  • Strategic Positioning: The Netherlands’ efficient ports and extensive connectivity with the EU via roads, railways, and waterways have positioned it as a vital gateway to the European market.
  • Strong Ties: Diplomatic relations between India and the Netherlands, established in 1947, have evolved into robust political, economic, and commercial partnerships.

India’s Trade Dynamics

Export Figures:

  • Forecasted to reach approximately US$776.68 billion in FY 2023–24.
  • Slightly surpassed the US$776.40 billion recorded in the previous fiscal year.
  • Concluded with the highest monthly merchandise exports of US$41.68 billion in March 2024.

Import Figures:

  • Total goods imports decreased by 5.66 percent to US$675.44 billion.

Global Merchandise Export Ranking:

  • India advanced from 19th to 17th place.
  • Marginal increase in share from 1.70 percent in 2014 to 1.82 percent in 2023.
  • Exported to 115 countries out of a total of 238 destinations during FY 2023-24.

Key Export Markets:

  • Include the US, UAE, Netherlands, China, UK, Saudi Arabia, Singapore, Bangladesh, Germany, and Italy.
  • Represent 46.5 percent of India’s export portfolio.

Diversification Strategy:

  • Focus on expanding beyond traditional sectors like iron ore and agricultural commodities.
  • Target sectors include electronics, pharmaceuticals, engineering products, and food items.
  • Plan to introduce goods such as alcoholic beverages, prepared meals, confectioneries, jackfruit, and bananas.
  • Emphasis on market research and analysis for product customization.

Trade Partners:

  • China emerged as India’s largest trading partner, surpassing the US.
  • Bilateral trade with China totalled US$118.4 billion in FY 2023-24.
  • Bilateral trade with the US amounted to US$118.3 billion in the same period.
  • India’s exports to China increased by 8.7 percent in FY24, driven by various sectors.
  • Imports from China rose moderately, totalling US$101.7 billion.

(Source of Data: Ministry of Commerce and Industry, Department of Commerce)

PYQ:

[2013] The balance of payments of a country is a systematic record of:

(a) All import and export transactions of a country during a given period of time, normally a year.

(b) Goods exported from a country during a year.

(c) Economic transaction between the governments of one country to another.

(d) Capital movements from one country to another.

 

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Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

China’s share in India’s industrial goods imports jump to 30% from 21% in last 15 years: GTRI

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trends in Bilateral Trades;

Mains level: India- China Bilateral Trade;

Why in the News?

India’s imports from China crossed $101 billion in 2023-24 from about $70 billion in 2018-19, and the country’s share of India’s industrial goods imports has risen from 21% to 30% over 15 years, according to a report by the Global Trade Research Initiative (GTRI).

  • The data shows, it’s resulting in a cumulative trade deficit exceeding $387 Billion in the last 5 years, which is an alarming situation for the Indian government.

What is meant by Trade Deficit?

  • A trade deficit refers to a situation where the country’s imports exceed the receipts from its exports. A trade deficit arises in the course of international trade when the payments for imports exceed the receipts from export trade.
  • A trade deficit is also referred to as a negative balance of trade.
  • The concerns arising due to this deficit include pressure on external payments and on the currency value of a country. Countries often alter import and export policies, curbing imports or increasing import duties on certain goods due to this.
  • They also encourage exports and consumption of indigenous goods.

India’s Industrial Imports from China:

  • Electronics and Telecom Sector: During April-January 2023-24, India’s import value for electronics, telecom, and electrical products was $67.8 billion, with China contributing $26.1 billion. (38.4% of the total imports)
  • Machinery Sector: China contributed 39.6% of India’s imports in this category. This highlights China’s essential role as a supplier of machinery to India.
  • Chemical and Pharmaceutical Sector: India’s chemical and pharmaceutical imports were $54.1 billion, with $15.8 billion coming from China (29.2% of the total).
  • MSMEs sector: Products like mobiles and data processing units, are imported by Indian MSMEs. These imports could potentially be produced domestically, highlighting gaps in India’s industrial capabilities.

Current Trade Observations concerning China and other countries:

  • Rising Trade Deficit with China: India’s exports to China have stagnated at around $16 billion annually (from 2019 to 2024), while imports from China surged from $70.3 billion in 2018-19 to over $101 billion in 2023-24.
  • Growth Rate of Imports: China’s share in India’s industrial product imports increased from 21% to 30% over the last 15 years. China’s exports to India grew 2.3 times faster than India’s total imports from all other countries.
  • Diverse Product Imports: Chinese firms are increasingly entering the Indian market, which is expected to accelerate the import of industrial products from China. India’s imports span high to low-technology items, like smartphones, electronics, electric vehicles, and solar energy.
  • Strategic Concerns: The growing trade deficit and dependence on China have profound strategic implications, affecting both economic and national security dimensions.

Way Forward:

  • Supply chain diversification: India must focus on diversifying its supply chains and reducing dependency on single-country imports, especially from geopolitical competitors like China.
  • Boosting R&D: Increase investment in research and development for electronics, semiconductors, and machinery to foster innovation and improve domestic production capabilities.
  • Incentivizing Production: Provide tax incentives, subsidies, and grants to local manufacturers of electronics, data processing units, and semiconductor devices to encourage production and reduce import dependency.

Mains PYQ:

Q China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbor. (UPSC IAS/2017)

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Investment lessons from the India-EFTA trade deal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trends in Indian Foreign Trades; Free Trade Agreement Policy;

Mains level: Trends in Indian Foreign Trades; Free Trade Agreement Policy;

Why in the News? 

India needs a clear Free Trade Agreement policy, especially in dealing with International Trade and Foreign Investment Laws.

About Free Trade Agreement:

    • A Free Trade Agreement between two or more countries aims to reduce or eliminate barriers to trade, such as tariffs, quotas, and other restrictions, to facilitate the flow of goods and services across borders.
    • Its significance for India: It can increase market access for Indian goods and services, boost exports, attract foreign investment, stimulate economic growth, create employment opportunities, and enhance competitiveness through exposure to international markets and technologies.
  • Present status of India’s Involvement in FTA: 
    • India is involved in various free trade arrangements, including the South Asian Free Trade Area (SAFTA), the Association of Southeast Asian Nations (ASEAN) Free Trade Area, the India-Japan Comprehensive Economic Partnership Agreement (CEPA), and negotiations with the European Union for a free trade agreement, among others.
    • Negotiations for India’s FTAs with countries like the United Kingdom and the European Union (EU) appear to have stalled amidst the current parliamentary elections in India.

 

Why does India need to rebuild its Free Trade Agreement policy?

  • For Comprehensive Economic Treaties: Combining trade and investment negotiations provides India with clear negotiating leverage to strike beneficial deals.
    • It allows India to leverage concessions in trade for advancements in investment, and vice versa. This approach enhances India’s bargaining power in FTA negotiations.
  • For Scope Expansion: India should expand the scope of investment issues by incorporating provisions for protecting foreign investors under international law, ensuring their confidence in investing in India.
    • It will help India to establish an efficacious dispute settlement mechanism under international law to resolve investment disputes effectively.
    • Providing enforceable legal protection to foreign investors is crucial for boosting their confidence, especially amidst declining foreign direct investment levels in India.
  • For addressing the drop in FDI Levels: The policy should address the decline in foreign direct investment levels in India by instilling confidence among foreign investors through robust legal protection and dispute resolution mechanisms.

Investment lessons from the India-EFTA Trade deal:

  • The India-EFTA FTA includes a comprehensive investment chapter, which is missing in recent Indian FTAs with countries like Australia, UAE, and Mauritius.
  • The agreement includes provisions wherein EFTA countries commit to making honest endeavors to increase FDI to India and facilitate job generation, codifying an obligation of conduct rather than an obligation of result.
  • Economic theory highlights the close linkage between trade and investment. While earlier Indian FTAs included both binding trade rules and investment protection, recent ones decoupled international trade law from international investment law.
  • The India-EFTA FTA, emphasizes combining trade and investment negotiations in one comprehensive economic treaty, that is ‘FTA 3.0 Approach’, which represents a departure from the decoupling approach seen in recent FTAs.

Way Forward:

  • Capacity Building: Enhance the capacity of Indian negotiators and policymakers to understand complex trade and investment issues, including legal frameworks, dispute resolution mechanisms, and international best practices.
  • Integrated Negotiation Approach: Adopt an integrated approach to FTA negotiations, wherein trade and investment aspects are negotiated together within a single agreement, ensuring coherence and synergy between the two.

Mains PYQ:

Q Quadrilateral Security Dialogue (Quad) is transforming itself into a trade bloc from a military alliance, in present times Discuss.

https://www.thehindu.com/opinion/op-ed/investment-lessons-from-the-india-efta-trade-deal/article68168582.ece#:~:text=Providing%20enforceable%20legal%20protection%20to,a%20higher%20economic%20growth%20trajectory.

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India’s growing dependence on Chinese Imports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India’s Imports from China and Other Countries

Mains level: NA

Why in the news?

  • India’s imports from China surged to over $101 billion in the fiscal year 2023-24, marking a significant increase from approximately $70 billion recorded in 2018-19.
  • The proportion of China’s industrial goods imports to India has risen from 21% to 30% over a span of 15 years, as highlighted in a report by the Global Trade Research Initiative (GTRI).

India’s Import: GTRI study

  • The GTRI study revealed that imports from China have grown at a pace 2.3 times faster than India’s overall imports during the 15-year period.
  • Contrary to common belief, China has emerged as the top supplier in eight core industrial sectors, encompassing machinery, chemicals, pharmaceuticals, and textiles, among others.
  • India is experiencing stagnant exports valued at around $16 billion annually.
  • Over a six-year period spanning from 2018-2019 to 2023-24, India’s cumulative trade deficit with China surpassed $387 billion, prompting apprehension among policymakers.

China’s Share of India’s Imports:

  • China accounted for 15% of India’s overall imports in 2023-24, with $101.8 billion out of a total of $677.2 billion.
  • Sector-wise Contributions:
  1. Electronics, Telecom, and Electrical Products: China’s contribution was 38.4% in April-January 2023-24.
  2. Clothing: Nearly 42% of India’s textile and clothing imports accounted from China.
  3. Machinery Sector: China accounted for 39.6% of India’s overall imports.
  4. Chemical and Pharmaceutical Sector: China’s share was 29.2%.
  5. Plastics and Related Articles: China provided articles worth $4.8 billion, accounting for 25.8% of total imports in this sector.

Back2Basics: Top Importers of India

S. No Importer Share of India’s Imports
1. China (Biggest Importer in India) 15.43%
2. United Arab Emirates 7.31%
3. United States 7.07%
4. Switzerland 3.82%
5. Hong Kong 3.12%
6. Singapore 3.09%
7. Indonesia 2.89%
8. South Korea 2.85%

 

PYQ:

[2017] ‘China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbor.

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Imposition of Anti-Dumping Duty on Sodium Cyanide

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Sodium Cyanide , Anti-dumping Duty

Mains level: NA

Why in the news?

The Directorate General of Trade Remedies (DGTR) has recently recommended the imposition of an anti-dumping duty on sodium cyanide (NaCN) imported from China, the European Union, Japan, and Korea.

Sodium Cyanide and Its Applications

  • Sodium cyanide is a deadly toxic, white, crystalline compound with the chemical formula NaCN.
  • It is a water-soluble solid, mainly used in gold mining, electroplating, and in the synthesis of organic chemicals.
  • It is hygroscopice. it quickly absorbs water from the air.
  • In gold mining, sodium cyanide is used to dissolve and separate gold from its ores.
  • It plays a pivotal role in various industrial processes, electroplating, metal heat treatment, and the production of insecticides, dyes, pigments, and pharmaceuticals.

What is Anti-Dumping Duty?

  • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below the price at which it is sold in the exporters’ domestic market.
  • This is imposed with the rationale that these products have the potential to undercut local businesses and the local economy.
  • The World Trade Organization (WTO) operates a set of international trade rules for the regulation of anti-dumping measures.
  • In general, the WTO agreement permits governments to act against dumping “if it causes or threatens material injury to an established industry in the territory of a contracting party.

Anti-Dumping Mechanism in India:

  • The Anti-Dumping mechanism in India is administered by the Directorate General of Anti-Dumping and Allied Dutites (DGAD) under the Ministry of Finance.
  • The anti-dumping law in India is covered under the Customs Tariff Act, 1975, and the Customs Tariff Rules, 1995.
  • The DGAD conducts anti-dumping investigations to determine if the domestic industry has been hurt by a surge in below-cost imports.

How is Anti-Dumping Duty calculated?

  • The anti-dumping duty is calculated as the difference between the normal value and the export value of the product.
  • The normal value is the market value of the product in the domestic market, while the export value is the price at which the product is exported to India.
  • The anti-dumping duty is imposed to offset the price difference and prevent the domestic industry from being harmed by cheap imports.

 

PYQ:

[2015] In India, the steel production industry requires the import of-

(a) Saltpetre

(b) Rock phosphate

(c) Coking coal

(d) All of the above

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UNCTAD Report Highlights Shifts in India’s Trade Relations

Note4Students

From UPSC perspective, the following things are important :

Prelims level: UNCTAD: its establishment, composition and members

Mains level: NA

What is the news?

  • The United Nations Conference on Trade and Development (UNCTAD) Global Trade Report revealed an evolving trade landscape for India, marked by increased reliance on China and the European Union (EU).

About UNCTAD

  • UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
  • It is part of the UN Secretariat.
  • The UNCTAD Conference ordinarily meets once in four years.
  • It reports to the UNGA and the Economic and Social Council, but has its own membership, leadership and budget.
  • It is also a part of the United Nations Development Group.
  • It supports developing countries to access the benefits of a globalized economy more fairly and effectively.
  • Reports published by the UNCTAD are-
  1. Trade and Development Report
  2. World Investment Report
  3. Technology and Innovation Report
  4. Digital Economy Report

Membership:

  • UNCTAD’s membership consists of all 195 member states of the United Nations.
  • India is an active member. The second UNCTAD Conference took place in New Delhi, India in 1968.

Key Highlights of the Report:

  1. Key Findings on India
  • Trade Trends: India’s trade dependence on China and the EU rose by 1.2%, while reliance on Saudi Arabia declined by 0.6%.
  • Factors: This shift occurred amidst supply chain disruptions caused by the pandemic and the Russia-Ukraine conflict, leading to record-high food and fuel prices.
  • Policy Measures: Despite efforts to reduce dependency on China through initiatives like the Production-Linked Incentive (PLI) scheme and Quality Control Orders (QCOs), India’s trade relations with China strengthened.
  1. Insights from the Report
  • Stable Proximity: Geographical proximity of international trade remained relatively constant, indicating minimal near-shoring or far-shoring trends.
  • Political Proximity: However, there was a noticeable rise in the political proximity of trade, favouring countries with similar geopolitical stances.
  • Concentration of Trade: Global trade increasingly favored major trade relationships, although this trend softened towards the end of 2023.
  • Sectoral Trends: Most sectors experienced a decline in trade value, except for pharmaceuticals, transportation equipment, and electric cars.
  • Global Forecast: Global merchandise trade is expected to contract by 5% in 2023, with services trade projected to gain 8%.
  1. Impact of Russia-Ukraine Conflict
  • Shifts in Trade: The ongoing conflict led to a surge in Russia’s trade dependence on China by 7.1% while decreasing reliance on the EU by 5.3%.
  • Oil Trade: Russian oil shifted from the EU to China and India, with China becoming a significant trade partner for Russia.
  • US Trade Dynamics: The US managed to reduce reliance on China by 1.2% in 2023, while increasing dependence on the EU and Mexico.

PYQ:

The Global Infrastructure Facility is a/an: (2017)

(a) ASEAN initiative to upgrade infrastructure in Asia and financed by credit from the Asian Development Bank.

(b) World Bank collaboration that facilitates the preparation and structuring of complex infrastructure Public-Private Partnerships (PPPs) to enable mobilization of private sector and institutional investor capital.

(c) Collaboration among the major banks of the world working with the OECD and focused on expanding the set of infrastructure projects that have the potential to mobilize private investment.

(d) UNCTAD-funded initiative that seeks to finance and facilitate infrastructure development in the world.

 

Practice MCQ:

With reference to the United Nations Conference on Trade and Development (UNCTAD), consider the following statements:

1. It is a permanent intergovernmental body established by the United Nations General Assembly.

2. It is part of the UN Secretariat.

3. India has never hosted the UNCTAD Conference.

How many of the above statements is/are correct?

(a) One

(b) Two

(c) Three

(d) None

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Free trade has two faces and the one offering harmony must prevail

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Free Trade Agreements

Mains level: Issues with FTAs

Why in the News?

  • Recently, the discussion acknowledged free trade’s nuanced and multifaceted nature, highlighting its potential benefits for peace and economic development while recognizing historical and contemporary challenges in promoting equitable outcomes.

Evolution of Free Trade ideology:

  • 19th Century Political Reformers and Free Trade:  Free trade was the rallying cry of 19th-century political reformers (Particularly Adam Smith who was inspired by Thomas Hobbes), who saw it as a vehicle for defeating despotism, ending wars, and reducing crushing inequalities in wealth.
  • The era’s economic cosmopolitanism encapsulated progressive causes such as anti-militarism, anti-slavery, and anti-imperialism.
  • US Populists and Opposition to Tariffs: US populists in the late 19th century staunchly opposed the gold standard but were also against import tariffs, which they thought benefited big business and harmed ordinary people.
  • They pushed to replace tariffs with a more equitable progressive income tax.
  • Socialists’ View on Free Trade in the Early 20th Century: Then, during the early part of the 20th century, many socialists viewed free trade, supported by supranational regulation, as the antidote to militarism, wealth gaps and monopolies.
  • Liberal Reformers’ Perspective on Protectionism: The 19th-century liberals and reformers were free traders because they thought protectionism served retrograde interests, including landed aristocrats, business monopolies and warmongers.
  • They believed economic nationalism went hand in hand with imperialism and aggression.
  • Historian Marc-William Palen cites a 1919 essay by the economist Joseph Schumpeter, who depicted imperialism as a “monopolistic symptom of atavistic militarism and protectionism—an ailment that only democratic free-trade forces could cure.”

Perception and misconceptions of Free trade:

  • Controversial Term-Free trade has been controversial in economics, with many people arguing that it contributes to rising inequality.
  • However, there is a grain of truth in the anti-trade stance, as growing trade did contribute to rising inequality and the erosion of the middle class in the US and other advanced economies in recent decades.
  • Blind Spot of Globalization – If free trade got a bad name,  globalisation’s boosters ignored its downsides or acted as if nothing could be done about them.
  • This blind spot empowered political leaders like Donald Trump to weaponize trade and demonize racial and ethnic minorities, immigrants, and economic rivals.
  • Diverse Opposition: Antipathy to trade is not limited to right-wing populists but also includes radical leftists, climate activists, food safety advocates, human-rights campaigners, labor unions, consumer advocates, and anti-corporate groups.
  • US President Joe Biden has distanced himself from free trade, believing that building a secure, green, equitable, and resilient US economy must take precedence over hyper-globalization.
  • Obstacle to Social Justice:  All progressives believe that free trade stands in the way of social justice.

Instrumentalisation of Trade:

1) Instrumentalized for Authoritarian end:

  • Under American Revolution: A particularly egregious example is Antebellum America, where free trade entrenched slavery.
  • During the drafting of the US Constitution in 1787, America’s slave-owning southerners ensured that the text would prohibit the taxation of exports. They understood that free trade would ensure that plantation agriculture remained profitable and safeguard the slavery system on which it was based.
  • When the North defeated the South in the US Civil War, slavery was abolished, and free trade was replaced with protectionism, which suited Northern business interests better.
  • Under British imperialism: After the repeal of the Corn Laws in 1846, the British government nominally abandoned protectionism and led Europe to sign free-trade agreements.

2) Instrumentalized for militaristic ends:

  • In Africa, the Middle East, and Asia, free trade was imposed through the barrel of a gun whenever the British encountered weak potentates ruling over valuable commodities and markets.
  • The British fought the infamous Opium Wars of the mid-19th century to force Chinese rulers to open their markets to British and other Western goods so that Western countries, in turn, could buy China’s tea, silk, and porcelain without draining their gold.
  • The opium was grown in India; a British monopoly forced farmers to work under horrendous conditions that left long-term scars.
  • Free trade served repression and war, and vice versa.

Post-World War II trade regime:

  • The American architects of the International Trade Organization followed in the footsteps of Cordell Hull—President Franklin D. Roosevelt’s secretary of state—believing they were pursuing world peace through free trade.
  • Hull was an economic cosmopolitan and a supporter of the 19th-century radical free-trade advocate Richard Cobden.
  • The post-war order was meant to be a system of global rules that eliminated bilateralism and imperial privileges.
  • While the US Congress ultimately failed to ratify the ITO, some of its key principles—including multilateralism and non-discrimination—survived in the General Agreement on Tariffs and Trade (GATT), the precursor to the World Trade Organization (WTO) of today.
  • Under GATT, commercial diplomacy replaced wars, and many non-Western countries—like Japan, South Korea, Taiwan and China—expanded their economies rapidly by leveraging global markets.

What are the present challenges to the Trade regime?

  • Rise of Corporate Influence: Big corporations and multinational companies gained substantial power during this period, influencing trade negotiations to serve their interests.
  • Neglect of Important Issues: Environmental concerns, public health, human rights, economic security, and domestic equity were overlooked as trade negotiations prioritized corporate interests.
  • Departure from Original Vision: Trade deviated from the original vision of figures like Cobden and Hull, who likely envisioned it as a force for peace and prosperity, instead becoming a source of conflict.
  • Shift in Trade Dynamics: The dominance of corporate influence shifted the focus of international trade away from broader societal welfare towards maximizing profits and corporate interests

Conclusion:

The lesson of history is that turning trade into a positive force requires democratizing it. This means that trade should work for the benefit of the broader public interest, not just for a select few. This is an important lesson to remember as the reconstruction of the world trade regime would occur in the years ahead.

 

Mains PYQ:

Q. What are the key areas of reform if the WTO has to survive in the present context of the ‘Trade War’, especially keeping in mind the interest of India? (UPSC 2018)

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India-EFTA Trade Pact: A Game-Changer in Economic Cooperation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: European Free Trade Association (EFTA) Bloc

Mains level: Read the attached story

In the news

  • India has inked a momentous Free Trade Agreement (FTA) with the European Free Trade Association (EFTA), comprising Iceland, Liechtenstein, Norway, and Switzerland.
  • The accord, aimed at attracting a staggering $100 billion in investment over 15 years, signifies a significant leap towards diversifying imports and forging robust economic ties with key European nations.

About the European Free Trade Association (EFTA) Bloc

Description
Member Iceland, Liechtenstein, Norway, Switzerland
Formation Established in 1960 by seven European countries as an alternative trade bloc to the EU
Trade Relations Free trade agreements among themselves and with other regions
Activities Participate in European Single Market through the EEA Agreement
Institutions EFTA Court, EFTA Surveillance Authority, EFTA Secretariat
Relationship with EU Not part of the EU,

But have close economic ties and trade agreements with EU countries

 Why was this FTA revived?

  • Resurgence of Talks: The trade deal comes to fruition after a hiatus of 16 years, during which discussions were stalled due to differences between the parties.
  • Strategic Realignment: Evolving geopolitical dynamics and mutual interests in reducing dependence on China played a pivotal role in reigniting negotiations and reaching a consensus.

Key Decisions

  • Investment Commitments: EFTA countries pledge to invest $100 billion in India, aiming to generate 1 million jobs within 15 years, demonstrating a shared commitment to mutual prosperity and development.
  • Market Access: The agreement ensures enhanced market access for both goods and services, with provisions for tariff concessions and non-discriminatory treatment of service providers.
  • Sectoral Focus: Priority sectors such as pharma, chemicals, minerals, and services receive particular attention, reflecting the potential for growth and collaboration in these areas.

Key Highlights of the Trade Pact

  • Scope of Agreement: The agreement covers tariff concessions for pharma, chemical products, minerals, and other key sectors, facilitating enhanced bilateral trade relations.
  • Binding Commitments: The pact includes a binding commitment to increase FDI from EFTA states into India by $50 billion within the first ten years and an additional $50 billion in the subsequent five years.
  • Mechanisms for Investment Facilitation: The agreement outlines mechanisms to facilitate investment flows from the private sector in EFTA countries, ensuring transparency and accountability.
  • Rebalancing Concessions: Provisions are in place to withdraw tariff concessions if the expected investment commitments are not met, ensuring accountability and adherence to agreed-upon terms.
  • Market Access Commitments: The agreement opens avenues for Indian service providers, particularly in audio-visual services, with commitments from EFTA nations to ensure non-discrimination and market access.
  • Visa Facilitation: EFTA countries have provided visa categories for intra-corporate transferees and independent professionals, enhancing opportunities for Indian service providers.
  • Tariff Reduction: The agreement entails the elimination of tariffs on industrial goods exported to India by EFTA companies, including pharmaceuticals, machinery, watches, and chemicals.
  • Agricultural Products Exemption: While agricultural items are largely excluded, meaningful tariff concessions have been granted for both basic and processed agricultural products.

Significance of the FTA’s Timing

  • Election Concerns: With numerous countries, including India, embarking on electoral processes, the window for negotiating free trade agreements (FTAs) may narrow significantly. Seizing the moment is imperative amid a global shift in supply chains away from China.
  • Geopolitical Opportunity: As global investors eye alternative destinations, delays in fostering investment flows and global integration could result in missed geopolitical advantages for India.
  • Addressing Trade Deficit: India seeks to mitigate trade deficits prevalent with many trading partners, including ASEAN nations. While previous FTAs provided access to intermediate goods, India’s relatively high average tariffs disadvantaged its position, granting preferential market access to FTA partners.

Challenges in India-EFTA Trade Agreement

  • Limited Tariff Benefits: Existing zero or low tariffs in EFTA countries limit the potential gains for Indian goods exports, particularly in industrial and agricultural sectors.
  • Trade Deficit Concerns: India’s significant trade deficit with EFTA, especially driven by imports of gold and precious metals, raises concerns about the imbalance in trade relations.
  • Market Access Limitations: The scope for increasing market access for Indian goods in EFTA remains low, posing challenges for trade expansion efforts.
  • Competition from Other Countries: EFTA investment commitments may face competition from other countries like Vietnam and Mexico, potentially impacting India’s ability to attract investment.
  • Political Uncertainty: The timing of signing the agreement is crucial due to upcoming elections in many countries, which could delay future trade agreements and geopolitical opportunities.

Opportunities in India-EFTA Trade Agreement

  • Investment Inflow: Commitments for $100 billion in investment over 15 years offer significant economic opportunities, including job creation and sectoral growth.
  • Services Sector Development: The agreement could bolster India’s services sector, enhancing its competitiveness and contributing to economic growth.
  • Sectoral Benefits: Key sectors like pharma, chemicals, food processing, and engineering stand to benefit from investment inflow, potentially reducing dependency on imports from China.
  • Joint Ventures: Collaboration in identified sectors through joint ventures could facilitate technology transfer, skill development, and product diversification.
  • Wider Economic Impact: Investment from EFTA countries, including Norway’s substantial sovereign wealth fund, could stimulate economic activity and fuel India’s growth trajectory.

Conclusion

  • The forthcoming trade agreement with EFTA signals a paradigm shift in India’s trade dynamics, emphasizing economic diversification and bolstering strategic sectors.
  • As India navigates evolving global trade landscapes, leveraging investments from EFTA nations presents an opportunity to stimulate growth, foster innovation, and reduce dependency on a single market.

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EoUs, SEZs to get RoDTEP sops

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RoDTEP Scheme, SEZ, EoU

Mains level: NA

In the news

  • In a significant move aimed at bolstering India’s export sector, the Centre recently announced the extension of tax refunds under the Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme to outbound shipments from Special Economic Zones (SEZs) and Export Oriented Units (EOUs).

About RoDTEP Scheme

  • Introduced by the Government as a duty remission scheme on exports, implemented from 1st January 2021.
  • Aimed at repealing and reducing taxes for exported products to boost exports in the country.
  • Administered by the Department of Revenue, Ministry of Finance.
  • Provides reimbursement of taxes, duties, and levies not refunded under any other mechanism, incurred by export entities in the manufacturing and distribution of exported products.
  • Includes direct costs incurred by exporters and prior stage cumulative indirect taxes on goods.

Compliance with the WTO

  • Follows the global principle that taxes/duties should not be exported.
  • Replaced the Merchandise Export Incentive Schemes (MEIS) after a WTO dispute ruling against India.

Eligibility Criteria

  • Applicable to all export sectors regardless of turnover, with the country of manufacturing of exported goods in India.
  • Applies to merchant or manufacturer exporters directly exporting goods.
  • Goods exported through e-commerce platforms are eligible.

Refund process

  • Rebate provided to eligible exporters as a percentage of the Freight on Board (FOB) value of exports.
  • Remission issued as transferrable e-scrips maintained in an electronic credit ledger by CBIC.
  • E-scrips can be used for paying basic customs duty on imports or transferred electronically to another party.

Back2Basics:

(1) Export Oriented Units (EOUs)

Details
Establishment EOUs are established under the provisions of the Foreign Trade (Development and Regulation) Act, 1992, and the Export Import Policy.
Regulation Regulated by the Directorate General of Foreign Trade (DGFT)
Benefits
  • Duty-free procurement of raw materials.
  • Reimbursement of GST and duty on fuels.
  • Fast track clearance facilities.
  • Exemption from industrial licensing for certain sectors.
Qualification Project must have a minimum investment of Rs. 1 crore in plant and machinery, except for specific sectors like software technology parts and biotechnology parks.
Geographical Scope EOUs can be set up anywhere in India based on scheme criteria.
Comparison with SEZs
  • SEZs are demarcated enclaves outside Customs jurisdiction.
  • SEZs enjoy tax exemptions, while EOUs pay taxes that can be claimed as refunds later.

 

(2) Special Economic Zones (SEZs)

Details
Inception Date SEZ policy in India was first implemented on April 1, 2000.
Objective
  • Enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
  • Promote exports and ensure a level playing field for domestic enterprises.
SEZ Act 2005 Enacted to provide the legal framework covering all important aspects of SEZ development and operations.
Setting up SEZs
  • Any private/public/joint sector, state government, or its agencies can establish an SEZ.
  • Foreign agencies can also set up SEZs in India.
Role of State Governments
  • State government representatives are consulted during the proposal consideration phase.
  • States must ensure the availability of basic infrastructure like water and electricity before recommending proposals.
Government Control
  • Statutory functions are controlled by the government in all SEZs.
  • The central government controls operation and maintenance in central government-controlled SEZs; the rest are privatized.
Exemption from Labor Laws
  • SEZs are subject to normal labor laws enforced by state governments.
  • A single-window clearance mechanism and simplified procedures/returns have been requested from state governments.
Monitoring Units in SEZs Annually by a unit approval committee consisting of a development commissioner, customs, and state government representatives.
Special Features for Business Units
  • Business units in SEZs are entitled to incentives and a simplified operating environment.
  • No license is required for imports, including second-hand machinery.

 


Try this PYQ from CSE Prelims 2016:

Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in

(a) Andhra Pradesh

(b) Gujarat

(c) Maharashtra

(d) Uttar Pradesh

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India Rejected Demand for Data Exclusivity in Drug Development in EFTA

Note4Students

From UPSC perspective, the following things are important :

Prelims level: European Free Trade Association (EFTA) Bloc

Mains level: Issues with FTA

Introduction

  • India has firmly rejected the demand from four European nations in the EFTA bloc for the inclusion of a ‘data exclusivity’ provision in proposed free trade agreements, citing its commitment to protecting the interests of the domestic generic drugs industry.

About the European Free Trade Association (EFTA) Bloc

Description
Member Iceland, Liechtenstein, Norway, Switzerland
Formation Established in 1960 by seven European countries as an alternative trade bloc to the EU
Trade Relations Free trade agreements among themselves and with other regions
Activities Participate in European Single Market through the EEA Agreement
Institutions EFTA Court, EFTA Surveillance Authority, EFTA Secretariat
Relationship with EU Not part of the EU,

But have close economic ties and trade agreements with EU countries

Debate over Data Exclusivity

  • Pharmaceutical Sector Implications: Data exclusivity provides innovator companies with exclusive rights over the technical data generated through expensive global clinical trials, preventing competitors from obtaining marketing licenses for low-cost versions during the exclusivity period.
  • Influence of Swiss Pharma Firms: Switzerland, home to major pharmaceutical firms like Novartis and Roche, has been advocating for data exclusivity, but India remains steadfast in its stance against it.

Protection of Generic Industry

  • Significance of Generic Industry: Barthwal highlighted the significant contribution of the generic drug industry to India’s exports and emphasized the government’s commitment to protecting its interests.
  • Export Growth: India emphasized that the generic drug industry’s growth aligns with its objective of promoting exports, showcasing its importance to the national economy.

Negotiations and Progress

  • Trade and Economic Partnership Agreement (TEPA): India and EFTA have been negotiating the TEPA since January 2008 to enhance economic ties, with talks covering various chapters, including intellectual property rights.
  • Advanced Stage of Talks: Negotiations are at an advanced stage, with both parties discussing trade in goods, rules of origin, intellectual property rights, and other key areas.

Conclusion

  • India’s firm stance against the inclusion of data exclusivity provisions in FTAs reflects its commitment to safeguarding the interests of its generic drug industry.
  • As negotiations with EFTA progress, India remains focused on promoting fair and equitable trade relations while upholding its principles of protecting domestic industries.

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India-China Bilateral Trade Hit a new record in 2023: Chinese Envoy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's over-dependence on Chinese imports

china

Introduction

  • Bilateral trade between India and China soared to a record $136.2 billion in 2023, marking a 1.5% year-on-year increase.

Why discuss this?

  • Trade Deficit Concerns: India has been grappling with a significant trade deficit in favor of China, exceeding $100 billion in 2022. Efforts to address this deficit remain a priority for India.
  • Diplomatic Vacancies: The absence of a Chinese Ambassador to Delhi for over 16 months and the lack of direct flights between the two countries underscore persistent diplomatic challenges.
  • Panchsheel Agreement Anniversary: The upcoming 70th anniversary of the India-China Panchsheel Agreement serves as a reminder of the importance of peaceful coexistence and adherence to international norms.

India-China Bilateral Trade Overview

  • Key Trading Partner: China stands as India’s largest trading partner, with significant exchanges in various commodities.
  • Major Imports from China: Electronic equipment, machinery, organic chemicals, and iron and steel are among the primary commodities imported from China into India.
  • Major Exports to China: Indian exports to China include cotton, gems, copper, ores, organic chemicals, and machinery.

Recent Measures to Curb Imports from China

  • Boycotts and Labeling Initiatives: Indian businesses are increasingly boycotting Chinese products, while the government mandates country of origin labelling for products sold online.
  • Ban on Chinese Apps: The Indian government has banned several Chinese mobile applications, citing concerns over national security and data privacy.

Challenges and Implications of Complete Boycott

  • Trade Deficits and Economic Realities: Complete boycotts may not be feasible as they could adversely affect Indian consumers, producers, and exporters.
  • Impact on Pharma Sector: The pharmaceutical sector, heavily reliant on Chinese imports for raw materials, could face significant disruptions.
  • Minimal Impact on China: UNCTAD data suggests that a complete boycott would have limited repercussions on China’s economy.
  • Integration and Policy Credibility: India’s integration with China and the potential fallout on policy credibility are crucial considerations.

Way Forward

  • Promoting Self-Reliance: India’s focus on self-reliance aims to bolster domestic capabilities and enhance competitiveness in global trade.
  • Government Support and Ecosystem Development: Government initiatives under the “Atmanirbhar” banner should prioritize industries needing support for self-reliance.
  • Addressing Cost Disadvantages: Long-term strategies must address the cost disparities in Indian manufacturing to reduce dependence on imports.
  • Conflict Resolution: Continued efforts towards conflict resolution and adherence to international norms will be crucial in navigating the complexities of this strategic partnership.

Back2Basics: Panchsheel Agreement

Details
Origin
  • Joint statement issued by PM Nehru during Chinese premier Zhou Enlai’s visits to India in 1954
  • Based on Westphalian norms of State Sovereignty
Principles
  1. Mutual respect for sovereignty and territorial integrity
  2. Mutual non-aggression
  3. Mutual non-interference in internal matters
  4. Equality and mutual benefit
  5. Peaceful co-existence
Relevance
  • Preserving independence, sovereignty, and territorial integrity
  • Reducing regional tensions and threats
  • Establishing India as an equal partner
  • Providing a framework for engagement
  • Portraying India as a robust democracy
  • Facilitating regional cooperation and connectivity

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What an ‘India Club’ means for its Shipping Industry?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India Club

Mains level: Read the attached story

Introduction

  • India is planning to establish its own Protection and Indemnity (P&I) entity, named the India Club, to insure ships operating along Indian coasts and waterways.
  • Presently, the Indian shipping industry relies on global firms for insurance coverage.

Understanding P&I Entities

  • Function and Structure: A P&I club is a mutual insurance association offering risk pooling, information, and representation for its members, including ship owners, operators, and other maritime stakeholders.
  • Coverage Scope: These clubs provide coverage for third-party risks like cargo damage, war, and environmental hazards, which traditional insurers often avoid.

Global P&I Club Landscape

  • International Group of P&I Clubs: Headquartered in London, this group comprises 13 clubs covering about 90% of the world’s ocean-going vessels.
  • Global Cooperation: These clubs operate on a cooperative model, pooling funds for large claims and determining liability through complex agreements.

Rationale behind making India Club

  • Reducing Vulnerability: A local P&I entity can mitigate risks related to international sanctions and pressures, as seen in the Russia-Ukraine conflict.
  • Focus on Domestic Shipping: Initially, the India Club will primarily insure ships involved in domestic movements.

Operational Model of India Club

  • Government-Led Initiative: The Ministry of Ports, Shipping, and Waterways is spearheading the formation of this coalition of domestic fleet owners.
  • Scope of Coverage: The India Club will cater to vessels on coastal routes and inland waterways within India.
  • Involvement of Traditional Insurers: Traditional insurance and reinsurance companies may participate in underwriting claims and offering services.

Challenges Facing

  • Limited Beneficiaries: The initiative might primarily benefit state-owned and smaller shipping lines, as many Indian-owned ships operate under foreign flags to evade stringent regulations.
  • Acceptance Issues: The India Club’s coverage might not be recognized by global traders.
  • High Coverage Requirements: Offering extensive coverage, especially for large crude carriers, could pose financial challenges.

Conclusion

  • Strategic Move: Establishing the India Club is a strategic step towards enhancing India’s maritime insurance capabilities and reducing dependence on international entities.
  • Balancing Challenges and Opportunities: While the initiative presents opportunities for greater autonomy in maritime insurance, it also faces challenges in global acceptance and financial viability.
  • Potential for Growth: If successfully implemented, the India Club could significantly bolster India’s maritime sector, offering tailored insurance solutions for domestic shipping needs.

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India-Oman to sign FTA in Jan 2024

Note4Students

From UPSC perspective, the following things are important :

Prelims level: FTA, CEPA

Mains level: India-Oman Trade Relations

oman

Central Idea

  • India and Oman are rapidly progressing in their negotiations for a Comprehensive Economic Partnership Agreement (CEPA), expected to be signed in January 2024.
  • The second round of talks was recently concluded in Muscat, indicating both countries’ eagerness to finalize the deal.

India-Oman Trade Relations

  • Export Destination: Oman is India’s third-largest export destination in the Gulf Cooperation Council (GCC), making the FTA crucial for enhancing Indian exports.
  • Current Trade Dynamics: Over 80% of Indian goods currently enter Oman with an average import duty of 5%, and the FTA aims to reduce these barriers.

Potential Benefits of the FTA

  • Boost in Exports: The agreement is expected to significantly increase Indian exports in various sectors, including gasoline, iron and steel, electronics, and machinery.
  • Key Export Sectors: Sectors like motor gasoline, iron and steel products, electronics, machinery, textiles, plastics, boneless meat, essential oils, and motor cars are likely to benefit from duty elimination.

Economic Context and Strategic Importance

  • Oman’s Economy: With a GDP of about USD 115 billion and a higher per capita income compared to India, Oman presents a market for diversified and higher-value Indian goods and services.
  • Bilateral Trade Growth: India-Oman bilateral trade reached USD 12.39 billion in 2022-23, with Indian exports and imports showing significant growth.
  • Oman’s Position: Oman’s strategic location in the Arabian Gulf region, with key ports along the Arabian Sea and the Gulf of Oman, is of utmost importance to India.
  • Historical Ties: The longstanding connection between Oman’s ruling family and India has fostered strong bilateral relations, with a significant Indian community contributing to these ties.

India-Oman Strategic Partnership

  • Defense and Security: The partnership, strengthened by a MoU signed in 2005, includes joint exercises and cooperation in maritime security.
  • Trade and Commerce: Bilateral trade and joint ventures are key pillars of engagement, with significant Indian investment in Oman.

Future Collaborations and Regional Stability

  • Space and Rare Earth Metals: Prospects for cooperation in space exploration and rare earth metals exploration are on the horizon.
  • Connectivity Projects: Oman could play a crucial role in India’s proposed connectivity corridors and infrastructure projects in West Asia.

Conclusion

  • Shared Interests: The deepening India-Oman relationship, marked by shared interests and mutual respect, positions Oman as India’s gateway to West Asia.
  • Broader Engagement: As India seeks to expand its global outreach, particularly in West Asia, Oman’s strategic importance and balanced foreign policy make it a key ally in the region.

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US, EU slap Countervailing Duties on 4 Indian goods

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Countervailing Duties (CVDs), RODTEP Scheme

Mains level: Read the attached story

Central Idea

  • The US and the European Union have imposed countervailing duties (CVDs) on select Indian products such as paper file folders, common alloy aluminum sheet, and forged steel fluid end blocks.
  • These measures are in retaliation against India’s Remission of Duties and Taxes on Export Products (RoDTEP) scheme, initiated in January 2021.

About Countervailing Duties (CVDs)

Details
Definition Tariffs imposed to neutralize the adverse effects of subsidies provided by a foreign government to their export industries.
Purpose To protect domestic industries from unfair competition due to imports subsidized by the exporting country’s government.
Investigation & Imposition Requires a domestic investigation to confirm the presence of subsidies and their impact on domestic industries.
WTO Compliance Imposition of CVDs must comply with World Trade Organization rules.
Types of Subsidies Includes direct transfers of funds, tax concessions, loan guarantees, and provision of goods/services at a discount.
Calculation The duty amount is typically equivalent to the value of the foreign subsidy.
Duration Not permanent; imposed for a specific period and subject to review and removal.
Global Use Frequently used by countries like the United States, European Union, Canada, and India.
Controversy and Disputes Can lead to trade disputes, viewed by some as protectionist or unjustified.
Impact on Prices May result in higher prices for affected goods in the importing country due to increased import costs.

 India’s Response to the Duties

  • Government and Exporters’ Defense: The Indian government and affected exporters have actively defended against the subsidy allegations. Their defense covered various programs and schemes at both the Central and State levels in India.
  • Method of Defense: The defense was presented through written and oral responses during the investigations.

Potential WTO Dispute

  • India’s Stance on Dispute Resolution: Minister of State for Commerce and Industry indicated India’s openness to bilateral resolution.
  • WTO Dispute Settlement Mechanism: Any party could approach the WTO Dispute Settlement mechanism if they believe a WTO member has adopted measures inconsistent with WTO agreements.

Conclusion

  • Growing Trade Tensions: The imposition of CVDs by the US and EU signifies escalating trade tensions with India, particularly concerning the RoDTEP scheme.
  • Impact on Indian Exports: These duties could potentially impact Indian exporters, affecting trade dynamics between India and these global economic powers.
  • Prospect of WTO Involvement: The possibility of this dispute reaching the WTO highlights the complexities of international trade laws and the need for careful navigation of global trade policies.

Back2Basics: RoDTEP Scheme

Details
Introduction Announced in 2020, replacing the Merchandise Exports from India Scheme (MEIS).
Objective To refund taxes and duties on exported products not covered under any other scheme, enhancing export competitiveness.
Scope and Coverage Covers various sectors, beneficial for a wide range of industries, including those not covered under MEIS.
Rebate Rates Varies based on the taxes and duties incurred on the production and distribution of the exported product.
Eligibility Exporters must comply with criteria including the condition that goods must be manufactured in India.
Claim Process Rebate claimed as a transferable duty credit/electronic scrip, maintained in an electronic ledger.
Implementation Implemented by the Directorate General of Foreign Trade (DGFT) and Customs Department.
Impact Aims to make Indian exports more competitive globally by offsetting domestic taxes and levies.
Compliance with WTO Designed to comply with India’s commitments under the WTO framework.
Process Fully digital and transparent process for claiming rebates, reducing the compliance burden on exporters.

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How Natural Gas is central to ties between India and Qatar?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: LNG imports by India

Mains level: Read the attached story

qatar

India-Qatar Diplomatic Spat

  • The recent death sentences handed down to eight former Indian Navy personnel by a Qatari court pose a significant challenge to the traditionally amicable ties between New Delhi and Doha.
  • In international relations, trade dynamics often play a pivotal role, and in the case of India and Qatar, the balance of trade is heavily skewed in Qatar’s favor, primarily due to imports.

LNG Dependency and Diplomacy

  • Trade Imbalance: Qatar enjoys significant leverage in the bilateral relationship because the trade balance is weighted heavily in its favor, with imports from Qatar far exceeding India’s exports.
  • LNG Dominance: Liquefied natural gas (LNG) is at the heart of this trade relationship, accounting for nearly 50% of India’s imports by value from Qatar.
  • Energy Security: India’s import dependency on natural gas is around 50%, and with a national drive to increase natural gas consumption, LNG imports are expected to grow, even with potential increases in domestic production.

Need for India’s Energy Transition

  • Cleaner Alternative: Natural gas is viewed as a cleaner and more affordable alternative to conventional petroleum fuels, aligning with India’s efforts to reduce carbon emissions and transition to cleaner energy sources.
  • Energy Security: Given India’s high import dependency on crude oil, natural gas is seen as a critical component of energy security.
  • Ambitious Targets: India aims to raise the share of natural gas in its primary energy mix to 15% by 2030, a goal likely to drive increased LNG imports in the years ahead.

Sensitivity of the Present Situation

  • Diplomatic Challenge: The case of the retired Navy personnel presents a sensitive challenge for Indian diplomacy, given India’s energy security concerns and ambitions.
  • Trade Dependency: India’s energy security relies on Qatar, making diplomatic relations delicate.

Trade Figures

  • Imports from Qatar: In FY2022-23, India’s total imports from Qatar were valued at $16.81 billion, with LNG accounting for $8.32 billion or 49.5%.
  • Exports to Qatar: In contrast, India’s exports to Qatar in the same period amounted to only $1.97 billion.
  • LNG Dependency: Of the 19.85 million tonnes of LNG imported by India in FY23, 10.74 million tonnes (54%) came from Qatar.

Global LNG Dynamics

  • Seller’s Market: The global LNG market has become a seller’s market following geopolitical disruptions, such as Russia’s invasion of Ukraine.
  • Term Contracts vs. Spot Purchases: Term contracts offer more stability compared to spot purchases, particularly during supply gluts or shortages.
  • Qatar’s Position: Qatar, as the world’s largest LNG exporter, has gained significant leverage and stability in the LNG market.
  • Long-Term Contracts: LNG importers worldwide, including India, are seeking long-term contracts with major suppliers like Qatar to secure stable supplies.

Future Prospects for India

  • Long-Term Contracts: India is actively negotiating for long-term LNG contracts, and Petronet’s existing contract with Qatar is set to expire in 2028.
  • Buyer’s Market: Industry experts predict that the global LNG market may become a buyer’s market in the coming years due to new LNG export projects. Qatar remains a key player in this scenario.

Conclusion

  • Balancing India’s energy security needs with diplomatic challenges in the backdrop of trade dependency on Qatar, especially in LNG, is a complex task.
  • India’s pursuit of long-term LNG contracts reflects its determination to secure stable energy supplies while navigating international relations sensitively.
  • The evolving global LNG market dynamics will continue to influence India’s energy choices and diplomatic strategies.

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India’s Current Account Deficit (CAD) Widens: Implications and Outlook

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Current Account Deficit (CAD)

Mains level: Read the attached story

Central Idea

  • Data released by the Reserve Bank of India (RBI) reveals that India’s Current Account Deficit (CAD) expanded significantly to $9.2 billion, equivalent to 1.1% of GDP, during the April-June quarter.
  • This represents a substantial increase from the preceding three months when it stood at $1.3 billion, or 0.2% of GDP.
  • Contrasting with the year-earlier quarter of fiscal 2022-23, where the CAD was $17.9 billion (2.1% of GDP), the current scenario reflects evolving economic dynamics.

What is Current Account Deficit (CAD)?

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

Current Account Deficit (CAD) =  Trade Deficit + Net Income + Net Transfers

(1) Trade Deficit

  • Trade Deficit = Imports – Exports
  • A Country is said to have a trade deficit when it imports more goods and services than it exports.
  • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
  • A trade deficit represents an outflow of domestic currency to foreign markets.

(2) Net Income

  • Net Income = Income Earned by MNCs from their investments in India.
  • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
  • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
  • Net income is measured by the following things:
  1. Payments made to foreigners in the form of dividends of domestic stocks.
  2. Interest payments on bonds.
  3. Wages paid to foreigners working in the country.

(3) Net Transfers

  • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
  • It Includes Remittances, Gifts, Donation etc

How does Current Account Transaction takes place?

  • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
  • Current account transactions are transactions that require foreign currency.
  • Following transactions with from which component these transactions belong to :
  1. Component 1 : Payments connection with Foreign trade – Import & Export
  2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
  3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

What are the reasons for the current account deficit?

deficit

  • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
  • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
  • However, with global demand picking up, merchandise exports have also been rising.

How will a large CAD affect the economy?

  • A large CAD will result in the demand for foreign currency rising, thus leading to depreciation of the home currency.
  • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
  • However, worsening CAD will put pressure on the inflow under the capital account.
  • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

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Extension to the RoDTEP Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RoDTEP Scheme

Mains level: Not Much

Central Idea

  • In light of a continuous seven-month decline in goods exports until August, the government has taken action to bolster outbound shipments.
  • The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme’s applicability has been extended for nine more months, now in effect until June 30, 2024.

About RoDTEP Scheme

Objective To refund central, state, and local duties or taxes on exported products.

The rebate does not apply to duties and taxes that have already been exempted, remitted, or credited.

Launch Date Introduced in January 2021.

Replacement for the Merchandise Export Scheme, which was deemed non-compliant with WTO Rules.

Rates of Tax Refund Tax refund rates under RoDTEP vary from 0.5% to 4.3% across different sectors.
Claim Process Exporters can claim the rebate as a percentage of the Freight On Board (FOB) value of their exports.
Issuance of Rebates Rebates are issued in the form of transferable duty credits or electronic scrips (e-scrips).
Significance of the Scheme Enhances the competitiveness of Indian products in global markets by refunding various taxes.

Expected to have a substantial impact on India’s trade volumes, export figures, and competitiveness.

Enables Indian exporters to meet international export standards and access GST refunds efficiently.

 

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India-Middle East-Europe Corridor: The way to a new world order

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India-Middle East-Europe Economic Corridor (IMEC).

Mains level: IMEC and its significance

Corridor

What’s the news?

  • In a historic development, global leaders, including the Prime Minister of India, the President of the United States, the Chancellor of Germany, the Crown Prince of Saudi Arabia, the President of the UAE, the Prime Minister of Italy, and the President of the EU, came together at a global summit in New Delhi on September 10 to establish the India-Middle East-Europe Economic Corridor (IMEC).

Central idea

  • The ancient Red Sea route, dating back to the Common Era, once connected distant civilizations, facilitating the exchange of goods and ideas. IMEC, a recently established trade corridor, is poised to reshape global trade dynamics. It envisions reliable and cost-effective transport connectivity to accelerate the development and integration of Asia, the Arabian Gulf, and Europe.

What is IMEC?

  • The India-Middle East-Europe Economic Corridor is an economic initiative aimed at creating a strategic trade and transportation corridor that connects India with the Middle East and Europe.
  • It was established through a memorandum of understanding (MOU) signed by the leaders of India, the United States, Germany, Saudi Arabia, the UAE, Italy, and the EU on September 10 in New Delhi.
  • IMEC envisions the development of a reliable and cost-effective transport network, including railways and ship-to-rail transit, to facilitate the movement of goods and services between India, the United Arab Emirates (UAE), Saudi Arabia, Jordan, Israel, and the European Union (EU).
  • It seeks to offer an alternative route for trade between Asia and Europe, reducing transit times and logistics costs compared to existing maritime routes like the Suez Canal.

Historic significance

  • Ancient Trade Routes: IMEC harkens back to the historic trade routes of the ancient world, particularly the Red Sea route that dates back to the beginning of the Common Era. This route facilitated the exchange of goods, culture, and ideas between distant civilizations. IMEC, in its modern form, symbolizes a contemporary effort to reestablish a similar corridor.
  • India’s Historic Role: The corridor’s historical significance for India is notable. In ancient times, India was at the heart of important trade routes, connecting it to regions as far away as Rome. IMEC reaffirms India’s role as a pivotal player in regional and global trade, reminiscent of its historical significance in trade networks.
  • Geopolitical Importance: Throughout history, regions at the crossroads of trade routes have held significant geopolitical clout. IMEC’s establishment underscores the contemporary geopolitical importance of the regions it connects, particularly India, the Middle East, and Europe.

Significance of IMEC

  • Historical Revival: IMEC revives ancient trade routes, particularly the Red Sea route, dating back to the Common Era. It reconnects regions and rekindles the spirit of historical trade.
  • Geopolitical Clout: IMEC’s establishment gathered leaders from India, the United States, Germany, Saudi Arabia, the UAE, Italy, and the EU. This underscores its geopolitical significance, positioning these regions as pivotal players in global trade.
  • Economic Growth: IMEC is expected to boost economic cooperation and trade among its participating nations, leading to economic growth and development.
  • Connectivity and Integration: The corridor aims to restore and enhance connectivity between regions with historical ties, creating a cohesive economic and trade network spanning Asia, the Arabian Gulf, and Europe.

Potential of IMEC to Reshape Global Trade

  • Shorter Routes: IMEC offers shorter and more cost-effective trade routes compared to the congested Suez Canal and Mediterranean routes. This can significantly reduce transit times and logistics costs for global trade.
  • Multimodal Connectivity: IMEC envisions a reliable railway and ship-to-rail transit network, complementing existing maritime and road routes. This multimodal connectivity enhances trade efficiency and reliability.
  • Regional Trade Boost: IMEC enhances regional trade by connecting major ports and facilitating the movement of goods between India, the UAE, Saudi Arabia, Jordan, Israel, and the EU. This fosters regional economic integration.
  • Standard Gauge Infrastructure: IMEC’s adoption of a standard gauge throughout the corridor eliminates the need for gauge changes, ensuring smoother and more efficient transportation of goods.

Challenges thet IMEC Must Overcome

  • Infrastructure Development: Building the necessary rail links, terminals, and inland container depots (ICDs) at major Gulf and Mediterranean ports is a complex and extensive endeavor.
  • Cross-Border Connectivity: Ensuring seamless connectivity across borders, especially in the Middle East, demands cooperation between multiple countries. This includes extending rail networks from the Gulf to Israel through Jordan.
  • Environmental Considerations: IMEC’s commitment to green and sustainable growth involves addressing environmental challenges, including reducing greenhouse gas emissions.
  • Coordination and Financing: Coordination among participating countries and securing financing are crucial to overcome financial barriers and ensure the corridor’s viability.

Conclusion

  • IMEC marks a historic moment for India and its partners, offering incredible potential for regional and global growth. As a catalyst for collective growth, global cooperation, and connectivity, IMEC embodies the spirit of Vasudhaiva Kutumbakam, benefiting millions across continents. This corridor’s establishment is just the beginning of a new era of global economic collaboration and shared prosperity.

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Greshams Law: What happens when governments fix Currency Exchange Rates?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gresham's Law

Mains level: Not Much

gresham's law

Central Idea

  • The law, named after English financier Thomas Gresham, came into play most recently during the economic crisis in Sri Lanka last year.
  • The Central Bank of Sri Lanka has fixed the exchange rate between the Sri Lankan rupee and the U.S. dollar

About Gresham’s Law

  • Thomas Gresham: The law is named after Thomas Gresham, an English financier who advised the English monarchy on financial matters. It extends beyond paper currencies and applies to commodity currencies and various goods.
  • Bad money drives out good: This maxim illustrates a phenomenon that occurs when government-fixed exchange rates diverge from market exchange rates, causing undervalued currency to be withdrawn from circulation.
  • Arbitrarily Fixed Prices: Gresham’s Law operates whenever governments arbitrarily set prices, causing a commodity to become undervalued compared to its market exchange rate. This undervaluation drives the commodity out of the formal market.
  • Black Market: In such scenarios, the only way to acquire the undervalued commodity is through the black market, as it is no longer available through official channels.
  • Goods Outflow: Countries can also experience the outflow of certain goods when their prices are forcibly undervalued by the government.

Application to Commodity Money

  • Gold and Silver Coins: Gresham’s Law is particularly evident when a government fixes the exchange rate of commodity money, like gold and silver coins, well below their market value. In response, people may hoard or melt these coins to obtain their intrinsic value, which is higher than the government-set rate.

Recent Example in Sri Lanka

  • Economic Crisis in Sri Lanka: Gresham’s Law was observed during the economic crisis in Sri Lanka, where the central bank fixed the exchange rate between the Sri Lankan rupee and the U.S. dollar.
  • Rupee Overvaluation: The government mandated that the price of the U.S. dollar should not exceed 200 Sri Lankan rupees, even though the black market rate indicated a higher value. This overvaluation of the rupee led to a decline in the supply of dollars and pushed the U.S. dollar out of the formal foreign exchange market.
  • Black Market Transactions: Individuals seeking U.S. dollars for foreign transactions were compelled to purchase them from the black market at rates exceeding 200 Sri Lankan rupees per dollar.

Conditions for Gresham’s Law to Apply

  • Government-Imposed Fixed Rates: Gresham’s Law operates when government authorities establish and enforce fixed exchange rates between currencies.
  • Effective Implementation: Effective enforcement of these rates by authorities is essential for the law to take effect.

Anti-thesis Concept: Thiers’ Law

  • “Good Money Drives Out Bad”: In the absence of government-imposed exchange rate fixes, the opposite phenomenon occurs. People tend to abandon currencies they perceive as of lower quality in favour of those they consider better, leading to the dominance of “good money.”
  • Thiers’ Law: This concept, known as Thiers’ Law and named after French politician Adolphe Thiers, complements Gresham’s Law.

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Strengthening export control measures for Dual-Use Items

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dual-Use Items

Mains level: Not Much

dual-use items

Central Idea

  • The government has recently announced its commitment to enhancing the control of dual-use items to prevent their misuse by non-state actors and terrorists.
  • Dual-use items refer to goods that can be utilized for both civilian and military purposes.

Understanding Dual-Use Items

  • Dual-use items are commodities with the potential for application in both civilian and military contexts.
  • They are heavily regulated due to their capacity to be initially intended for civilian use and later repurposed for military or even terrorist activities.
  • Some examples include global positioning satellites, missiles, nuclear technology, chemical and biological weapons, night vision technology, thermal imaging equipment, specific models of drones, precision-engineered aluminium pipes, and certain types of ball bearings.

Control Mechanisms for Dual-Use Items

  • International Cooperation: Most industrialized nations have established export controls on specific categories of designated dual-use technologies.
  • Multilateral Agreements: Various international treaties and agreements govern the export of these items.
  • India’s Participation: India is a signatory to major multilateral export control regimes like the Missile Technology Control Regime (MTCR), Wassenaar Arrangement (WA), Australia Group (AG), and Nuclear Suppliers Group (NSG). It is also party to key conventions such as the Chemical Weapons Convention (CWC) and Biological and Toxic Weapons Convention (BWC).
  • DGFT’s Role: In India, the Director General of Foreign Trade (DGFT) plays a pivotal role as a facilitator of exports and imports. The DGFT maintains a specialized list known as SCOMET (Specialty Chemicals, Organisms, Materials, Equipment, and Technologies) to regulate dual-use items.

What is the SCOMET List?

  • SCOMET item is an acronym for Special Chemicals, Organisms, Materials, Equipment, and Technologies.
  • These are dual-use items that can be used for both civilian and military applications. India’s Foreign Trade Policy regulates the export of items on the SCOMET List.
  • Exporting these items and technologies falls under strict regulations. It can either be prohibited or permitted only under a license.
  • The SCOMET control list aligns with the control lists of various multilateral export control regimes and conventions.

Necessity of Controlling Dual-Use Items

  • India’s Commitment: India is firmly committed to non-proliferation efforts related to dual-use items.
  • Integral Component: Export control over these items forms an integral part of India’s broader export control system.
  • Compliance: It ensures that sensitive and dual-use goods, including those covered by the Missile Technology Control Regime (MTCR), are traded in full compliance with India’s obligations under various international regimes.

Conclusion

  • The government’s commitment to enhancing export control measures for dual-use items reflects its dedication to global non-proliferation efforts and the responsible trade of sensitive technologies.
  • Collaborative efforts among governments, industries, and stakeholders remain crucial in achieving effective export control of these items.

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Understanding Curbs on Rice Exports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Rice Export Curbs

rice

Central Idea

  • The Indian government takes measures to stabilize domestic rice prices and ensure food security.
  • Recent actions include banning white rice exports, imposing a 20% export duty on par-boiled rice, and allowing Basmati rice exports under specific conditions.

Rice Production Estimate: Shows decline

  • Third Advanced Estimate shows a 13.8% decline in Rabi season 2022-2023’s rice production.
  • Kharif sowing data indicates increased rice cultivation, but delayed sowing predicted due to monsoon issues.
  • Expectations of new season crop arrivals starting after the first week of September.

Rice Exports

  • India holds a 45% share in the global rice market and leads in exports.
  • April-May 2023 rice exports show a 21.1% increase compared to the previous fiscal year.
  • May records a 10.86% rise in Basmati rice exports and 7.5% increase in non-Basmati rice exports.
  • Non-Basmati rice shipments have been rising for three years, and Basmati exports in 2022-2023 exceed the previous year.
  • Total rice exports (excluding broken rice) till August 17 are 15% higher than the same period last year.

Impact on Indian Farmers

  • Increased Minimum Support Price (MSP) for rice benefits farmers.
  • Current paddy procurement prices by rice millers are higher than MSP, ensuring better returns.
  • Export restrictions prevent steep rice price increases in the domestic market.
  • The government’s high benchmark price strategy benefits farmers, ensures availability, and avoids price spikes.

Exporters’ Perspectives

  • Competitive prices of Indian par-boiled rice globally, despite the 20% export duty.
  • Some rice-exporting countries, like Indonesia, now seek imports due to market dynamics.
  • Calls for classifying rice based on type (common vs. specialty) instead of Basmati and non-Basmati.
  • Suggestion to insulate Geographical Indication (GI) recognized rice from general market interventions.
  • Concerns about the impact of export restrictions on farmers and calls for policy adjustments.

Conclusion

  • India’s efforts to balance domestic and international rice markets involve export restrictions and price management.
  • Rice exports remain competitive even with export duty, driven by global demand.
  • Export policies and decisions need to be aligned with market dynamics to benefit farmers and the economy.

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India and the Northern Sea Route

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Northern Sea Route

Mains level: Read the attached story

Northern Sea Route

Central Idea

  • Murmansk, the gateway to the Arctic and the starting point of the Northern Sea Route (NSR), is witnessing a growing Indian presence in cargo traffic.

Why discuss this?

  • India accounts for 35% of the cargo handled by the Murmansk port in the first seven months of 2023.
  • This surge in Indian engagement in the Arctic holds significant implications for India’s economic and water security.

About Northern Sea Route

  • The Northern Sea Route (NSR) is a maritime shipping route that runs along the northern coast of Russia, connecting the Atlantic Ocean to the Pacific Ocean.
  • It traverses the Arctic Ocean and Siberian coastline, providing a shorter route between Europe and Asia compared to the traditional routes through the Suez Canal or the Panama Canal.
  • NSR stretches from the Barents Sea, near the Arctic archipelago of Novaya Zemlya, to the Bering Strait, separating Russia from Alaska

Significance of the Arctic for India

  • Climate Impact: The Arctic’s susceptibility to climate change holds potential consequences for India, impacting economic and water security.
  • Resource Prospects: The Arctic region harbors substantial untapped hydrocarbon reserves, including oil, gas, coal, zinc, and silver, making it an enticing prospect for India’s energy needs.
  • Sustainable Approach: India’s Arctic Policy of 2022 underscores adherence to UN Sustainable Development Goals in the region’s economic development.

India’s Arctic Journey

  • Historical Engagement: India’s connection with the Arctic dates back to the signing of the Svalbard Treaty in 1920.
  • Scientific Endeavors: India has undertaken various scientific studies and research initiatives in the Arctic, including atmospheric, marine, and glaciological studies.
  • Observations and Research: Notably, India’s research station “Himadri” in Ny-Alesund and its multi-sensor moored observatory and atmospheric laboratory demonstrate its commitment to Arctic research.

Reviving the NSR

  • NSR Overview: The NSR is the shortest shipping route connecting Europe and Asia-Pacific countries, traversing the Arctic Ocean.
  • Distance Advantage: The NSR boasts potential distance savings of up to 50% compared to traditional routes via Suez or Panama, gaining prominence after the 2021 Suez Canal blockage.
  • Russia’s Role: Russia, equipped with a nuclear-powered icebreaker fleet, ensures safe navigation by breaking ice along the NSR.

Drivers for India’s NSR Engagement

  • Cargo Traffic Growth: India’s involvement is fueled by the consistent rise in cargo traffic along the NSR, coupled with a 73% growth rate between 2018-2022.
  • Energy Imports: As India increasingly imports energy resources from Russia, the NSR offers a reliable and secure transportation avenue.
  • Strategic Transit: The Chennai-Vladivostok Maritime Corridor (CVMC) project aligns with India’s geographical position, enabling efficient transit routes and shorter transport times.

Conclusion

  • India’s burgeoning involvement in the Arctic, underscored by its significant role in the Northern Sea Route’s cargo traffic, exemplifies its strategic pursuit of diversified energy resources and enhanced trade corridors.
  • As India forges partnerships with Russia and navigates the challenges of a changing Arctic landscape, it’s poised to play a pivotal role in shaping the future of Arctic trade and sustainable development.

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What flipped the decline of India’s FOREX reserves?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: Read the attached story

forex

Central Idea

  • India’s forex reserves were at $578.4 billion as of March 2023—a fall of over $28 billion since March 2022, $19.7 billion of which was due to valuation changes, as per RBI.
  • The depreciation of the US dollar and increased capital flows contributed to a surge in reserves this year.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  1. Foreign Currency Assets (FCAs)
  2. Special Drawing Rights (SDRs)
  3. Gold Reserves
  4. Reserve position with the International Monetary Fund (IMF)

Current Scenario: Impact of US Rate Hikes and Capital Inflows

  • US Rate Hikes and Capital Flows: The US Federal Reserve’s rate hikes have triggered a flow of foreign investments into the US treasury, leading to capital outflows from India.
  • Potential Capital Inflows: So far this year, the US Fed has raised rates by 75 basis points. This could potentially increase capital inflows into emerging markets like India.
  • Improved Balance of Payment (BoP): India’s Balance of Payment has improved significantly, with the current account deficit projected to be less than 2% of GDP.
  • Resumption of Equity Capital Flows: There is a resumption in equity capital flows, and India continues to attract substantial investments compared to other emerging market peers.

Global Standing of India’s Forex Reserves

  • Rank among Nations: India ranks fourth among countries with the highest forex reserves, following China, Japan, and Switzerland.
  • Differences in Reserve Accumulation: Most countries maintain large and persistent current account surpluses, owing to a competitive exports market. However, India, Brazil, and the US have accumulated reserves primarily through capital flows rather than a significant current account surplus.

RBI’s Strategy for Diversifying Forex Reserves

  • Internationalizing the Rupee: The RBI aims to reduce reliance on foreign currencies by internationalizing the Indian rupee.
  • Exploring Use of Asian Clearing Union Currencies: The RBI is exploring the use of currencies from member states of the Asian Clearing Union, including the rupee, for payment and settlement among themselves.
  • Agreement with Sri Lanka: An agreement with the Central Bank of Sri Lanka enables the use of the rupee as a designated foreign currency, promoting trade between the two countries and facilitating rupee transactions for Indian tourists in Sri Lanka.

Conclusion

  • While India’s forex reserves have seen fluctuations due to various factors, the country’s sustained efforts to diversify and strengthen its reserves position indicate a proactive approach by the RBI.
  • The ongoing focus on attracting foreign investments, coupled with measures to internationalize the rupee, may contribute to a more stable and resilient forex reserve management system in the future.

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Niti Aayog’s Export Preparedness Index, 2022

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Export Preparedness Index (EPI

Mains level: Not Much

export
PC: Live Mint

Central Idea

  • Tamil Nadu has emerged as the most export-competitive state in India, securing the top spot in the Export Preparedness Index 2022 by Niti Aayog.

Export Preparedness Index (EPI)

  • EPI is a comprehensive tool aimed at gauging the export readiness of India’s states and union territories (UTs).
  • The index analyses various parameters, enabling the identification of strengths and weaknesses in each region and offering valuable insights for effective policy formulation.
  • EPI focuses on four pillars:
  1. Policy: This pillar evaluates the effectiveness of a state’s trade policy, providing strategic direction for both exports and imports.
  2. Business Ecosystem: The efficiency of a business ecosystem is crucial for attracting investments and fostering an enabling infrastructure for startups and entrepreneurship.
  3. Export Ecosystem: This pillar assesses the business environment specific to exports, determining the level of support and facilitation provided to exporters.
  4. Export Performance: The sole output-based parameter, this pillar examines the reach of export footprints in states and UTs, measuring their actual export achievements.
  • 10 Sub-pillars include: Export Promotion Policy; Institutional Framework; Business Environment; Infrastructure; Transport Connectivity; Export Infrastructure; Trade Support; R&D Infrastructure; Export Diversification; and Growth Orientation.

States performance

  • Export-Competitive State: Top Contenders: Maharashtra, Karnataka, and Gujarat (last year’s leader) followed closely, while Haryana claimed the fifth position.
  • Coastal States’ Dominance: Coastal states dominated the top rankings, with four out of the top five positions occupied by them. Andhra Pradesh also secured the ninth spot.
  • Gujarat- Leading Merchandise Exporter: Gujarat holds the top position as the leading merchandise exporter, accounting for one-third of India’s total merchandise exports.
  • Top Five Exporting States: Maharashtra, Tamil Nadu, Karnataka, and Uttar Pradesh complete India’s top five exporters.
  • Seven States’ Dominance: An impressive 75% of India’s total exports are contributed by just seven states.

Reasons for export boost

  • Export Promotion Policies: The top-performing states have implemented export promotion policies at both state and district levels.
  • Diversified Export Basket: These states have a diverse export basket, showcasing their global footprint.
  • Promoting Unique Products: Successful states focus on promoting products unique to their region. Tamil Nadu and Karnataka lead in exporting geographical indication (GI) products.

India’s Export Performance

  • Resilient Exports: Despite pandemic challenges and supply-side issues, India’s goods exports remained robust, reaching an all-time high of $447 billion in FY23.
  • Target for FY24: The government refrained from setting a specific export target for FY24 due to global headwinds but may aim for $450 billion to $500 billion in goods exports.
  • Services Exports: Services exports amounted to $323 billion in FY23, bringing India’s overall exports to $770 billion.

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India- UAE Local Currency Settlement System (LCSS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Local Currency Settlement System (LCSS)

Mains level: Read the attached story

uae dirham rupee india lcss local currency

Central Idea

  • India and the United Arab Emirates (UAE) signed a pact during PM Modi’s visit to Abu Dhabi.
  • It established a framework for promoting the use of the Indian rupee (INR) and UAE Dirham (AED) in cross-border transactions.

Local Currency Settlement System (LCSS)

  • LCSS Establishment: The framework aims to establish a Local Currency Settlement System (LCSS) between India and the UAE.
  • Domestic Currency Transactions: LCSS enables exporters and importers to invoice and pay in their respective domestic currencies.
  • Foreign Exchange Market Development: LCSS facilitates the development of an INR-AED foreign exchange market.
  • Transaction Optimization: The use of local currencies optimizes transaction costs and settlement time.
  • Remittance Benefits: LCSS benefits remittances from Indians residing in the UAE.

Interlinking of Payment Systems: UPI-IPP Linkage

  • Payment System Linkage: The Memorandum of Understanding (MoU) includes the linking of India’s Unified Payments Interface (UPI) with the UAE’s Instant Payment Platform (IPP).
  • Card Switches and Messaging Systems: It explores linking the card switches (RuPay switch and UAESWITCH) and messaging systems of both countries.
  • Efficient Cross-Border Fund Transfers: UPI-IPP linkage facilitates fast, convenient, safe, and cost-effective cross-border fund transfers.
  • Mutual Acceptance of Domestic Cards: The agreement enables the mutual acceptance of domestic cards and processing of card transactions.

Impact of the Move

  • Trade boost: Bilateral trade between India and the UAE reached around $85 billion in FY23.
  • Exchange Rate Risk Management: The agreement helps Indian exporters’ hedge exchange rate risks in rupee-based trade.
  • Internationalization of the Rupee: It supports India’s efforts to internationalize the rupee and reduce dependence on the US dollar.
  • Interest from Other Countries: Countries in Africa, the Gulf region, Sri Lanka, and Bangladesh have shown interest in trading in rupee terms.

Significance for Exporters

  • Denominating in Local Currencies: Denominating export contracts and invoices in local currencies minimizes exchange-rate risks and aids in competitive pricing.
  • Enhanced Cooperation: Enhanced cooperation between the banking systems of India and the UAE supports trade and economic activity.
  • Major Export Categories: Major Indian exports to the UAE include mineral fuels, pearls, precious stones, electrical machinery, and equipment.
  • Trade Growth and Destination: The UAE is India’s second-largest export destination, and India-UAE trade reached $85 billion in 2022.

Benefits for Remittances

  • Reduced Transaction Costs: The agreement reduces high transaction costs and exchange rate margins associated with remittances.
  • Affordable and Efficient Remittances: It makes remittances more affordable and efficient, particularly for low-wage earners.
  • Increased Remittance Inflows: In 2022, India experienced a 24.4% increase in remittances to $111 billion, accounting for 3.3% of GDP.
  • Contribution of GCC Countries: Remittance inflows from Gulf Cooperation Council (GCC) countries contribute significantly to India’s total remittance inflows.

Larger Impact

  • Reducing Dollar Dependence: The agreement promotes the use of local currencies, reducing dependence on the US dollar in international transactions.
  • Strengthening Economic Ties: Strengthened economic ties between India and the UAE encourage investments, remittances, and trade growth.
  • Rupee Internationalization: The agreement aligns with India’s goal of internationalizing the rupee and expanding its global acceptance.
  • Similar Cross-Border Efforts: Similar efforts, such as collaboration with Singapore’s PayNow, have been undertaken to facilitate cross-border transactions.

Conclusion

  • The agreement positively impacts bilateral trade, facilitates remittances, and supports India’s goal of internationalizing the rupee.
  • By reducing transaction costs and enhancing financial connectivity, the agreement strengthens economic relations between India and the UAE, fostering trade growth and cooperation.

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UK signs CPTPP Trade Deal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CPTTP

Mains level: Not Much

cptttp

Central Idea

  • The UK has formally signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a major Indo-Pacific trade deal.
  • Joining the bloc is seen as the UK’s biggest trade deal since leaving the European Union.

What is CPTPP?

  • The CPTPP, established in 2018, reduces trade barriers among 11 countries, including Australia, Canada, Japan, Mexico, and Vietnam.
  • Objectives of CPRPP include-
  1. Tariff Reduction and Market Opening: The agreement requires countries to eliminate or significantly reduce tariffs and make commitments to open services and investment markets.
  2. Addressing Competition and Intellectual Property: The CPTPP includes rules on competition, intellectual property rights, and protections for foreign companies.
  3. Expanding Membership: While the CPTPP aims to counter China’s regional dominance, China and other countries such as Taiwan, Ukraine, Costa Rica, Uruguay, and Ecuador have applied to join.

Importance of CPTPP for the UK

  • Cutting Tariffs and Expanding Trade: The UK government anticipates reduced tariffs for UK exports to Asia Pacific countries. Joining the CPTPP expands trade opportunities, as the bloc represents 15% of global trade and a combined GDP of £12 trillion.
  • Post-Brexit Trade Strategy: After leaving the EU, the UK seeks to deepen trade ties with the Pacific region through its “Global Britain” strategy.
  • Seeking Faster-Growing Economies: The UK aims to establish trade deals with countries and blocs with faster-growing economies than the EU, given limitations in achieving agreements with major powers like China and the United States.

Challenges and Criticisms

  • Economic Impact of Brexit: Critics argue that trade deals like the CPTPP will struggle to compensate for the economic damage caused by leaving the EU, which remains the UK’s largest trading bloc.
  • Long-Term Productivity Forecast: Brexit is projected to reduce the UK’s long-term productivity by 4%, according to the Office for Budget Responsibility.
  • Existing Trade Deals and Economic Boost: The UK already has trade deals with most CPTPP members, and the projected economic boost from joining the agreement is relatively modest at 0.08% annually.

Recent Developments

  • Information Gathering Process: CPTPP members are assessing aspiring economies’ ability to meet the bloc’s high standards as part of the decision-making process for future membership.
  • Collective Decision-Making: The decision on new members and the timeline for their inclusion will be made collectively by existing CPTPP participants.

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UK launches Developing Countries Trading Scheme (DCTS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Developing Countries Trading Scheme (DCTS)

Mains level: Read the attached story

developing

Central Idea

  • The launch of the Developing Countries Trading Scheme (DCTS) by the United Kingdom presents a significant opportunity for India and 65 other poor and developing nations.

Developing Countries Trading Scheme (DCTS)

  • The DCTS is a preferential trading program introduced by the United Kingdom.
  • It replaces similar arrangements that were in place during the UK’s membership in the European Union.
  • The scheme aims to support trade and economic growth for 65 poor and developing countries.

Key Features:

  • Tariff Reduction: DCTS removes or reduces tariffs on imports from eligible countries.
  • Simplified Trading Rules: The scheme simplifies trade procedures to facilitate smoother transactions.
  • Enhanced Market Access: It provides improved market access for participating countries’ products.
  • Favorable Terms: UK businesses can save costs through reduced or eliminated tariffs on imports.
  • Product Coverage: The scheme covers various goods, including clothing, food, and children’s toys.

Focus on Sustainability and Good Governance

  • Responsible Trade Practices: Participating countries are expected to adhere to international conventions related to human rights, labor standards, anti-corruption measures, climate change, and environmental protection.
  • Mutual Benefits: The scheme promotes sustainable development and creates a mutually beneficial partnership between the UK and developing countries.

Benefits for Participating Countries

  • Trade Opportunities: DCTS creates opportunities for businesses and supports livelihoods.
  • Job Creation: The scheme aims to generate employment by diversifying local and international supply chains.
  • Economic Growth: It contributes to sustained economic growth in participating countries.
  • Market Expansion: DCTS helps countries access the UK market and expand their export capacities.

Impact on India

  • Trade Opportunities for India: The DCTS presents significant trade opportunities for India.
  • Labour-Intensive Sectors: Indian exporters in sectors like textiles, leather goods, and metals can benefit.
  • Market Access: The scheme reduces trade barriers and expands market access to the UK for Indian goods.
  • Interim Measure: DCTS serves as an interim measure while negotiations for a comprehensive Free Trade Agreement (FTA) between the UK and India continue.
  • Future Potential: The DCTS sets the stage for deeper economic ties and a future FTA between the UK and India.

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India’s Toy Industry: Unravelling the Recent Export Surge

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tradition toys industry

Mains level: India's transition to a net exporter in the toy industry, reforms, challenges and way ahead

Toy Industry

Central Idea

  • India’s toy industry has witnessed a remarkable turnaround in recent years, transitioning from being a net importer to becoming a net exporter during 2020-21 and 2021-22. The credit for this achievement is often attributed to the Make in India initiative launched in 2014 and related policies. However, it is crucial to examine whether this surge represents sustained industrial growth or is a temporary outcome of protectionist measures.

Toy Industry

The import-export dynamic of India’s toy industry

  • Historical Imbalance: Historically, India’s toy industry has been characterized by a significant imbalance, with imports dominating the market. Imports accounted for a substantial share of domestic toy sales, often reaching up to 80% of the market.
  • Recent Shift: In recent years, there has been a notable shift in the import-export dynamic. Between 2018-19 and 2021-22, toy exports from India have seen significant growth, increasing from $109 million (₹812 crore) to $177 million (₹1,237 crore). At the same time, toy imports have declined from $371 million (₹2,593 crore) to $110 million (₹819 crore), according to official data.
  • Factors Driving the Shift: Several factors have contributed to this shift. The “Make in India” initiative launched in 2014, aimed at promoting domestic manufacturing and boosting exports, has played a crucial role. Additionally, policy measures such as higher import duties and non-tariff barriers have influenced the decline in toy imports.
  • Positive Transformation: The shift in the import-export dynamic represents a positive transformation for the Indian toy industry. It signifies improved manufacturing capabilities, enhanced competitiveness, and the ability to meet domestic and international demand through domestic production and exports.
  • Small Global Share: Despite the positive shift, India’s share in the global toy trade remains relatively small, representing only a fraction of the overall market. There is still room for further growth and expansion to increase market share and global competitiveness.
  • Key Considerations: Monitoring and nurturing the import-export dynamic is crucial for sustaining this positive trend. Factors such as policy support, investment in research and development, innovation, quality improvement, and adherence to international standards will play essential roles in strengthening India’s position as an exporter of toys.
  • Opportunities and Challenges: The evolving import-export dynamic of the toy industry presents both opportunities and challenges. Continued efforts to foster domestic manufacturing, promote innovation, enhance product quality, and implement export-oriented policies will be critical for sustained growth and competitiveness in the global market

The impact of reforms and the ‘Make in India’ initiative on India’s toy industry

  • Increased Focus on Domestic Manufacturing: ‘Make in India’ aimed to promote domestic manufacturing and reduce dependence on imports. It led to a renewed focus on developing and enhancing the manufacturing capabilities of the toy industry in India.
  • Policy Reforms: Reforms such as the abolition of the reservation policy and the introduction of ease of doing business measures created a more favorable environment for businesses, including toy manufacturers, to operate and invest in India.
  • Boost to Organized Sector: The entry of new firms into the organized sector following the abolition of the reservation policy contributed to improved productivity growth. It allowed for the formalization of the industry and attracted investments.
  • Increased Customs Duties: As part of the protectionist measures, the basic custom duty on toys was tripled from 20% to 60% in February 2020. This increase in import duties aimed to discourage toy imports and promote domestic production.
  • Non-tariff Barriers: Along with higher import duties, the imposition of non-tariff barriers such as production registration orders and safety regulation codes contributed to a contraction in toy imports, further supporting the domestic toy industry.

Facts for prelims

Traditional Toys Region Materials Unique Features
Channapatna Toys Karnataka Wood Colorful, organic vegetable dyes, smooth finish
Kondapalli Toys Andhra Pradesh Wood Carved, vibrant colors, rural and mythological themes
Thanjavur Dolls Tamil Nadu Terracotta Intricate details, decorative, used in ceremonies
Terracotta Toys Various regions Clay Earthy tones, rustic charm
Dokra Crafts Odisha and West Bengal Metal (Dokra) Intricate figurines, tribal-inspired designs

Critique on Sustainable Improvements or Protectionist Measures

  • Lack of Long-term Evidence: The shift from being a net importer to a net exporter has occurred in just a few years, and it may be premature to conclude that these improvements are sustainable in the long run. A more extended period of consistent growth and performance would provide a stronger basis for claiming sustainable improvements.
  • Dependency on Protectionist Measures: Relying solely on protectionism can create artificial market conditions and hinder the industry’s ability to compete globally on its merits. Sustainable improvements should be based on factors like innovation, productivity, and competitiveness rather than protectionism.
  • Short-term Solution: Protectionist measures, such as higher import duties and non-tariff barriers, may provide temporary relief to domestic industries by limiting imports. However, they often fail to address the underlying challenges and structural issues within the industry.

Way ahead

  • Comprehensive Policy Framework: Develop a comprehensive policy framework specifically tailored to the needs of the toy industry. This framework should address issues related to infrastructure development, access to finance, technology upgradation, skill development, and innovation support.
  • Encouraging Investment: Encourage both domestic and foreign investment in the toy industry by providing incentives, tax breaks, and streamlined procedures for setting up manufacturing units.
  • Enhancing Competitiveness: Focus on improving the competitiveness of Indian toy manufacturers through measures such as improving quality standards, promoting design capabilities, and fostering innovation.
  • Skill Development and Training: Implement skill development programs to enhance the capabilities of the workforce engaged in the toy industry.
  • Strengthening Industry-Academia Collaboration: Foster collaboration between industry players and academic institutions to promote research and development activities, knowledge exchange, and skill development.
  • Export Promotion: Actively promote Indian-made toys in international markets through trade fairs, exhibitions, and targeted marketing campaigns. Develop export-oriented strategies to tap into global demand and establish India as a reliable and competitive toy manufacturing hub.
  • Supporting MSMEs: Provide specific support and incentives to micro, small, and medium-sized enterprises (MSMEs) in the toy industry. This can include access to finance, technology support, marketing assistance, and capacity-building programs to enhance their competitiveness and contribute to the growth of the sector.

Toy Industry

Conclusion

  • India’s transition to a net exporter in the toy industry is a positive development. While protectionist measures may have played a role in the recent turnaround, sustaining net exports necessitates strengthening domestic investment and production on a sustained basis. By considering lessons learned, India can chart a path towards sustainable growth and competitiveness in its toy industry and beyond.

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India’s Toy Industry

 

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RBI advises banks to transit away from LIBOR

Note4Students

From UPSC perspective, the following things are important :

Prelims level: London Interbank Offered Rate (LIBOR)

Mains level: Read the attached story

Central Idea: The RBI has issued an advisory to banks and other RBI-regulated entities regarding the transition away from London Interbank Offered Rate (LIBOR) July 1.

What is London Interbank Offered Rate (LIBOR)?

Explanation
Definition LIBOR is a benchmark interest rate used in financial transactions such as loans, derivatives, and bonds.

It is the interest rate at which banks can borrow funds from other banks in the London interbank market.

It serves as a benchmark rate for various financial transactions worldwide.

Calculation Method LIBOR rates are calculated based on submissions from a panel of major banks in London.

These banks estimate their borrowing costs for various currencies and tenors.

The submissions are used to calculate an average rate, which is published daily by the Intercontinental Exchange (ICE), the administrator of LIBOR.

Currencies and Tenors LIBOR is calculated for different currencies and tenors ranging from overnight to one year.

The currencies include USD, EUR, GBP, JPY, CHF, and others.

The tenors represent the time periods for which the rates are quoted.

Importance It has been widely used since the 1980s as a benchmark for financial contracts worth trillions of dollars globally.

It serves as a reference rate for various loans, derivatives, and other financial instruments.

 

Why is RBI moving away from LIBOR?

Like many other countries, has been working towards transitioning away from LIBOR. The primary reasons for this transition include:

  • Manipulation risks: Following the global financial crisis in 2008, there were concerns about the reliability and potential manipulation of LIBOR.
  • Discontinuation of LIBOR: The regulatory authority in the UK that oversees LIBOR, announced in 2017 that it will no longer compel banks to submit the necessary data to calculate LIBOR after the end of 2021.
  • Adoption of alternative Reference Rates: Various countries, including India, have identified and adopted alternative reference rates that are more reliable and based on actual market transactions. Ex RBI introduced the Secured Overnight Financing Rate (SOFR).
  • Alignment with International Standards: Many countries have already initiated the shift to alternative reference rates, necessitating India’s alignment to maintain consistency and harmonization in international financial markets.
  • Risk Mitigation: RBI’s move aims to mitigate the potential risks associated with an unreliable or manipulated benchmark rate.

Related terminologies

Mumbai Interbank Forward Outright Rate (MIFOR): MIFOR is a benchmark rate used in Indian financial markets. It represents the forward premium or discount on the USD-INR exchange rate based on the LIBOR rate.

Fallbacks: They are provisions inserted into contracts to establish alternative reference rates if the original benchmark rate (such as LIBOR) becomes unavailable or unreliable.

 

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The Future of the US Dollar As a World Reserve Currency

Note4Students

From UPSC perspective, the following things are important :

Prelims level: common currency and reciprocal trading

Mains level: Speculations over the US Dollar as world reserve and viability of alternatives

US Dollar

Central Idea

  • The status of the US dollar as the world reserve currency has been a topic of speculation, especially as China, India, and Russia explore alternative currencies for international trade. However, the demise of the dollar as the world reserve currency is unlikely to happen anytime soon.

Rise of the dollar: Historical Context

  • The rise of the dollar as the world’s preferred currency aligns with the rise of the US as one of the world’s strongest economies with a deep financial system and stable government.
  • Though the position of the dollar has been challenged over time by the Great Britain Pound, the euro, and other currencies, the dollar has maintained its dominance.

What is the current status of Dollar as forex reserve?

  • According to reports from the International Monetary Fund, the dollar’s share of foreign exchange reserves has fallen over time from 80% in the 1970s to about 60% in 2022.
  • The euro has made up for about 20% of the remaining 40% room created by this fall.
  • Smaller currencies such as the Australian and Canadian dollars, Swedish krona, and South Korean won have claimed their share in the portfolios of various countries’ foreign exchange reserves making up most of the remaining gap of 20%, with Chinese currency taking up the rest.

How Dollar maintained its dominance as a reserve currency?

  • The strength of the U.S. economy: The U.S. has one of the world’s strongest economies, with a deep financial system and a stable government. This has contributed to the popularity of the dollar as a preferred currency for international trade and as a reserve currency.
  • Demand for dollar-denominated assets: Many countries hold U.S. government debt as a hedge against currency fluctuations affecting the valuation of their reserves. Additionally, many currencies are pegged to the U.S. dollar and some countries use the dollar as their own currency. This has meant that a huge proportion of U.S. dollars reside outside the U.S.
  • The dollar premium: The U.S. government debt is in high demand worldwide, which allows it to issue debt at the lowest interest rate. This relaxes the fiscal constraint substantially, boosting the debt-issuing government’s capacity to borrow more without having to deal with the negative effects of such borrowing on the domestic economy. This phenomenon is often referred to as the dollar premium.
  • No serious competition: Although the position of the dollar as the world currency has been challenged from time to time by other currencies, no currency has emerged as a serious contender. The only serious competitor at this point is the euro, which stands second but at quite a distance.

Facts for prelims

Common Currency or Reciprocal Trading Arrangement?

  • A common currency or reciprocal trading arrangement refers to an agreement between two or more countries to use a common currency or to trade with each other using their own currencies without the involvement of a third-party currency, such as the US dollar.
  • The purpose of such an arrangement is to increase trade among the participating countries and reduce the reliance on a single currency for international transactions.
  • The idea of a common currency or reciprocal trading arrangement has been discussed among various countries, including China, India, and Russia, as an alternative to the US dollar-dominated international financial system.

What are the Factors supporting the US Dollar?

  • Status as Reserve Currency: The US Dollar is still the world’s most dominant reserve currency, which means that central banks and governments around the world hold significant quantities of it as part of their foreign exchange reserves.
  • Large Financial Market: The US has one of the largest and most liquid financial markets in the world, which makes it an attractive destination for foreign investment.
  • Safe Haven Status: The US Dollar is often seen as a safe haven during times of global economic uncertainty, due to the perceived stability of the US economy and political system.
  • Demand for US Treasury Bonds: The US government issues Treasury bonds, which are widely held by foreign governments and investors as a low-risk investment.
  • Petrodollars: The US Dollar is used as the currency of choice for global oil trading, which means that countries that buy oil from the OPEC countries must hold US Dollars to pay for it. This leads to a constant demand for US Dollars.
  • Military and Political Influence: The US has a significant military and political influence on the world stage, which gives it leverage in global trade negotiations and financial institutions such as the IMF and World Bank.

US Dollar

Challenges facing the US Dollar

  • Increased global competition: As more countries try to shift away from the US dollar, there is increased competition from other currencies such as the euro, the Chinese renminbi, and even cryptocurrencies. This could potentially reduce the demand for the US dollar.
  • Rising US debt levels: The US has been running persistent budget deficits and adding to its national debt for many years. This could lead to inflation and a loss of confidence in the US dollar, particularly if investors begin to worry about the US government’s ability to service its debt.
  • Geopolitical risks: Political tensions and instability around the world could also undermine the US dollar’s status as the world’s reserve currency. For example, sanctions imposed by the US on other countries could prompt them to look for alternatives to the US dollar in international trade.
  • Emerging technologies: The rise of digital currencies and blockchain technology could challenge the dominance of traditional currencies, including the US dollar. If cryptocurrencies become more widely accepted, they could potentially weaken demand for the US dollar as a global reserve currency.

Future of the US Dollar

  • Despite the challenges, the US dollar is likely to remain the dominant reserve currency for the foreseeable future due to its widespread use in international trade, its deep and liquid financial markets, and its historical stability.
  • The euro and other currencies may continue to gain ground, but are unlikely to displace the dollar anytime soon.
  • The growing use of digital currencies, such as Bitcoin, may also pose a challenge to the traditional reserve currency system in the future, but it remains to be seen how this will play out.

Facts for prelims: Concept box from civilsdaily

What is mean by closed capital account?

  • A closed capital account is a situation where a country has restrictions on the flow of capital in and out of its borders. This means that the government regulates and limits the movement of funds across its borders.
  • Closed capital accounts are often implemented to protect the domestic economy from external shocks and to maintain the stability of the local currency.
  • China, for example, has a relatively closed capital account as it imposes strict controls on capital inflows and outflows.

Conclusion

  • The run of the US dollar as an international reserve currency is far from over. The only serious contender at this point is the euro, which stands second but at quite a distance. The possibility of the Chinese currency or any other common currency becoming a serious contender is thin and distant at this point. The current system may not be optimal and should be improved, but expecting a common currency between China, India, and Russia or any such reciprocal trading arrangement to replace the US dollar would be an exaggeration.

Mains Question

Q. The status of the US dollar as the world reserve currency has been a topic of speculation, especially as China, India, and Russia explore alternative currencies for international trade. In this light discuss the challenges faced by US dollar and viability of reciprocal trading arrangements.

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The Rising Demand for De-Dollarisation

 

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Mapping India’s Export Hotspots

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian Exports

Mains level: Not Much

export

Central idea: The article discusses the top exporting districts in India and their contribution to the country’s overall exports. It also provides information on the top exported commodities in each district.

Top Exporting Districts in India

Rank District State Share of India’s Exports
1 Jamnagar Gujarat 24%
2 Surat Gujarat 4.5%
3 Mumbai Suburban Maharashtra 4.5%
4 Dakshina Kannada Karnataka
5 Devbhumi Dwarka, Bharuch, Kachchh Gujarat
6 Mumbai Maharashtra
7 Kancheepuram Tamil Nadu
8 Gautam Buddha Nagar Uttar Pradesh

 

Top Exporting Districts in Each State

  • Map 1 shows the district that formed the highest share of a State’s exports in FY23.
  • The size of the circle in the map corresponds to the value of exports.
  • Most top exporting districts in the north-eastern States formed as much as 90% of a State’s exports, while some top exporting districts formed only around 20% of a State’s exports.

Top Exported Commodities

  • Jamnagar’s dominance can be attributed to the fact that it formed a lion’s share of India’s surging petroleum exports, while Kancheepuram’s most exported commodity was smartphones.
  • Map 1 also lists the top exported commodity of the top exporting districts in each State.

Top Exporting Districts for Each Commodity

  • Maps 2A-2F show the top five exporting districts for the top six commodities exported by India.
  • They include petroleum products, precious stones and jewellery, rice, wheat and other cereals, smartphones and electronic parts, vehicles other than railways, and pharmaceutical products.

Share of Top Exporting Commodity

  • Table 3 shows the share of the top exporting commodity of the top exporting district in India’s total exports.
  • For instance, Jamnagar’s petroleum products export formed 67% of India’s total exports for that commodity, while Surat’s precious stones and jewellery exports formed 36% of India’s total exports for that commodity.

 

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India’s Forex Reserves rise $6.30 bn to $584.75 bn

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: Read the attached story

forex

India’s forex reserves increased by $6.306 billion to $584.755 billion last week, according to the Reserve Bank of India (RBI).

Why discuss this?

  • In October 2021, India’s forex reserves reached an all-time high of $645 billion.
  • Since then, the reserves have been declining.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  1. Foreign Currency Assets (FCAs)
  2. Special Drawing Rights (SDRs)
  3. Gold Reserves
  4. Reserve position with the International Monetary Fund (IMF)

Countries with the highest foreign reserves

  • Currently, China has the largest reserves followed by Japan and Switzerland.
  • India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. Russia – $597.40 Billion

Why are these reserves so important?

  • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
  • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
  • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
  • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

Initiatives taken by the government to increase forex

  • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
  • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
  • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

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Foreign Trade Policy 2023: India Needs To Adopt 21st-century Trade Policy Instruments

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Foreign trade policy, 2023

Mains level: Foreign trade policy, 2023, problems and solutions

Central Idea

  • The Foreign Trade Policy 2023 (FTP 2023) has been recently introduced, but it falls short of addressing the challenges that Indian exporters are likely to face in the global market. India needs to adopt 21st-century trade policy instruments such as product and process standards to improve the quality and efficiency of products.

Foreign Trade Policy, 2023

  • The policy is dynamic and open-ended to accommodate the emerging needs of the time.
  • It aims to promote India’s overall exports, which has already crossed US$ 750 Billion.
  • The key approach to the policy is based on these 4 pillars:
  1. Incentive to Remission,
  2. Export promotion through collaboration – Exporters, States, Districts, Indian Missions,
  3. Ease of doing business, reduction in transaction cost and e-initiatives and
  4. Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining SCOMET (Special Chemicals, Organisms, Materials, Equipment, and Technologies) Policy

FTP 2023’s inadequate focus on 21st-century trade policy instruments

  • 20th-century mindset: The FTP 2023’s primary focus is on regulating, prohibiting, and restricting trade, which is a 20th-century mindset. In contrast, most countries today rely on improving product quality and production efficiencies by rapidly infusing technology to expand their presence in global markets.
  • Focus on upgrading the current standards: India needs to focus on upgrading institutions, production facilities, and promoting the development and facilitation of trade to meet the current standards.

Rejigging of export promotion schemes

  • Export promotion schemes: Export promotion schemes were modified after a WTO dispute settlement panel ruled against India in 2019, which found that these schemes provide export subsidies that are not allowed under WTO rules.
  • Remission of Duties: The Remission of Duties or Taxes on Export Products (RoDTEP) Scheme was launched in 2021 to neutralize the effect of taxes and duties included in exported goods. The Rajya Sabha’s Standing Committee on Commerce found several weaknesses in the scheme, and FTP 2023 should have responded to the recommendations.

Developing districts as export hubs

  • FTP 2023 introduces the novel idea of developing districts as export hubs, which could help achieve the objective of balanced regional development.
  • However, the policy only speaks of setting up export promotion committees at the district and state/UT levels, with no mention of supporting efficient infrastructure.

E-commerce and India’s readiness to engage in the WTO

  • E-commerce is a focus area of FTP 2023, but India has opposed discussions on extending the rules of the WTO in this area.
  • Moreover, advanced countries have been seeking data portability, which India has refused to accept.
  • It remains unclear whether the mention of e-commerce in FTP 2023 implies that India is ready to engage in the WTO on this matter.

Conclusion

  • FTP 2023 falls short of addressing the challenges that Indian exporters are likely to face in the global market. It needs to focus on upgrading institutions, production facilities, and promoting the development and facilitation of trade, which requires the Directorate General of Foreign Trade (DGFT) to coordinate with all the standard-setting agencies of the government and relevant institutions in the private sector. Developing districts as export hubs could help achieve the objective of balanced regional development, but supporting efficient infrastructure is critical for the programme’s success.

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India and Malaysia to settle trade in INR

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Vostro and Nostro Accounts, SWIFT

Mains level: Trade settlement in Rupees

india

India and Malaysia have agreed to settle their trade in Indian rupees instead of the US dollar.

What is the move?

  • The Reserve Bank of India (RBI) had allowed the settlement of international trade in the Indian rupee in July 2022.
  • Malaysia was one of the eighteen countries that were permitted to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.

Volume of bilateral trade

  • India-Malaysia bilateral trade reached $19.4 billion during 2021-22.
  • Malaysia is the third-largest trading partner of India in the ASEAN region, after Singapore and Indonesia, with $30.1 billion and $26.1 billion in bilateral trade with India.

Facts for prelims: Nostro and Vostro Accounts

Nostro and vostro accounts are two types of accounts used in international trade and banking to facilitate foreign currency transactions.

A Nostro account is a foreign currency account held by a domestic bank in a foreign bank. It is used to facilitate international transactions, such as foreign currency payments, and to hold foreign currency deposits. The word “nostro” means “ours” in Italian, and the term reflects the fact that the foreign bank holds the domestic bank’s funds on its behalf.

A Vostro account, on the other hand, is a domestic currency account held by a foreign bank in a domestic bank. It is used by the foreign bank to hold domestic currency deposits, and to facilitate domestic currency transactions such as payments to local vendors. The word “vostro” means “yours” in Italian, and the term reflects the fact that the domestic bank holds the foreign bank’s funds on its behalf.

 

What are Special Rupee Vostro Accounts (SRVAs)?

  • SRVAs are a mechanism introduced by the RBI to allow banks from certain countries to open accounts in Indian rupees with Indian banks.
  • These accounts can be used to settle trade transactions between the two countries in Indian rupees, instead of using other currencies.
  • The aim of this initiative is to facilitate the growth of global trade and to support the interests of the global trading community in Indian rupees.
  • The Union Bank of India has become the first bank in India to operationalize this option by opening a SRVA through its corresponding bank in Malaysia – India International Bank of Malaysia.
  • Banks from 18 countries so far are allowed by the RBI to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.

Significance of the move

  • The move aims to provide better pricing for goods and services traded between the two countries and overcome currency-related obstacles that have affected bilateral trade.
  • This shift away from the US dollar signals India’s de-dollarization efforts.
  • The decision also comes against the backdrop of ongoing official efforts to safeguard Indian trade from the impact of the Ukraine crisis.

Broader implications

  • The sanction on the Russian economy and the ongoing war in Ukraine have made it increasingly difficult to make payments to Russia in US dollars.
  • Many countries are exploring alternatives to the US dollar as the dominant reserve currency for international trade.

 

Try this MCQ

Q. Which of the following is a key difference between Nostro and Vostro accounts?

A) A Nostro account is held by a bank in a foreign country, while a Vostro account is held by a bank in the home country.

B) A Vostro account is used for incoming transactions, while a Nostro account is used for outgoing transactions.

C) A Nostro account is denominated in the local currency of the home country, while a Vostro account is denominated in a foreign currency.

D) A Vostro account is used for trade financing, while a Nostro account is used for personal banking transactions.

 

Post your answers here.
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Foreign Trade Policy 2023: Aiming for $2 Trillion in Exports and Streamlining Processes

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Recent Free Trade Agreements

Mains level: Foreign Trade Policy 2023

Central Idea

 

  • Foreign Trade Policy 2023 focuses on shifting from an incentive to a tax remission-based regime, improving the ease of doing business, promoting exports through collaborations, and targeting emerging areas. It aims to achieve $2 trillion in export of goods and services by 2030, up from the previous $900 billion target.

 

Foreign Trade Policy 2023

 

  1. Reducing Friction Points:
  • Automatic approvals for various permissions will streamline processes and reduce bureaucratic hurdles for businesses.
  • Reduced processing times for revalidation of authorizations (expected to be brought down to one day), extension of export obligation periods, advance authorizations, and EPCG issuances will expedite export activities.
  • Lowered application fees for MSMEs will provide financial relief and encourage more small businesses to participate in global trade.
  1. Supporting Export Growth:
  • Facilitating e-commerce exports will enable Indian businesses to tap into the growing global e-commerce market, estimated to reach $6.07 trillion by 2024.
  • Widening the basket covered under RODTEP will ensure more exporters benefit from tax remission, increasing competitiveness.
  • Boosting manufacturing, particularly in labor-intensive sectors, will create more jobs and enhance the export potential.
  • Rationalizing thresholds for exporter recognition will make it easier for businesses to be acknowledged and incentivized for their export performance.
  • Merchanting trade reform will promote services exports and reduce transaction costs.
  • Promoting the use of the rupee in international trade can help reduce exchange rate risks and increase trade with countries facing currency restrictions.
  1. One-time Amnesty Scheme: The amnesty scheme aims at faster resolution of trade disputes, clearing pending cases, and improving the overall trade environment.

 

Supplemental Measures

 

  • Boost to domestic manufacturing: Lowering import tariffs will make raw materials and intermediate goods more affordable, boosting domestic manufacturing and export competitiveness.
  • Competitive Indian goods and services: Ensuring a competitive exchange rate will enhance the affordability of Indian goods and services in global markets.
  • FTA’s: Signing broader and deeper free trade agreements can open new markets for Indian exporters and attract foreign investments.

 

Conclusion

 

  • The Foreign Trade Policy 2023 comes at a time of global uncertainty, but with India’s small share in global trade (around 1.8% in merchandise exports and roughly 4% in services), there is significant room for improvement. The new policy, along with additional measures, can enhance the country’s trade performance and achieve the ambitious $2 trillion export target by 2030. However, it is crucial to monitor the policy’s implementation and address potential challenges for businesses to fully reap the benefits.

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Key highlights of the Foreign Trade Policy, 2023

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Foreign Trade Policy

Mains level: Read the attached story

foreign trade policy

Union Minister of Commerce and Industry has launched the Foreign Trade Policy 2023.

Foreign Trade Policy, 2023

  • The policy is dynamic and open-ended to accommodate the emerging needs of the time.
  • It aims to promote India’s overall exports, which has already crossed US$ 750 Billion.
  • The key approach to the policy is based on these 4 pillars:
  1. Incentive to Remission,
  2. Export promotion through collaboration – Exporters, States, Districts, Indian Missions,
  3. Ease of doing business, reduction in transaction cost and e-initiatives and
  4. Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining SCOMET (Special Chemicals, Organisms, Materials, Equipment, and Technologies) Policy

Overview of the FTP, 2023

  • FTP to provide the policy continuity and a responsive framework
  • Approach of FTP: From Incentive to Remission
  • Introduces scheme for remission of duties, taxes and govt levies on export goods
  • Digitisation of applications pertaining to FTP
  • Automatic system-based approval of FTP applications
  • Pilot introduced for cutting processing of applications related to advance authorisation to 1 day
  • Norms for recognition as Star Trading Houses eased
  • Promotes trade in Indian Rupee
  • Introduces provisions for merchanting trade
  • Dairy sector to be exempted from maintaining average export obligation * Battery electric vehicles; vertical farming equipment & green hydrogen eligible for reduced obligation under Export Promotion Capital Goods (EPCG) scheme
  • Special advance authorization scheme extended for apparel & clothing sector
  • Extends all FTP benefits to e-commerce exports
  • Value limit for exports through courier service increased from Rs 5 lakh to Rs 10 lakh per consignment
  • Focus on engaging with states & districts through Districts as Export Hubs initiative
  • Aims at streamlining export of dual use items under SCOMET policy
  • Introduces amnesty scheme for one-time settlement of default in export obligation by advance authorisation and EPCG authorisation holders
  • FTP to be dynamic and responsive to the emerging trade scenario
  • Restructuring of Department of Commerce on the anvil to make it future-ready

 

Key highlights

(1) Process Re-Engineering and Automation

  • The policy emphasizes export promotion and development, moving away from an incentive regime to a regime which is facilitating, based on technology interface and principles of collaboration.
  • Reduction in fee structures and IT-based schemes will make it easier for MSMEs and others to access export benefits.
  • Duty exemption schemes for export production will now be implemented through Regional Offices in a rule-based IT system environment, eliminating the need for manual interface.

(2) Towns of Export Excellence

  • Four new towns have been designated as Towns of Export Excellence (TEE) in addition to the existing 39 towns.
  • The TEEs will have priority access to export promotion funds under the Market Access Initiative (MAI) Scheme.
  • It will be able to avail Common Service Provider (CSP) benefits for export fulfilment under the EPCG Scheme.

(3) Recognition of Exporters

  • Exporter firms recognized with ‘status’ based on export performance will now be partners in capacity-building initiatives on a best-endeavour basis.
  • 2-star and above status holders would be encouraged to provide trade-related training based on a model curriculum to interested individuals.

(4) Promoting Export from the Districts

  • The FTP aims at building partnerships with State governments and taking forward the Districts as Export Hubs (DEH) initiative.
  • This would promote exports at the district level and accelerate the development of grassroots trade ecosystem.

(5) Streamlining SCOMET Policy

  • India is placing more emphasis on the “export control” regime.
  • A robust export control system in India would provide access of dual-use High end goods and technologies to Indian exporters while facilitating exports of controlled items/technologies under SCOMET from India.

 

(6) Facilitating E-Commerce Exports

  • Various estimates suggest e-commerce export potential in the range of $200 to $300 billion by 2030.
  • FTP 2023 outlines the intent and roadmap for establishing e-commerce hubs and related elements such as payment reconciliation, book-keeping, returns policy, and export entitlements.
  • As a starting point, the consignment wise cap on E-Commerce exports through courier has been raised from ₹5Lakh to ₹10 Lakh in the FTP 2023.

(7) Facilitation under Export Promotion of Capital Goods (EPCG) Scheme

The government has made several changes to the Foreign Trade Policy, including:

  • Adding PM MITRA scheme for textile and apparel parks to EPCG’s Common Service Provider Scheme
  • Exempting dairy sector from maintaining Average Export Obligation
  • Adding green technologies such as BEVs, vertical farming equipment, and rainwater harvesting to EPCG’s reduced Export Obligation requirement.

(8) Facilitation under Advance authorization Scheme

  • DTA (Domestic Tariff Area) units can access the Advance Authorization Scheme for duty-free import of raw materials for manufacturing export items, and it can be used for domestic and export production.
  • The Special Advance Authorization Scheme has been extended to the Apparel and Clothing sector to facilitate prompt execution of export orders.
  • The Self-Ratification Scheme for fixation of Input-Output Norms has been extended to 2-star and above status holders.

(9) Merchanting trade

  • The FTP 2023 has introduced provisions for merchanting trade, which allows the shipment of goods from one foreign country to another foreign country without touching Indian ports, involving an Indian intermediary.
  • This will be subject to compliance with RBI guidelines, and it won’t be applicable for goods/items classified in the CITES and SCOMET list.
  • This is expected to allow Indian entrepreneurs to convert certain places into major merchanting hubs.

(10) Amnesty Scheme

  • The government is introducing a special one-time Amnesty Scheme under the FTP 2023 to address default on Export Obligations and provide relief to exporters who have been unable to meet their obligations under EPCG and Advance Authorizations.
  • All pending cases of default in meeting Export Obligation (EO) of authorizations can be regularized on payment of all customs duties that were exempted in proportion to unfulfilled Export Obligation.
  • The interest payable is capped at 100% of these exempted duties under this scheme, and no interest is payable on the portion of Additional Customs Duty and Special Additional Customs Duty.

 

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UK to join Asia-Pacific Trade Treaty

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CPTPP

Mains level: Not Much

trade

UK has agreed to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade pact based around the Pacific Rim, as it seeks to build ties around the world after leaving the European Union.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

  • CPTPP is a free trade agreement (FTA) that was agreed in 2018 between 11 countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
  • Britain will become the 12th member, and the first to join since the partnership since its inception.
  • The agreement was originally proposed as the Trans-Pacific Partnership (TPP) in 2005, with the goal of creating a free trade area that would cover 12 countries, including the US.
  • However, the US withdrew from the agreement in 2017, prompting the remaining 11 countries to renegotiate the deal and create the CPTPP.

Economic prospects

  • CPTPP countries approximately has a combined GDP of 11 trillion pounds ($13.6 trillion) once Britain joins, or 15% of global GDP with UK membership.
  • It does not have a single market for goods or services, and so regulatory harmonisation is not required, unlike the European Union, whose trading orbit Britain left at the end of 2020.

Key trade objectives of CPTPP

  • The CPTPP is designed to reduce tariffs and promote economic integration among its members.
  • It aims to eliminate tariffs on more than 95% of goods traded between member countries, and to provide greater market access for services and investment.
  • The agreement also includes provisions on intellectual property, labor, and environmental standards.

How much does Britain trade with CPTPP?

  • British exports to CPTPP countries were worth 60.5 billion pounds in the twelve months to end-Sept. 2022.
  • Membership of the grouping will add another 1.8 billion pounds each year in the long run, and possibly more if other countries join.

Key benefits to be reaped by UK

  • Exporters could benefit from CPTPP membership even when trading with countries where there is a bilateral FTA.
  • To benefit from preferential tariffs, exporters must demonstrate a product as a sufficient proportion of “locally” sourced parts.
  • Rules of origin under rolled-over post-Brexit free trade agreements with Japan, Mexico and Canada, for instance, allow exporters to count EU inputs as “local”.
  • However, under CPTPP, inputs from CPTPP members can usually be considered local, giving exporters another option if it is beneficial.

Geopolitical considerations: China Factor

  • While the long-term benefit for Britain’s economy is set to be modest, Britain has other reasons for joining the bloc.
  • UK will get a veto on whether China joins the treaty. Beijing had applied to become a member of the bloc in September 2021.

 

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Latest Trade Data : India’s Merchandise Exports and Imports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's export and import and the current trends

Central Idea

  • The Ministry of Commerce and Industry has released the latest trade data that shows a continued contraction in India’s merchandise exports and imports in February. It indicates a slowdown in both the global and domestic economies.

Overview

  • The pace of contraction has deepened, and this has resulted in a further narrowing of the country’s merchandise trade deficit.
  • The disaggregated data shows that core-exports and core imports have continued to contract, and there has been a softening in imports of consumer and investment goods, pointing towards weakening domestic demand.

What the data shows?

  • Deepening of Contraction: Both exports and imports have seen a deepening of the pace of contraction. Merchandise exports fell by 8.8% in February, while imports declined by 8.2% in the same month. These figures follow a decline of 6.6% and 3.6% in exports and imports respectively in January.
  • Narrowing Trade Deficit: The contraction has led to a further narrowing of the trade deficit to $17.4 billion in February.
  • Impact on Export Destinations: The report by Nomura reveals that the sharpest declines have been observed in India’s exports to the US, China, Japan, and the rest of Asia.
  • Overall Growth: The higher export growth in the first half of the financial year has pushed overall growth for the year so far (April-February) to 7.55%.

Sectors Affected

  1. Exports side:
  • The disaggregated data reveals that core exports, which exclude exports of oil, gold, and gems and jewellery, have continued to contract.
  • 16 out of the 30 main export segments have fallen in February, including labour-intensive segments such as leather and textiles.
  • Non-oil non-gems and jewellery exports are almost at the same level as last year.
  1. On the imports side:
  • Core imports, which exclude oil, gold, and gems and jewellery, have also continued to contract.
  • The data points towards a softening of imports of consumer and investment goods, indicative of weakening domestic demand.

Back to basics: Trade Deficit

  • A trade deficit occurs when a country’s imports of goods and services exceed its exports.
  • In other words, it is the amount by which the value of a country’s imports exceeds the value of its exports. It is often seen as an indicator of a country’s economic competitiveness and can have implications for the overall balance of payments and the strength of the domestic currency.

How Narrowing of trade deficit is beneficial?

  • Narrowing of the trade deficit means that the country is importing fewer goods than it is exporting, which can improve the overall balance of payments and help to strengthen the domestic currency.
  • This can also have positive effects on the economy by reducing the dependence on foreign borrowing and boosting domestic production and employment.

The outlook for exports remains subdued

  • According to a report by Crisil, India’s merchandise export growth is likely to moderate to 2-4 per cent in the coming fiscal year as two of the country’s biggest destinations for exports the US and EU are expected to slow down sharply.
  • As per the International Monetary Fund’s latest World Economic Outlook, the US economic growth is expected to slow down from 2 per cent in 2022 to 1.4 per cent in 2023, while the Euro region is expected to moderate from 3.5 per cent to 0.7 per cent over the same period.

Conclusion

  • The trade data indicates a slowdown in the economy. Sluggish exports and tight monetary policy are expected to reduce growth further. This assessment by the World economic outlook implies that exports are unlikely to provide a fillip to growth. The overall economic momentum will be further weighed down as the full impact of the RBI’s tighter monetary policy will be felt across the country.

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India’s Foreign Trade Policy set to be revised from April 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Foreign Trade Policy

Mains level: India's foreign trade policy

 

trade

Central idea: The revision of India’s Foreign Trade Policy, which has been unchanged since 2015 and due for three years, may finally be announced by the end of this month.

What is a Foreign Trade Policy?

  • India’s Foreign Trade Policy (FTP) is a set of guidelines for goods and services imported and exported.
  • These are developed by the Directorate General of Foreign Trade (DGFT), the Ministry of Commerce and Industry’s regulating body for the promotion and facilitation of exports and imports.
  • FTPs are enforceable under the Foreign Trade Development and Regulation Act 1992.

What is India’s Foreign Trade Policy?

  • In line with the ‘Make in India,’ ‘Digital India,’ ‘Skill India,’ ‘Startup India,’ and ‘Ease of Doing Business initiatives, the Foreign Trade Policy (2015-20) was launched on April 1, 2015.
  • It provides a framework for increasing exports of goods and services, creating jobs, and increasing value addition in the country.
  • The FTP statement outlines the market and product strategy as well as the steps needed to promote trade, expand infrastructure, and improve the entire trade ecosystem.
  • It aims to help India respond to external problems while staying on top of fast-changing international trading infrastructure and to make trade a major contributor to the country’s economic growth and development.

Issues with FTP (2015-2020)

  • Acting on Washington’s protest, a WTO dispute settlement panel ruled in 2019 that India’s export subsidy measures are in violation of WTO norms and must be repealed.
  • Tax incentives under the popular Merchandise Exports from India Scheme (MEIS) (now renamed as RODTEP Scheme)and Service Exports from India Scheme (SEIS) programmes were among them.
  • The panel found that because India’s per capita gross national product exceeds $1,000 per year, it may no longer grant subsidies based on export performance.

Why such a delay in Foreign Trade Policy?

  • Geopolitical uncertainty: The geo-political situation is not suitable for long-term foreign trade policy, said Union Commerce Minister.
  • Global recession: Currently, fears of a recession in major economies like the US and Europe have escalated a panic among investors.
  • Decline in USD inflows: Foreign investors have begun to pull back their money from equities.
  • Rupee depreciation: The US Dollar is at a 22-year high, while the Rupee hit a new all-time low of $81.6.
  • Huge trade deficit: The trade deficit widened by more than 2-folds to $125.22 billion (April – August 2022) compared to $53.78 billion in the same period last year.

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Free Trade Agreements (FTAs) and its Geoeconomic Implications

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Free trade agreements and its advantages

Trade

Central Idea

  • With a projected 7 per cent growth for the ongoing year, the Indian economy is set to register the highest growth rate across all the major economies of the world. Moreover, Indian growth story for the years to come will be shaped by the unfolding geoeconomic and geopolitical forces that will sustain its consumption-driven-growth phenomenon, further driving investment and production.

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What is Regional Trade Agreement (RTA)?

  • RTA is a treaty between two or more countries in a particular region that aims to reduce or eliminate trade barriers, such as tariffs and quotas, to facilitate increased trade between the member countries.
  • RTAs can take various forms, such as Free Trade Agreements, Customs Unions, Common Markets, and Economic Unions.

Trade

What is Free Trade Agreement (FTA)?

  • FTA is a specific type of RTA that eliminates tariffs and other trade barriers on goods traded between the member countries.
  • FTAs may also include provisions on trade in services and investment, but they are primarily focused on reducing tariffs on goods.

India’s tryst with RTAs/ FTAs

  • From 2021, there has been a sudden spurt in signing bilateral trade agreements by India.
  • The India-Mauritius CECPA in 2021, India-UAE CEPA and Australia-India ECTA in 2022, are some examples.
  • Talks on these grounds with the UK and Canada are in advanced stages,
  • Serious intentions on inking FTAs with the EU and Israel have also been expressed.

Geoeconomic Implications

  1. India-UAE Comprehensive Economic Partnership Agreement (CEPA):
  • Western QUAD: The India-UAE CEPA strengthens Indian commitment with I2U2 (i.e. Israel, India, UAE and the United States), also referred to as the western QUAD, a regional force convened in October 2021.
  • Access to the western neighbours: This agreement provides India an access to the western neighbours that can facilitate the process of negotiating trade agreements in the absence of China.
  • Advantage for India-GCC FTA: It puts India a step ahead towards having an India-GCC (Gulf Cooperation Council) FTA, thereby ameliorating its relations with the gulf nations.
  • Boost to economy: On the economic front, the trade pact is envisioned to almost double bilateral commodity trade by 2027, increase service trade and generate 10 lakh jobs in labour-intensive sectors.
  1. The Australia-India Economic Cooperation and Trade Agreement (ECTA)
  • The Australia-India ECTA boosts Australia-India ties on various fronts, including geopolitical one.
  • Once a more comprehensive FTA, i.e. the CECA (Comprehensive Economic Cooperation Agreement) gets inked between the two nations, various other areas such as services, investments, government procurement and intellectual property will be covered.
  • Even within the QUAD, the strong relationship between Australia and India will help in creating an Australia-India niche.
  1. Indo-Pacific Economic Framework for Prosperity (IPEF)
  • The IPEF, an economic initiative driven by the Biden administration with a total of fifteen participating member nations, presents the massive potential to ink a regional trade agreement and create a trade bloc without China.
  • If that happens, India, being a member, will definitely be a beneficiary.

Trade

How FTA’s will lead to Consumption-driven growth?

  • FTAs boosting consumption demand, this can happen through two avenues.
  • Increase consumption choice: The FTAs will enable cheaper imports of commodities and will increase the consumption choice.
  • Multiplier effect on domestic incomes: The second is that the direct multiplier effect of enhanced trade and increased employment will have its multiplier effect on domestic incomes.
  • Increase purchasing power: Both the forces combined together will increase the purchasing power of the consumers, and increase consumption demand.

Trade

Factors that put India at Competitive Advantage

  • India’s demographic dividend: India’s competitive advantage lies with its comparative demographic dividend over China. The under-30 population in India, being about 52 percent, compares favorably with around 40 percent for China, which is going to shrink faster over the next decade. The young population is expected to boost consumption, savings and investments, and will drive consumption-led-growth.
  • Low wage and thereby Cost-competitiveness: Second, as per 2019 estimates, the average Indian wage is 10% of that of China, thereby rendering relative cost-competitiveness to the products manufactured in India as compared to China. This is already enticing foreign investment.
  • National Infrastructure Pipeline: India’s massive emphasis on physical infrastructure through projects like the National Infrastructure Pipeline (NIP) for FY 2019-25 and transport sector growth will reduce the transaction costs of doing business.
  • Reforms in business environment: India has been working extensively to reform its business environment through effective policy practices be it through measures like Production Linked Incentive (PLI) scheme, or bringing about substantial changes in its tax regimes, liberalization of the Foreign Direct Investment (FDI) policies in manufacturing, etc.
  • Digital literacy: It entails digital literacy and English language skills. On both counts, the Indian youth is way ahead of China.
  • Strong Indian Diplomacy: Indian diplomacy is also playing an important role with trade agreements being used as important instruments of diplomacy. This is true for the UAE, Australia, and the partnerships like QUAD (or even IPEF), and I2U2.

Conclusion

  • No doubt, FTAs are emerging as important tools for economic diplomacy for India for deeper levels of engagement with friendly nations. At the same time, the FTAs are two-level games for India. At the international level, it has to negotiate with the concerned nation/s, while at the domestic level it has to negotiate with various contending constituencies. Yet, FTAs’ role as a growth driver through trade and investment cannot be ignored. In addition, with India becoming the most populous nation in the world, surpassing China in January 2023, it presents itself as the largest product and factor market to the global community.

Mains Question

Q. What are FTAs and RTAs? India is enhancing its FTAs and RTAs in recent times. Discuss how it will contribute to the growth of the economy.

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India’s Agricultural Farm Exports data expected to reach a new high

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Major farm export/import commodities

Mains level: Read the attached story

export

India’s agricultural exports are poised to scale a new peak in the financial year ending March 31, 2023. But so are imports, bringing down the overall farm trade surplus.

Agriculture trade in a nutshell

  • India’s agricultural exports are expected to reach a new high in FY 2022-23.
  • The value of farm exports from April-December 2022 was 7.9% higher than the same period of the previous year, totalling $39 billion.
  • Imports of agricultural produce have also grown 15.4% from $24.1 billion in April-December 2021 to $27.8 billion in April-December 2022, resulting in a shrinking of the overall farm trade surplus.
  • As a result, there has been a further shrinking of the surplus on the farm trade account.

Note: This newscard provides useful insights regarding agricultural exports-import balance. Aspirants are not advised to memorize the numbers but imbibe the trend.

Drivers of Exports

The two big contributors to India’s agri-export growth have been rice and sugar.

(1) Rice

  • India in 2021-22 shipped out an all-time-high 21.21 million tonnes (mt) of rice valued at $9.66 billion.
  • That included 17.26 mt of non-basmati (worth $6.12 billion) and 3.95 mt ($3.54 billion) of basmati rice.
  • In the current fiscal, the growth has been primarily led by basmati rice.
  • Its exports have gone up by 40.3% in value (from $2.38 billion in April-December 2021 to $3.34 billion in April-December 2022).
  • The corresponding increases have been less for non-basmati exports: 3.3% in value ($4.51 billion to $4.66 billion) and 4.6% in quantity (12.60 mt to 13.17 mt).

(2) Sugars

  • Sugar exports hit a record value of $4.60 billion in 2021-22, as against $2.79 billion, $1.97 billion, $1.36 billion, and $810.90 million in the preceding four fiscals.
  • This fiscal has seen a further surge of 43.6%, from $2.78 billion in April-December 2021 to $3.99 billion in April-December 2022.
  • India exports of rice and sugar are well on course to touch, if not top, $11 billion and $6 billion respectively in 2022-23.

Key imports

More than a general export slowdown, it’s the growth in imports that should be cause for concern.  This has come mainly from three commodities-

(1) Edible oils

  • The first is vegetable oils, whose imports shot up from $11.09 bn in 2020-21 to $18.99 bn in 2021-22.
  • Imports now account for over 60% of the country’s estimated 22.5-23 mt annual oil consumption.

(2) Cotton

  • India has turned from a net exporter to a net importer of cotton.
  • India’s cotton exports reached an all-time-high of $4.33 bn back in 2011-12.
  • It remained at reasonably high levels until 2013-14 ($3.64 bn), before plunging to $1.62 bn by 2016-17 and $1.06 bn in 2019-20.
  • There was a recovery thereafter to $1.90 bn in 2020-21 and $2.82 bn in 2021-22.
  • But during this fiscal, imports have also soared from $414.59 million to $1.32 billion for the same period.

Policy implications

export

  • It can be seen how closely India’s farm performance is linked to international commodity prices.
  • The UN Food and Agriculture Organization’s (FAO) Food Price Index — having a base value of 100 for the 2014-16 period — averaged 122.5 points in 2012-13 and 119.1 points in 2013-14.
  • Those were the years when India’s agri-exports were at $42-43 billion. As the index crashed to 90-95 points in 2015-16 and 2016-17, so did exports to $33-34 billion.
  • The exports recovery in 2020-21 and 2021-22 happened along with — rather, on the back of — rising global prices and the FAO index averaging 102.5 points and 133 points in the two years.

Inferences from this trend

Ans. India’s farm exports will slow down in the months ahead.

  • Moreover, this could be accompanied by increased imports, as was the case from 2014-15 to 2017-18.
  • In the event, the focus of policymakers too, may have to shift from being pro-consumer (to the extent of banning/ restricting exports) to pro-producer (providing tariff protection against unbridled imports).

Way forward

  • The government needs to do something about cotton and edible oils.
  • India’s cotton production has declined from the high of 398 lakh bales in 2013-14 to a 12-year low of 307.05 lakh bales in 2021-22.
  • Clearly, the effects of not allowing new genetic modification (GM) technologies after the first-generation Bt cotton are showing, and impacting exports as well.
  • A proactive approach is required in edible oils as well, where planting of GM hybrid mustard has been permitted with great reluctance — and which is now a matter before the Supreme Court.

 

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Forex Reserves zoom by $10.417 billion to $572 billion

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: India's forex reserves and its implications

India’s forex reserves zoomed by $10.417 billion to $572 billion, making it one of the biggest weekly jumps in recent times.

Recent trends in FOREX Reserves

  • In the previous reporting week, the overall reserves had dropped by $1.268 billion to $561.583 billion.
  • In October 2021, the country’s forex reached an all-time high of $645 billion.
  • The reserves have been declining as the central bank deploys the kitty to defend the rupee amid pressures caused majorly by global developments.
  • In October 2022, the reserves had swelled by $14.721 billion during a week.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  1. Foreign Currency Assets (FCAs)
  2. Special Drawing Rights (SDRs)
  3. Gold Reserves
  4. Reserve position with the International Monetary Fund (IMF)

Countries with the highest foreign reserves

  • Currently, China has the largest reserves followed by Japan and Switzerland.
  • India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. Russia – $597.40 Billion

Why are these reserves so important?

  • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
  • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
  • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
  • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

Initiatives taken by the government to increase forex

  • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
  • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
  • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

 

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In news: National Export Co-operative Society

Note4Students

From UPSC perspective, the following things are important :

Prelims level: National Export Co-operative Society

Mains level: Not Much

The first consignment expected to be exported by the first-ever National Export Co-operative Society.

Why in news?

  • The Union Cabinet on January 11 approved the setting up Multi-State Seed Society, Multi-State Organic Society and Multi State Export Society.

What is National Export Co-operative Society (NECS)?

  • The society will have an authorised share capital of ₹2,000 crore with the area of operation all over the country.
  • It will be registered under the Multi-State Cooperative Societies (MSCS) Act, 2002.
  • It will have its registered office in Delhi.
  • The Society’s registration will be complete in the next few days and the first consignment will be exported in three months.
  • It will work as an export house for handicrafts, handlooms, khadi and other products, ensuring enhancement of income of the cooperative member entrepreneurs.

Funding of NECS

  • Leading cooperatives like IFFCO, KRIBHCO, NAFED, Amul and National Cooperative Development Corporation (NCDC) will be the promoters of the Society.
  • They will contribute ₹100 crore each.

Working of NECS

  • The Society will be different from the Export Promotion Council under the Ministry of Commerce.
  • This Society will provide end-to-end services to the cooperatives.
  • It will open foreign bank accounts and complete all the formalities, including necessary permissions for exporting a product.
  • The dividends will be shared with the manufacturer instantly and without any brokerage fee.
  • The Society will hire consultants in foreign countries who will help expand its footprint across continents.

Why need cooperatives for export promotion?

  • Cooperatives contribute 28.80% in fertilizer production, 35% in fertilizer distribution, 30.60% in sugar production and 17.50% in milk in the national economy.
  • However, their contribution to exports is negligible.
  • Society will benefit the smallest of farmer or artisan who has a good product but does not have access to the right platform.
  • Through this Society, they will get access to international market and good returns too.
  • Once a product has been tested for international standards, the packaging and export will be done by the Society.

 

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NITI Aayog cautions against cutting trade ties with China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India-China trade imbalance

Amid demands for snapping trade ties with China for its transgressions on the border, former NITI Aayog Vice-Chairman has opined that cutting trade ties with Beijing would amount to sacrificing India’s potential economic growth.

What is the news?

  • Panagariya said both countries can play the trade sanctions game.
  • The ability of a $17 trillion economy (China) to inflict injury on a $3 trillion economy (India) is far greater than the reverse.

Why in news?

  • The trade deficit, the difference between imports and exports, between India and China touched $51.5 billion during April-October this fiscal.
  • The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.

A quick backgrounder

  • Trade ties began to boom since the early 2000s.
  • This was driven largely by India’s imports of Chinese machinery and other equipment.
  • It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

The Hindi-Chini buy buy

  • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
  • Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
  • Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
  • For instance India sources close to 90 per cent of certain mobile phone parts from China.

India’s export to China

  • Even as an export market, China is a major partner for India.
  • China is the third-largest destination for Indian shipments.
  • At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

Should we worry about this?

  • Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
  • In this light, India’s trade imbalance with China should not be viewed in isolation.
  • For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
  • Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

So, having a trade deficit is good?

  • Of course NOT. Running persistent trade deficits across all countries raises two main issues.
  1. Availability of foreign exchange reserves to “buy” the imports.
  2. Lack of domestic capacity to produce most efficiently.

Can we ban trade with China?

Ans. Certainly NOT!

  • It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
  • It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
  • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
  • Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
  • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
  • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

China is our Frenemy. Here is why.

  • The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
  • Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
  • Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

Way forward

  • Panagariya suggested to expand trade faster with other trading partners rather than cutting it with Beijing through a blunt instrument such as trade sanctions.
  • We should take advantage of India’s excellent growth prospects for the next decade and concentrate on growing the economy bigger as fast as possible.
  • Once we are the third largest economy, our sanctions threats are likely to carry greater credibility.

 

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Anti-dumping duty on viscose fibre from Indonesia

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Anti-dumping duty

Mains level: Not Much

The Directorate General of Trade Remedies (DGTR) has recommended the levy of anti-dumping duty (ADD) on viscose staple fibre imported from Indonesia.

What is Dumping?

  • Dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home (or its domestic) market.
  • This is an unfair trade practice which can have a distortive effect on international trade.
  • Anti-dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect.

What is Anti-Dumping Duty?

  • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.
  • In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market.
  • In fact, anti-dumping is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry.
  • Such ‘dumped’ products have the potential to undercut local businesses and the local economy.
  • Anti-dumping duties provide relief to the domestic industry against the injury caused by dumping.

Mechanism in India

  • The Department of Commerce recommends the anti-dumping duty, provisional or final.
  • The Department of Revenue in Finance Ministry acts upon the recommendation within three months and imposes such duties.

WTO and Anti-Dumping Duties

  • The WTO operates a set of international trade rules, including the international regulation of anti-dumping measures.
  • It does NOT intervene in the activities of companies engaged in dumping.
  • Instead, it focuses on how governments can—or cannot—react to the practice of dumping.
  • In general, the WTO agreement permits governments to act against dumping if it causes or threatens material injury to an established domestic industry.

Issues with such duties

  • Anti-dumping duties have the potential to distort the market.
  • In a free market, governments cannot normally determine what constitutes a fair market price for any good or service.

Back2Basics: Viscose Fibre

  • Viscose is a type of rayon. Originally known as artificial silk, in the late 19th century, the term “rayon” came into effect in 1924.
  • The name “viscose” derived from the way this fibre is manufactured; a viscous organic liquid used to make both rayon and cellophane.
  • It is the generalised term for a regenerated manufactured fibre, made from cellulose, obtained by the viscose process.
  • As a manufactured regenerated cellulose fibre, it is neither truly natural (like cotton, wool or silk) nor truly synthetic (like nylon or polyester) – it falls somewhere in between.
  • Chemically, viscose resembles cotton, but it can also take on many different qualities depending on how it is manufactured.

 

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Rupee Settlement Mechanism draws interest from more nations

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Rupee Settlement System for International Trade

Mains level: Read the attached story

rupee

India’s rupee trade settlement mechanism, a means of using rupees instead of dollars and other big currencies for international transactions, is attracting interest from more countries.

More countries are interested

  • Tajikistan, Cuba, Luxembourg and Sudan have begun talking to India about using the mechanism.
  • They have shown interest in opening special rupee accounts, called vostro accounts.
  • Opening of these accounts needs approval from the Reserve Bank of India.
  • It has already been used by Russia following the imposition of sanctions on Moscow over the Ukraine war.

Rupee Settlement System for International Trade

  • Banks acting as authorized dealers for such transactions would have to take prior approval from the regulator to facilitate this.
  • All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
  • The exchange rate between the currencies of the two trading partner countries may be market determined.
  • Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
  • These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
  • Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

Benefits of such a mechanism

  • Trade facilitation: This will also facilitate trade with countries like Russia which are facing sanctions.
  • FOREX savings: India imports more than it exports so the country will also save foreign currency under the new arrangement.
  • Rupee appreciation: The rupee is at a historic low against the dollar. It will also help stabilize rupee.
  • Mitigating war impact: Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
  • Convertibility easing: We see this as a first step towards 100% convertibility of rupee.
  • Energy security: It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.
  • Export promotion: As such, the new mechanism will help India promote its exports.

Which countries would prefer this system?

  • War mongering Russia: For now, it looks like trade settlements in rupee will be limited to countries like Russia and Iran who are facing sanctions from the West
  • Bankrupt Sri Lanka: SL is going through economic turmoil and India has been consistently extending lines of credit to SL.
  • Immediate neighbors: Other countries may include immediate neighbors of India.

Rupees over Dollars: Why countries would prefer Rupees?

  • At a very simplistic level, this is like two Indians deciding to use an alternative mode of exchange that they have come up with, instead of using rupees.
  • In other terms, this is similar to the barter system.
  • The main reason for countries to want to trade with India in rupees is this:
  1. USD has been going through a phase of strength against most currencies in the world
  2. Strong USD performance has essentially made imports expensive for most countries
  3. Sri Lanka, which is going through one of its worst economic crises in decades, is a glaring example of a country in which the economy has come to a halt due to a drastic fall in forex reserves
  • While the Sri Lankan Rupee has declined over 83 percent against the US Dollar, its fall against the Indian Rupee has been lower at 70 percent.
  • So instead of paying 83 percent more to make purchases in USD, Sri Lanka can pay in Indian Rupees and save some money.

Challenges

  • Trade surplus countries’ preference: The question that RBI and the Indian government will have to answer is this – why would countries with a trade surplus with India want to trade in rupees?
  • Negative trade balance: China had a $73-billion trade surplus with India in 2021-22 – that is, Indian imports from China exceeded its exports to China by $73 billion.
  • Idle money lying useless: If China were to trade with India in rupees, it would have Indian rupees worth $73 billion (about ₹5.77 lakh crore) sitting idle in its Rupee Vostro accounts in an Indian bank.
  • Few countries interested: Countries whose exports to India are more than imports, will not be too enthusiastic to trade in rupees, especially if the difference is huge as in the case of China.

 

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India-UK Free Trade Agreement (FTA) is good for both countries

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India: UK FTA and advantages for India

UK

Context

  • The ties between India and the UK are often described as a Living Bridge, a dynamic economic force of people, businesses and ideas. As Prime Minister Narendra Modi drives forward plans to make India a developed nation within the next 25 years and the UK forges deeper trade relationships around the globe, our connections are growing stronger every day.

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Background: How India-UK trade relationship taking shape in recent time?

  • Enhanced trade relationship: India and the UK are two of the largest economies on the planet. Economic relationship between the two is reaching new heights with an enhanced trade partnership.
  • Minimised trade barriers: Both have lowered several trade barriers, pledged to bring down many more and set an ambitious target to double the value of India-UK trade by 2030.
  • Opening up opportunities in UK: Since then, Indian firms, including established businesses and recent startups, have been finding opportunities in the UK.
  • Business and investment in India: British businesses in fields ranging from food to financial services are expanding and investing in India. The car manufacturer, McLaren, which has just opened a showroom in Mumbai, is one example.
  • FTA’s beneficial for future and mutual growth: An India-UK free trade agreement is a natural next step for both, bringing two nations with extraordinary plans for their futures closer still.

UK

What are Free trade agreements (FTA)?

  • Free trade agreements are agreements between the two or more countries or trading blocks that primarily agrees to eliminate or reduce customer tariff and non-tariff barriers on substantial trade between them.

Importance of Free Trade Agreements

  • FTA include multiple trade aspects: FTAs cover a wide array of topics such as tariff reduction impacting the entire manufacturing and the agricultural sector; rules on services trade; digital issues such as data localization; intellectual property rights that may have an impact on the accessibility of drugs; and investment promotion, facilitation, and protection.
  • Great impact on economy and society: Consequently, an FTA has a far-reaching impact on the economy and society. Given this, one legitimately expects transparency and greater scrutiny of the FTA process both during and after the negotiations.

UK

How a Free trade agreement with UK will benefit India?

  • Greater market access works both ways: Prime Minister Modi has urged Indian businesses to export their products to the world with “zero-effect, zero-defect”. In other words, high-quality goods with no environmental impact. A free trade agreement between our nations could further help achieve this target. It would help Indian firms to sell to a market that imported almost £820 billion of goods and services from around the world in the last 12 months on record.
  • UK will aid in the ongoing India’s economic progress: The Indian economy’s future is an exciting one, with the prospect of new technologies, growing businesses and better jobs for its citizens. The UK has the skills and experience to aid this progress. A deal that’s right for both could make it cheaper and easier for ambitious Indian businesses to tap into this expertise. It is also only right that the millions of SMEs that power India’s economy benefit from a deal.
  • Investment in one another’s economy will multiply the opportunities: The British cybersecurity solutions firm, Telesoft Technologies, has just said it will pump £10 million into its India subsidiary over the next five years supporting a growing telecoms sector. A free trade agreement that smooths British and Indian firms’ path to invest in one another’s economy would mean such opportunities multiply.
  • FTA can be a force of primary economic growth in uncertain times: A free trade agreement’s value cannot be measured entirely in rupees and pounds. Covid-19’s impact on supply chains, slow global economic growth and volatile markets mean we are living in uncertain times, where free trade could be the primary force of prosperity throughout history. It will help to build the long-term security that people around the world need right now.

UK

Conclusion

  • In the economic uncertainty, free trade can be considered as answer to building the long-term security that people around the world need right now. In this, the year of its 75th anniversary since Independence and its G20 Presidency, India is on a path to a new economic future. It would be great to have UK alongside on this journey, as we together can use trade to benefit our citizens and the world.

Mains question

Q. Trade between India and UK is on upward trend. Free trade agreement between the two will surely benefit both the countries. How India can take advantage of the FTA between the two?

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India-China trade deficit is at $51.5 Bn

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India-China trade imbalance

The trade deficit, difference between import and exports, between India and China has touched $51.5 billion during April-October this fiscal.

Widening deficit

  • The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.
  • According to the data, imports during April-October this fiscal stood at $60.27 billion, while exports aggregated at $8.77 billion.
  • The merchandise exports from India to China had increased from $11.93 billion in 2014-15 to $21.26 billion in 2021-22.

India-China bilateral trade

  • In 2021, annual two-way trade crossed $100 billion for the first time, reaching $125.6 billion, with India’s imports accounting for $97.5 billion, pegging the imbalance at close to $70 billion.
  • This is certainly a healthy deficit compared to the industrial development in both nations.

A quick backgrounder

  • Trade ties began to boom since the early 2000s.
  • This was driven largely by India’s imports of Chinese machinery and other equipment.
  • It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

The Hindi-Chini buy buy

  • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
  • Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
  • Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
  • For instance India sources close to 90 per cent of certain mobile phone parts from China.

India’s export to China

  • Even as an export market, China is a major partner for India.
  • China is the third-largest destination for Indian shipments.
  • At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

Should we worry about this?

  • Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
  • In this light, India’s trade imbalance with China should not be viewed in isolation.
  • For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
  • Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

So, having a trade deficit is good?

  • Of course NOT. Running persistent trade deficits across all countries raises two main issues.
  1. Availability of foreign exchange reserves to “buy” the imports.
  2. Lack of domestic capacity to produce most efficiently.

Can we ban trade with China?

Ans. Certainly NOT!

  • It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
  • It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
  • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
  • Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
  • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
  • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

China is our Frenemy. Here is why.

  • The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
  • Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
  • Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

Way forward

  • In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
  • But no country is completely self-sufficient and that is why trade is such a fantastic idea.
  • For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

 

 

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Everything you need to know about ‘Friendshoring’

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Friendshoring

Mains level: Not Much

friendshoring

In her visit to India last week, US secretary of treasury Janet Yellen reiterated her country’s stance of pushing for “friendshoring” to diversify away from countries that present geopolitical risk.

What is Friendshoring?

  • Friendshoring is a strategy where a country sources the raw materials, components and even manufactured goods from countries that share its values.
  • The dependence on the countries considered a “threat” to the stability of the supply chains is slowly reduced.
  • It is also called “allyshoring”.
  • Apple’s announcement to shift its iPhone manufacturing facilities from China to India.

US push for friendshoring

  • In the current case, Yellen said that Russia has long presented itself as a reliable energy partner, but in the Ukraine war, Putin has weaponized the gas “against the people of Europe”.
  • Another country Yellen mentioned in her speech was China.
  • She said it currently controls over 80 per cent of global solar panel production.
  • However, there are reports that in parts of the country, like Xinjiang, the production of panels takes place through forced labour.

Issues with friendshoring

  • Friendshoring may push the world towards a more isolated place for trade and reverse the gains of globalisation.
  • It is a part of the “deglobalisation” process.
  • While moving supply chains away from East Asia could increase security in the long run, an ill-conceived implementation of this friendshoring strategy could result in price hikes and a stronger China over time.

 

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In news: Vostro Accounts

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Vostro and Nostro Accounts, SWIFT

Mains level: Rupee-Ruble Trade

vostro

Russian banks have been permitted by the RBI to open special Vostro accounts to pave the way for rupee-based export-import transactions.

Why such move?

  • Logged out of SWIFT -the messaging service to facilitate and confirm cross-border payments – most Russian banks are looking for alternative ways.
  • India and several other countries too want a way out so that trade can continue.
  • India and Russia are now exploring to directly trade in rupee-ruble.

And this is where Nostro and Vostro may come into play.

What is a Vostro Account?

  • A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank.
  • Vostro is a Latin word that means “your”, therefore, a vostro account implies that it is “your account”.
  • An example of such an account would be HSBC vostro account is held by SBI in India.

Understanding a Vostro Account

  • The banks are acting in a fiduciary relationship and they share a principal-agent relationship.
  • The correspondent foreign bank is a financial intermediary in the transactions that they are involved in.
  • The foreign bank acts as an agent that provides services such as executing wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, expediting international trade on behalf of the domestic bank.
  • It is most used in settlement of foreign exchanges or foreign trade.
  • No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India.
  • An overdraft facility can only be availed if it is specifically sanctioned.

Other related terms: Nostro and Loro Accounts

  • Vostro and Nostro accounts are often confused to be the same.
  • While in essence, it is the same account that is being spoken about, the perspective from which it is being seen matters.
  • In a vostro account, it is the correspondent foreign bank point of view, whereas in a nostro account, it is the point of view of the domestic bank.
  • Vostro accounts are maintained in the domestic currency whereas, nostro accounts in foreign currency.
  • A Loro account is a current account that is maintained by one domestic bank for another domestic bank in the form of a third party account, unlike nostro and vostro which is bilateral correspondence.

Why is it used?

  • This account serves as an economic way for small domestic banks to access the financial resources and services of a larger foreign bank.
  • Enables one to offer international banking solutions to a customer without opening a bank branch in a foreign nation.
  • It minimizes the time for transfer of funds.
  • Closely monitored nostro accounts can be used for better reconciliation of statements.

 

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US removes India from its Currency Monitoring List

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Currency Manipulation

Mains level: Read the attached story

The United States’ Department of Treasury has removed India from its Currency Monitoring List. India had been on the list for the last two years for alleged manipulation of Rupee.

What is Currency Manipulation?

  • Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective.
  • It is a designation applied by the US Department of the Treasury, to countries that engage in what is called “unfair currency practices” that give them a trade advantage.
  • The typical claim – often doubtful – is that countries manipulate their currencies in order to make their exports effectively cheaper on the world market and in turn make imports more expensive.

Why do countries manipulate their currencies?

  • In general, countries prefer their currency to be weak because it makes them more competitive on the international trade front.
  • A lower currency makes a country’s exports more attractive because they are cheaper on the international market.
  • For example, a weak Rupee makes Indian exports less expensive for offshore buyers.
  • Secondly, by boosting exports, a country can use a lower currency to shrink its trade deficit.
  • Finally, a weaker currency alleviates pressure on a country’s sovereign debt obligations.
  • After issuing offshore debt, a country will make payments, and as these payments are denominated in the offshore currency, a weak local currency effectively decreases these debt payments.

US treasury’s criteria for currency monitoring

To be labelled a manipulator by the U.S. Treasury:

  • Countries must at least have a $20 billion-plus bilateral trade surplus with the US
  • foreign currency intervention exceeding 2% of GDP and a global current account surplus exceeding 2% of GDP

Which are the countries under this list?

  • China, Japan, Korea, Germany, Malaysia, Singapore, and Taiwan are the seven economies that are a part of the current Currency Monitoring List.
  • China’s failure to publish foreign exchange intervention and broader lack of transparency around key features of its exchange rate mechanism.

 

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Current Account Deficit (CAD) likely to be lower at 3% this fiscal

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Current Account, CAD

Mains level: Read the attached story

deficit

The SBI has estimated a lower current account deficit at 3% for this fiscal as against the minimum consensus of 3.5%, citing rising software exports, remittances and a likely $5-billion jump in forex reserves via swap deals.

What is Current Account Deficit (CAD)?

deficit

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

Current Account Deficit (CAD) =  Trade Deficit + Net Income + Net Transfers

(1) Trade Deficit

  • Trade Deficit = Imports – Exports
  • A Country is said to have a trade deficit when it imports more goods and services than it exports.
  • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
  • A trade deficit represents an outflow of domestic currency to foreign markets.

(2) Net Income

  • Net Income = Income Earned by MNCs from their investments in India.
  • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
  • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
  • Net income is measured by the following things:
  1. Payments made to foreigners in the form of dividends of domestic stocks.
  2. Interest payments on bonds.
  3. Wages paid to foreigners working in the country.

(3) Net Transfers

  • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
  • It Includes Remittances, Gifts, Donation etc

How Current Account Transaction does takes place?

  • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
  • Current account transactions are transactions that require foreign currency.
  • Following transactions with from which component these transactions belong to :
  1. Component 1 : Payments connection with Foreign trade – Import & Export
  2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
  3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

What has the SBI said?

  • The biggest impact on CAD is oil imports, which form as much as 30% of the country’s import bills.
  • Every $10 increase in crude prices impacts the CAD to the tune of 40 basis points while the same on fuel inflation is 50 bps and also results in 23 bps decline in growth.
  • Strong remittances and software exports had lowered CAD by 60 basis points (bps) in the June quarter.
  • Forex reserves, which have declined from $642 billion in September 2021 to about $531 billion last week, are expected to rise by $5 billion as swap transactions reverse.

 

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China’s total trade surplus with India ‘surpasses $1 trillion’

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India-China trade imbalance

china

The favourable trade balance that China has enjoyed with India, since bilateral trade began to boom in the early 2000s, has now exceeded $1 trillion.

India-China bilateral trade

  • In 2021, annual two-way trade crossed $100 billion for the first time, reaching $125.6 billion, with India’s imports accounting for $97.5 billion, pegging the imbalance at close to $70 billion.
  • This is certainly a healthy deficit compared to the industrial development in both nations.

A quick backgrounder

  • Trade ties began to boom since the early 2000s.
  • This was driven largely by India’s imports of Chinese machinery and other equipment.
  • It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.

The Hindi-Chini buy buy

  • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
  • Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25 per cent.
  • Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain.
  • For instance India sources close to 90 per cent of certain mobile phone parts from China.

India’s export to China

  • Even as an export market, China is a major partner for India.
  • China is the third-largest destination for Indian shipments.
  • At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).

Should we worry about this?

  • Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
  • In this light, India’s trade imbalance with China should not be viewed in isolation.
  • For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
  • Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.

So, having a trade deficit is good?

  • Of course NOT. Running persistent trade deficits across all countries raises two main issues.
  1. Availability of foreign exchange reserves to “buy” the imports.
  2. Lack of domestic capacity to produce most efficiently.

Can we ban trade with China?

Ans. Certainly NOT!

  • It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
  • It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
  • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 per cent.
  • Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
  • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
  • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.

China is our Frenemy. Here is why.

  • The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
  • Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
  • Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

Way forward

  • In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
  • But no country is completely self-sufficient and that is why trade is such a fantastic idea.
  • For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

 

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Forex Reserves to dip by $23 billion by Dec

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: Read the attached story

India’s depleted foreign exchange reserves are likely to drop further, falling to their lowest level in more than two years by end-2022.

Forex to dip

  • In a battle that has so far failed to staunch the rupee’s fall to a record low against the greenback, the RBI has drawn down its foreign exchange reserves by close to $100 billion, to $545 billion.
  • Those reserves are forecast to fall another $23 billion to $523 billion by the end of this year.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  • Foreign Currency Assets (FCAs)
  • Special Drawing Rights (SDRs)
  • Gold Reserves
  • Reserve position with the International Monetary Fund (IMF)

Countries with the highest foreign reserves

Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves. (Data from August 2022)

  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. India – $612.73 Billion
  5. Russia – $597.40 Billion

Why are these reserves so important?

  • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
  • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
  • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
  • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

Initiatives taken by the government to increase forex

  • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
  • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
  • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

 

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Foreign Trade Policy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Foreign Trade Policy

Mains level: Read the attached story

The government has extended the launch of new Foreign Trade Policy (FTP) (2022-27) by six more months and would continue with the existing one.

Why such delay in Foreign Trade Policy?

  • Geopolitical uncertainty: The geo-political situation is not suitable for long-term foreign trade policy, said Union Commerce Minister.
  • Global recession: Currently, fears of a recession in major economies like the US and Europe have escalated a panic among investors.
  • Decline in USD inflows: Foreign investors have begun to pull back their money from equities.
  • Rupee depreciation: The US Dollar is at a 22-year high, while the Rupee hit a new all-time low of $81.6.
  • Huge trade deficit: The trade deficit widened by more than 2-folds to $125.22 billion (April – August 2022) compared to $53.78 billion in the same period last year.

What is a Foreign Trade Policy?

  • India’s Foreign Trade Policy (FTP) is a set of guidelines for goods and services imported and exported.
  • These are developed by the Directorate General of Foreign Trade (DGFT), the Ministry of Commerce and Industry’s regulating body for the promotion and facilitation of exports and imports.
  • FTPs are enforceable under the Foreign Trade Development and Regulation Act 1992.

What is India’s Foreign Trade Policy?

  • In line with the ‘Make in India,’ ‘Digital India,’ ‘Skill India,’ ‘Startup India,’ and ‘Ease of Doing Business initiatives, the Foreign Trade Policy (2015-20) was launched on April 1, 2015.
  • It provides a framework for increasing exports of goods and services, creating jobs, and increasing value addition in the country.
  • The FTP statement outlines the market and product strategy as well as the steps needed to promote trade, expand infrastructure, and improve the entire trade ecosystem.
  • It aims to help India respond to external problems while staying on top of fast-changing international trading infrastructure and to make trade a major contributor to the country’s economic growth and development.

Issues with FTP (2015-2020)

  • Acting on Washington’s protest, a WTO dispute settlement panel ruled in 2019 that India’s export subsidy measures are in violation of WTO norms and must be repealed.
  • Tax incentives under the popular Merchandise Exports from India Scheme (MEIS) (now renamed as RODTEP Scheme)and Service Exports from India Scheme (SEIS) programmes were among them.
  • The panel found that because India’s per capita gross national product exceeds $1,000 per year, it may no longer grant subsidies based on export performance.

Way forward

  • WTO-compliance: With incentives under MEIS and SEIS in the cloud, WTO-compliant tax benefits are a must.
  • Access to credit: Credit availability has long been a need of exporters, particularly MSMEs.
  • Infrastructure upgrade: China’s network of ports, motorways, and high-speed trains, which are among the greatest in the world, is one of the reasons it is a manufacturing and export powerhouse.
  • Digitization and e-commerce boost: India requires innovative trading procedures as a result of Covid-19 breaking old supply channels.

 

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Asian Palm Oil Alliance (APOA) formed by 5 South Asian Countries

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Palm Oil, APOA

Mains level: Not Much

Edible oil trade associations from five palm oil importing countries in South Asia – India, Pakistan, Sri Lanka, Bangladesh and Nepal – on Thursday announced the setting up of Asian Palm Oil Alliance (APOA).

What is Oil Palm?

  • Palm oil is an edible vegetable oil derived from the mesocarp of the fruit of the oil palms.
  • The oil is used in food manufacturing, in beauty products, and as biofuel.

What is APOA?

  • Through APOA, the countries aim at safeguarding the economic and business interests of the palm oil consuming countries and will work towards increasing the consumption of palm oil in member countries.
  • The idea is to gain collecting bargaining power and make imports sustainable.
  • APOA held its first general body meeting on the side-lines of the Globoil Summit.
  • The industry associations of Asian palm oil importing countries, unlike their counterparts in Europe, are not involved in shaping the global discourse on sustainable palm oil in a collective way.
  • The alliance would work towards ensuring that palm oil is recognised as a high-quality, economical, and healthy vegetable oil and to change the negative image of palm oil.

Why such move?

  • India’s annual imports of edible oil is around 13-14 million tonne (MT).
  • Around 8 MT of palm oil is imported from Indonesia and Malaysia, while other oils, such as soya and sunflower, come from Argentina, Brazil, Ukraine and Russia.
  • Asia accounts for around 40% of the global palm oil consumption while Europe accounts for 12% of palm oil trade.
  • Indonesia and Malaysia are the biggest palm oil exporters in the world.
  • India is the largest importer of palm oil in Asia, accounting for 15% of global imports, followed by China (9%), Pakistan (4%) and Bangladesh (2%).

Try this PYQ:

Q.Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

(a) Spices

(b) Fresh fruits

(c) Pulses

(d) Vegetable oils

 

Post your answers here.
13
Please leave a feedback on thisx

 

 

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What’s at stake in talks for a UK-India Free Trade Agreement (FTA)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: FTA

Mains level: India-UK FTA

India and the UK recently revived talks for a Free Trade Agreement (FTA) to encourage trade and investment. The FTA between India and UK is expected to be signed by October.

What is a Free Trade Agreement (FTA)?

  • It is an agreement between two or more countries to minimize barriers to imports and exports of products and services among them.
  • It includes reducing tariffs, quotas, subsidies or prohibitions which could limit exchange of goods and services across borders.
  • The FTA might allow free trade among the two nations with a few exceptions.
  • This involves a formal and mutual agreement signed between two or more countries.
  • The agreement could be comprehensive and include goods, services, investment, intellectual property, competition, government procurement and other areas.

What is the status of the India-UK FTA?

  • India and the United Kingdom have a multi-dimensional strategic partnership and are actively engaged in bilateral trade.
  • The two countries agreed to begin formal negotiations for an FTA in January 2022, aiming to advance trade and investment relations between them.
  • The fifth round of FTA talks concluded on 29 July, and the expectation is that negotiations would be completed and the stage set for the FTA by October.
  • The FTA is important for both countries as it would provide a boost and create a robust framework of overall trade and investment between the two countries.

Which are the countries with which India has FTAs?

  • As of April 2022, India had 13 FTAs, including the South Asian Free Trade Area, and with Nepal, Bhutan, Thailand, Singapore, Japan and Malaysia.
  • The 13 also include the agreements with Mauritius, UAE and Australia signed during the last five years.
  • Additionally, India has also signed six limited Preferential Trade Agreements.

What is the level of India-UK trade?

  • Bilateral trade stands at $50 billion (ie approx. $35 billion in services and $15 billion in merchandise).
  • India is UK’s 12th largest trading partner and accounts for 1.9% of UK’s total trade in four quarters to the end of 2022.
  • UK is the seventh largest export destination for India.
  • The trade balance maintained by India with UK has largely been a surplus.
  • Top three services exported from India to UK are technical, trade-related and other business services, professional and management consulting services and travel.

How will an FTA with UK benefit India?

  • Apart from reducing tariffs, the FTA also looks at lowering non-tariff barriers, particularly technical  barriers to trade around rules of origin, investor  protection and IPR.
  • MoUs on joint recognition of certain educational qualifications and an outline pact on healthcare workforce have already been signed.
  • Also, both UK and India have set up panels for a totalization deal being advocated by India and permitting Indian legal services for the UK.

Back2Basics: Types of Trade Agreements

(1) Free Trade Agreement – discussed above

(2) Preferential Trade Agreement

  • In this type of agreement, two or more partners give preferential right of entry to certain products.
  • This is done by reducing duties on an agreed number of tariff lines.
  • Here a positive list is maintained i.e. the list of the products on which the two partners have agreed to provide preferential access.
  • Tariff may even be reduced to zero for some products even in a PTA.
  • India signed a PTA with Afghanistan.

(3) Comprehensive Economic Partnership Agreement

  • Partnership agreement or cooperation agreement are more comprehensive than an FTA.
  • CECA/CEPA also looks into the regulatory aspect of trade and encompasses and agreement covering the regulatory issues.
  • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment, and other areas of economic partnership.
  • It may even consider negotiation on areas such as trade facilitation and customs cooperation, competition, and IPR.
  • India has signed CEPAs with South Korea and Japan.

(4) Comprehensive Economic Cooperation Agreement

  • CECA generally cover negotiation on trade tariff and Tariff rate quotas (TRQs) rates only.
  • It is not as comprehensive as CEPA.
  • India has signed CECA with Malaysia.

(5) Framework Agreement

  • Framework agreement primarily defines the scope and provisions of orientation of the potential agreement between the trading partners.
  • It provides for some new area of discussions and set the period for future liberalisation.
  • India has previously signed framework agreements with the ASEAN, Japan etc.

(6) Early Harvest Scheme

  • An Early Harvest Scheme (EHS) is a precursor to an FTA/CECA/CEPA between two trading partners. For example, early harvest scheme of RCEP has been rolled out.
  • At this stage, the negotiating countries identify certain products for tariff liberalization pending the conclusion of actual FTA negotiations.
  • An Early Harvest Scheme is thus a step towards enhanced engagement and confidence building.

 

Also read

[Sansad TV] Perspective: Free Trade Agreement

 

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Increase in Current Account Deficit (CAD)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CAD

Mains level: Not Much

The Finance Ministry has asserted that the current account deficit (CAD) could, however, deteriorate this year mainly due to rising trade deficits.

What is Current Account Deficit (CAD)?

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers

(1) Trade Deficit

  • Trade Deficit = Imports – Exports
  • A Country is said to have a trade deficit when it imports more goods and services than it exports.
  • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
  • A trade deficit represents an outflow of domestic currency to foreign markets.

(2) Net Income

  • Net Income = Income Earned by MNCs from their investments in India.
  • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
  • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
  • Net income is measured by the following things:
  1. Payments made to foreigners in the form of dividends of domestic stocks.
  2. Interest payments on bonds.
  3. Wages paid to foreigners working in the country.

(3) Net Transfers

  • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
  • It Includes Remittances, Gifts, Donation etc

How Current Account Transaction does takes place?

  • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
  • Current account transactions are transactions that require foreign currency.
  • Following transactions with from which component these transactions belong to :
  1. Component 1 : Payments connection with Foreign trade – Import & Export
  2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
  3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

What has been the recent trend?

  • In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).
  • The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
  • However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.
  • Remittances by Indians abroad also rose.

What are the reasons for the current account deficit?

  • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
  • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
  • However, with global demand picking up, merchandise exports have also been rising.

How will a large CAD affect the economy?

  • A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.
  • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
  • However, worsening CAD will put pressure on inflow under the capital account.
  • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

 

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Govt. extends RoSCTL Scheme for Garment Exports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RoSCTL Scheme

Mains level: Not Much

The RoSCTL scheme will continue for export of garments/apparels, and made-ups till March 31, 2024, according to a press release from the Union Ministry of Textiles.

What is RoSCTL Scheme?

  • RoSCTL stands for Rebate of State and Central Taxes and Levies (RoSCTL).
  • It is an export incentive in the form of transferable and sellable duty credit scrips (certificate) offered on the basis of the value of the export.
  • It replaces the Rebate of State Levies (RoSL) scheme, a monetary incentive scheme under which Customs would deposit the rebate directly into the exporter’s bank account.
  • This scheme was seen as India’s reaction to the increasing international pressure on export incentives provided by the Indian government.

Why was this scheme introduced?

  • The US, in particular, has been very vocal, urging the discontinuation of export incentive schemes like the Merchandise Exports from India Scheme (MEIS).
  • It held that they flouted the WTO Agreement on Subsidies and Countervailing Measures.

Why was this scheme extended to textile sector?

  • With a view to boost exports and job creation in the textile sector, the government has approved the continuation of the scheme.
  • The scheme aims to help them cut high logistics and other costs and enable them to compete globally.

 

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India’s imports from China rose to a record in first half of 2022

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India-China trade imbalance

India’s imports from China reached a record $57.51 billion in the first half of the year, according to China’s trade figures.

India-China Bilateral Trade

  • China is India’s largest trading partner.
  • Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, and technical equipment.
  • Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulfur, stone, cement; machines, engines, and pumps.

Recent measures to curb imports from China

  • Blame it on the pandemic and the border dispute, but the result is the same: some Indian businesses are boycotting China.
  • The government is now asking Indian e-commerce companies like Flipkart and Amazon India to label country of origin for all products sold on its websites.
  • The govt banned many Chinese mobile applications, including top social media platforms such as TikTok, Helo and WeChat and games such as PUBG.

Can we completely boycott Chinese products?

  • Trade deficits are not necessarily bad: Both Indian consumers and Chinese producers are gainers through trading.
  • Will hurt the Indian poor the most: This is because the poor are more price-sensitive.
  • Will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market.
  • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 per cent.
  • Will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
  • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years.
  • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China.

Way forward

  • In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
  • The government’s “Atmanirbhar” focus is expected to help ministries handhold industries where self-reliance needs to be built.
  • For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

 

We would love to see you attempting these questions. Post your answer snaps in the comment box.

 

Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

 

Q.“Curbing Chinese imports to India will do more harm than any good”. Analyse.

 

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India & FTA

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CAROTAR

Mains level: Paper 3- Addressing the issues in FTAs

Context

In recent months, India has signed trade agreements with Australia and UAE. n the last week of June, New Delhi began talks for a similar agreement with the EU.

How FTA with EU could help India

  • India’s successful sectors like textiles, pharmaceuticals and leather could benefit from these deliberations, which would also be keenly watched by representatives of the services and renewable energy sectors.
  • A successful free trade agreement (FTA) with the EU could help India to expand its footfall in markets such as Poland, Portugal, Greece, the Czech Republic and Romania, where the country’s exports registered double-digit annual growth rates in the last decade.

So, what are the factors India need to consider while signing FTA

1] Impact of tariff on domestic industry:

  • It has been observed that when India is an importer, the preferential tariffs that accrue as a result of trade agreements are significantly lower than the rates charged from countries given Most Favoured Nation (MFN) status by India.
  • But when the partner country is the importer, preferential tariffs on Indian goods, in most cases, are closer to the MFN tariffs.
  • As a result, Indian exporters do not get the same returns as their counterparts in the partner countries.
  • India’s trade with South Korea is a case in point.
  • Before entering into a trade agreement care should, therefore, be taken to ensure that the domestic industry is not made to compete on unequal terms with the partner countries.

2] Adherence to the rules of origin

  • The India-UAE Comprehensive Economic Partnership Agreement sets a good example.
  • It includes a strong clause on the rules of origin.
  • Forty per cent value addition or substantial processing of up to 40 per cent in the exporting country is required to qualify for lower tariffs.
  • Rules of origin have been a bone of contention in most Indian trade agreements.
  • (CAROTAR, 2020): In 2020, the country notified the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR, 2020), which require a basic level of due diligence from the importer.

3] Including the offset clauses

  • “Offset clauses” — where the exporter is obliged to undertake activities that directly benefit the importing country’s economy — should be built into trade agreements, especially for technology intensive sectors.

4] Emergency action plan

  •  In February 2020, the US made India ineligible for claims under GSP, America’s oldest preferential trade scheme.
  • The US Trade Representative’s Office deemed India as a developed country and suspended beneficial treatment under the GSP.
  • A contingency plan should be in place to tackle such situations.

5] Inclusion of sunset clause

  • India should also take a cue from the US-Mexico-Canada Agreement, to incorporate a “sunset” clause in trade agreements.
  • The pact between the three North American nations provides for periodic reviews and the agreement is slated to end automatically in 16 years unless the countries renegotiate it.

6] Parity between services and merchandise

  • India should negotiate for parity between services and merchandise.
  • Low trade in services: India’s trade in services is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) exceeds the world average.
  • It is especially high in legal and accounting services due to the licencing requirements in both these segments.
  • Expansion in banking and financial services: There is also significant room for expansion of trade in the banking and financial services industry.

Conclusion

A well-crafted trade agreement could help India enhance its share in global trade and help attain the government’s target of making the country a $5-trillion economy.

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Back2Basics: CAROTAR Rules

  • Importers will have to do their due diligence to ensure that imported goods meet the prescribed ‘rules of origin’ provisions.
  • This is the essential availing concessional rate of customs duty under free trade agreements (FTAs).
  • A list of minimum information, which the importer is required to possess, has also been provided in the rules along with general guidance.
  • Also, an importer would now have to enter certain origin related information in the Bill of Entry, as available in the Certificate of Origin.

Why need CAROTAR?

  • CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
  • India has inked FTAs with several countries, including Japan, South Korea and ASEAN members.
  • Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
  • The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.

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International North–South Transport Corridor (INSTC)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: International North–South Transport Corridor (INSTC)

Mains level: Read the attached story

Iran started the first transfer of Russian goods to India via a new trade corridor which transits the West Asian nation, people on the Iranian side familiar with the developments told news outlets.

The cargo will travel through the International North-South Transport Corridor (INSTC).

What is the news?

  • The cargo ship departed St. Petersburg for the Caspian Sea port city of Astrakhan.
  • It will reach the northern Iranian port of Anzali and then will be transferred by road to the southern port of Bandar Abbas on the Persian Gulf.
  • From Bandar Abbas it will reach via ship to India at Jawaharlal Nehru Port Trust (JNPT).

International North–South Transport Corridor (INSTC)

  • The INSTC is a 7,200 km-long multimodal transportation network encompassing sea, road, and rail routes to offer the shortest route of connectivity.
  • It was established on 12th September 2000 in St. Petersburg, by Iran, Russia and India for the purpose of promoting transportation cooperation among the Member States.
  • It links the Indian Ocean to the Caspian Sea via the Persian Gulf onwards into Russia and Northern Europe.
  • It will move freight between India, Iran, Afghanistan, Armenia, Azerbaijan, Russia, Central Asia and Europe.

Significance of INSTC

  • Trade facilitation: INSTC is aimed at reducing the carriage cost between India and Russia by about 30 per cent and bringing down the transit time by more than half.
  • New corridor in making: It has the potential to transform the economies of countries along the corridor into specialized manufacturing, logistics, and transit hubs by facilitating access to newer markets.
  • Multimodal transit: The recent Suez Canal blockade, which cost the global economy hefty damage amounting to US$9 billion, has amplified the optimistic outlook towards the INSTC as a cheaper and faster alternative multimodal transit corridor.

Benefits offered to India

  • Export promotion: The INSTC connects India with Central Asia, and Russia, and has the potential to expand up to the Baltic, Nordic, and Arctic regions, increasing the scope of trade multifold.
  • Ease of trade: For India, it provides a shorter trade route with Iran, Russia, and beyond to Europe, creating scope for increased economic engagement.
  • Alternative Route to Central Asia: It opens up a permanent alternative route for India to trade with Afghanistan and Central Asia, given the hurdles in the direct route through Pakistan.

 

 

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Global Chip Shortage and Related Issues

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Semiconductor industry

CEOs of AMD, Nvidia and Intel have said at different forums last year that the chip situation will remain tight for the rest of 2022.

Genesis of shortage

  • After reaching its peak in 2011, the laptop market growth slowed down with the rise of alternatives such as smartphones and tablets.
  • Then, the pandemic hit.
  • People switched to work from home, children connected to schools through laptops, and get-togethers happened over video calls.
  • This shift led to a surge in demand for laptops and tablets.
  • The stay-at-home rules also made several people pick up console-based learning and gaming.
  • Each of these devices were in high demand and are run on thumbnail-sized semiconductors, performing various functions on a single device.

Also read:

[Sansad TV] Perspective: Semiconductor Industry & India

What led to the production anomaly?

  • Manufacturers produce them as 200mm or 300mm wafers. These are further split into lots of tiny chips.
  • While the larger wafers are expensive and mostly used for advanced equipment, the devices that were in high demand needed smaller diameter wafers.
  • But the manufacturing equipment needed to make them were in short supply even before the pandemic began.
  • Industry is moving in the direction of 5G and advanced communication, which requires expensive wafers.
  • High consumer demand for low-end products, coupled with large orders from tech firms chocked chip makers whose factories were also closed during lockdowns.
  • As the industry gradually tried to pull itself out of the supply crunch, and logistical complexities have exacerbated the problem.

Impact of Ukrainian War

  • Separately, Russia’s invasion of Ukraine has strained exports of essential commodities used to make chip sets.
  • Moscow supplies rare materials like palladium, and Kyiv sells rare gases to make semiconductor fab lasers.
  • This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.

Global supply chain

  • About a decade and half back, semiconductors barely drew attention from large companies that have now come to rely on the thumbnail-sized semiconductor piece.
  • During this period, firms developed a system to make chip sets.
  • The system was made by interconnecting several parts of the world to make a single device.
  • It is what we now call as the global supply chain.

How intricate is this network?

  • Semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions, according to a joint study by Global Semiconductor Alliance and Accenture.
  • The report estimates a semiconductor-based product could cross international borders about 70 times before finally making it to the end customer.
  • Wafer fabrication is the most globally dispersed, with 39 countries directly involved in the supply chain and 34 involved in allied activity.
  • They provide services like photolithography, etching and cleaning.
  • Designing happens across 12 countries; product testing and manufacturing each are done across 25 countries.

COVID is the only raison d’être

  • Supply chain dynamics back fired due to the pandemic, and the recent geopolitical events.
  • When the pandemic began, carmakers stopped requesting chips from suppliers due to low demand for new vehicles.
  • And now, as they ramp up production to meet consumer demand, chip makers are down on supply because they have cut deals with other industries.
  • As the geopolitical events in Central Europe and production shutdowns in China continue to add pressure to the already complicated semiconductor supply chain.

 

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India’s U-turn on Wheat Exports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Wheat cultivation in India

Mains level: Distant dream of doubling farmers income

The Union commerce ministry was preparing to send delegations abroad to boost the country’s wheat exports, when the government abruptly banned its exports on 14 May.

Why did India ban the export of wheat?

  • Record retail inflation has punctured India’s export hopes.
  • While wheat prices are up nearly 20%, prices of essential food items such as flour have risen nearly 15% last year.
  • Prices of other food items that use wheat, like bread and biscuits, have surged, too.
  • Heatwaves in the latter part of March, especially in northwest India, impacted the production of foodgrains.

Is India staring at a food shortage?

  • India’s grain stocks are well above the buffer levels and the decision to regulate wheat exports was taken largely to check prices and curb hoarding.
  • The public distribution system in the country would be run smoothly.
  • However, the government has replaced wheat with rice in the Pradhan Mantri Garib Kalyan Yojana scheme for 2022-23.
  • The effort clearly is a response to the reduced availability of wheat.

What has been the global reaction to the ban?

  • Agriculture ministers from G7 condemned India’s decision to withhold wheat exports amid a global grain shortage.
  • India is the world’s second-largest wheat producer and was expected to fill the gap created because of the Ukraine war.
  • However, wheat exports will be allowed in cases where an irrevocable letter of credit has already been issued.

How will the ban affect India’s neighbors?

  • The export control will help India guide wheat trade in a certain direction.
  • Even with the ban, there is a window open for neighbouring countries.
  • The export will be allowed to other countries “based on the request of their governments”.
  • This window is crucial for Sri Lanka because the country is facing an economic crisis.
  • Also, Bangladesh and Nepal have traditionally relied on Indian wheat.

What is the impact on farmers and traders?

  • The ban has deprived Indian wheat traders the opportunity to gain from the global grain shortage.
  • It may have an unfavorable impact on wheat farmers too.
  • Market prices of wheat had soared past the minimum support price (MSP) in recent months.

Issues with the ban

  • This ban has impacted the credibility of India as a reliable supplier of anything in global markets.
  • It conveys that we don’t have any credible export policy as it can turn its back at the drop of a hat.
  • More interestingly, it also reflects a deep-rooted consumer bias in India’s trade policies.
  • It is this consumer bias that indirectly becomes anti-farmer. This ban deprives farmers from profit-making.
  • It only shows the hollowness of agri-trade policies and dreams of doubling agri-exports.
  • The export ban also reflects poorly on India’s image in playing its shared global responsibility amid the Russia-Ukraine war.

Way forward

  • It may be recognised that inflation is a global phenomenon today caused by excessive liquidity injected by central banks and loose fiscal policies around the world.
  • India’s wheat export ban will not help tame inflation at home.
  • The Government could have announced a bonus of Rs 200-250/quintal on top of MSP to augment its wheat procurement.
  • The govt could have calibrated exports by putting some minimum export price (MEP).

Back2Basics:

How the Central and State governments procure Wheat?

 

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India must seize the trade opportunity opening now

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Non-tariff barriers

Mains level: Paper 3- Trade opportunities for India

Context

Slower global growth, an adverse geopolitical environment, the shadow of recurring waves of the pandemic and prolonged supply chain issues are likely to weigh on export growth this year.

Trade growth in 2021 and uncertainties in 2022

  • The year 2021 was a record one for trade despite the pandemic.
  • In terms of volumes, merchandise trade rose 9.8 per cent, while in dollar terms, it grew 26 per cent.
  • The value of commercial services trade was also up 15 per cent.
  • India has had a good export run in line with global trends, witnessing record goods exports of $419 billion, while touching $250 billion in services exports.
  • However, global growth forecasts have now been pared down.
  • Slower global growth, an adverse geopolitical environment, the shadow of recurring waves of the pandemic and prolonged supply chain issues are likely to weigh on export growth this year.

Taping into opportunities

  • Ukraine and Sri Lanka are major exporters of agricultural products and the vacuum created by their limited presence in global trade will open up agricultural export opportunities for India.
  • This will not only spur overall exports but will also help to support the recovery of the agrarian economy through higher realisations.
  • Tea and wheat: As many as 25 African countries import more than one-third of their wheat from Russia and Ukraine and for 15 of them, the share exceeds 50 per cent.
  • Sri Lanka is also a major player in the global tea market and produces around 300 million kg annually.
  • Almost 98 per cent of its annual production is exported.
  • India, the second-largest producer of tea with an annual production of 900 million kg, is in a good position to exploit the opportunity and fill the gap.
  • Textile: Apart from tea and wheat, newer export opportunities have arisen for textiles.
  • Sri Lanka exports $5.42 billion worth of garments and prolonged power cuts in the island nation will hurt its production and export capacity.

Suggestions

  • 1] Work on non-tariff barriers: One, work on non-tariff barriers for agricultural trade with a special focus on harmonising the sanitary and phytosanitary (SPS) requirements.
  • 2] Autonomy in tea sector: To support tea exports, traditional tea boards are seeking a greater role and autonomy for optimising the development, promotion, and research in the sector.
  • Quicker implementation of the proposed Tea Promotion and Development Act is of utmost importance.
  • 3] Integration with global supply chains: India must double down on its integration with global supply chains.The commerce ministry has negotiated a slew of trade deals.
  • 4] Reduce tariff rates for intermediate inputs: Tariff rates for intermediate inputs should be reduced to either zero or should be negligible for India to become an attractive location for assembly activities.
  • 5] Realignment of specialisation patterns: India must persist with the creation of an enabling ecosystem that realigns its specialisation patterns towards labour-intensive processes and product lines.
  • The labour market reforms must be taken to their logical conclusion.
  • 6] Pro-active FDI policy: A continuous and pro-active FDI policy is also critical as foreign capital and technology are key enablers for entry into global production networks even as local firms play a role as subcontractors and suppliers of intermediate inputs to MNEs.
  • 7]Power supply and logistical bottlenecks: Lastly, exports could suffer if basic issues such as availability of power and logistical bottlenecks keep rearing their ugly heads.
  • The Economic Survey 2019 had recommended that low levels of service link costs (costs related to transportation, communication, and other tasks involved in coordinating the activity etc) are prerequisites to strengthen their participation in GVCs.
  • This should not be neglected.

Conclusion

If India were to tap export opportunities in developed markets, it must act on the suggestions above.

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Confidentiality ring amendment and its impact on antitrust disputes

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Confidentiality ring

Mains level: Paper 3- CCI

Context

Amazon (the defendant) decided to take the confidentiality route towards its submissions in an order dated March 7 passed by the DG-CCI on the Amazon dispute.

About the Confidentiality Ring

  • In 2015, the EU mandated the creation of a data room to respect the confidentiality of certain documents.
  • The EU has to protect this mandate to ensure that the right of defence is not prejudiced. 
  • Articles 101 and 102 of the Treaty of the European Union, which states: “Through confidentiality rings, DG Competition (EU) can safeguard the rights of defence while respecting the legitimate interests in the confidentiality of the information providers.
  • In addition, confidentiality rings remove or reduce the burden of preparing non-confidential versions of documents.”

Adoption of Confidentiality ring by CCI

  • CCI’s investigation under Sections 3, 4 or 5 of the Competition Act are related to the suo motu powers given to the director-general of the commission, which have now extended toward establishing a confidentiality ring.
  • The CCI has taken an alternative view by vaguely replacing the intent with the regulation.
  • The commission may provide the Confidentiality ring after providing a reasonable opportunity to the informant to represent its case before the Commission.
  • This casts an onus on the informant.
  • Turning to the provider of confidential information, the party seeking confidentiality has to submit reasons and the same must be rebutted by the informant, CCI or any other parties, largely driven by the CCI.

Issues with the CCI adoption of the Confidentiality Ring

1] Indiscriminate use of defendant’s reputation ground

  • What would happen if the informant seeks additional documents so that the agency is not prejudiced?
  • By hearing parties out, through redacted information the CCI is bound to be questioned as to the reasons for deciding in a certain manner and worse, could stifle the process at the start.
  • This is likely because the CCI has to hear the objections that the informant may have regarding the reasons for keeping information confidential.
  • The usual ground for seeking this protection is the defendant’s reputation.
  • However, this defence can be used to indiscriminately to subdue any counter that may arise from the informant, who may not possess the intricate details of how a cartel works.

2] Rejection of informant’s right to know the information

  • The second question is about the relief under Section 35 of the Act that empowers the CCI to establish a confidentiality ring including the parties in dispute to disseminate the information for which the confidentiality clause is invoked.
  • However, this is immediately caveated by Regulation 8 of the “Confidentiality Ring” Amendment of April 8, which states that the informant shall not be part of the ring.
  • This will essentially lead the CCI to gather more information surreptitiously for the determination of the case.
  • Void the informant’s right to know information: It has also effectively rejected the informant’s right to know the information, which would be necessary to establish their claim.
  • Brings secrecy: This not only empowers the CCI to further its cause of suo motu investigation but also brings secrecy to cases of high-value disputes.

3] It protects the defendant

  • The reason the CCI decided to establish a confidentiality ring is the opposite of the EU directive.
  • The EU would like to protect the information provider, but the CCI seems to want to protect the documents of the defendant.
  • This contradicts the intent in regulation 1 wherein the CCI intends to protect the informant and regulation 2, which gives unfettered rights to “parties” in the dispute to summarily drop the confidentiality card which, according to any reasonable person, includes the defendant.

Conclusion

The protection provided to the informants, unfortunately, turns out to be to the advantage of the defendants, who are usually large multi-billion dollar entities. It enables the CCI to ringfence its investigation creating legal immunity for “all” involved.

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ECGC to seek RBI nod for payment in forex to exporters

Note4Students

From UPSC perspective, the following things are important :

Prelims level: ECGS

Mains level: Export promotion schemes in India

ECGC Ltd., the government enterprise that provides export credit insurance, will soon approach the Reserve Bank of India for approval to deal in foreign currency for the benefit of exporters.

What is ECGC?

  • ECGC is an acronym for Export Credit Guarantee Corporation of India Ltd.
  • It is a government owned export credit provider.
  • It is under the ownership of Ministry of Commerce and Industry and is based in Mumbai.
  • It provides export credit insurance support to Indian exporters.
  • Its topmost official is designated as Chairman and Managing Director who is a central government civil servant under ITS cadre.
  • The GoI had initially set up Export Risks Insurance Corporation (ERIC) in July 1957.
  • It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee Corporation of India in 1983.

Functions of ECGC

  • ECGC provides a range of credit risk insurance covers to exporters against loss in export of goods and services as well.
  • It offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.
  • It provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan and advances.

Facilities by ECGC

  • It offers insurance protection to exporters against payment risks.
  • It provides guidance in export-related activities.
  • It makes available information on different countries with its own credit ratings.
  • It makes it easy to obtain export finance from banks/financial institutions.
  • It assists exporters in recovering bad debt.
  • It provides information on the creditworthiness of overseas buyers.

Why need export credit insurance?

  • Payments for exports are open to risks even at the best of times.
  • The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world.
  • An outbreak of war or civil war may block or delay payment for goods exported. Ex. Ukraine War.
  • Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. Ex. Sri Lankan Crisis.
  • In addition, the exporters have to face commercial risks of insolvency or protracted the default of buyers.
  • Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

 

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UK to issue Open General Export Licence (OGEL) to India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: OEGL

Mains level: India-UK defence ties

In the backdrop of the rapid geopolitical turmoil, PM Modi and his British counterpart Boris Johnson agreed on a new and expanded India-UK defence partnership and vowed to seal an ambitious free trade agreement by the end of the year.

What is the news?

  • The UK is creating an Open General Export Licence (OGEL) for India to reduce bureaucracy and slashing delivery times for defence procurement.
  • It will partner with India on new fighter jet technology as well as in the maritime sphere to detect and respond to threats.

What is OGEL?

  • The open General Licence is a type of license that is used for the export license that is issued by the government for domestic suppliers.
  • The items that are to be exported in India are categorised into three types. They are prohibited items, restricted items, and freely importable items. These classifications are made based on the nature and use of the products.
  • The application processing and grant of OEGL will be taken care of by the Department of Defence Production. The process will vary for each case.
  • The primary aim of the OEGL is to give a boost to the defence exports of India. This will also improve the ease of doing business and imports and exports.
  • The countries allowed under the OGELs are: Belgium, France, Germany, Japan, South Africa, Spain, Sweden, UK, USA, Canada, Italy, Poland and Mexico.

Items to be exported

  • The items permitted under OGEL includes components of ammunition & fuse setting device without energetic and explosive material; firing control & related alerting and warning equipment & related system; and body protective items.
  • Complete aircraft or complete unmanned aerial vehicles (UAVs) and any components specially designed or modified for UAVs are excluded under this license.

 

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Addressing Duty Anomalies in Trade Deals

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GST slabs, Inverted Duty Structure

Mains level: Issues with Inverted Duty Structure

India has long suffered the anomaly of imported raw material being taxed more than the finished product. Economists call it the inverted duty structure. A spate of free trade agreements (FTAs) in the past have not helped. Are the new ones any better?

What is the inverted duty structure?

  • An inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods.
  • In other words, the GST rate paid on purchases is more than the GST rate payable on sales.

Why is it a problem?

  • When manufacturers cannot set off the taxes paid on raw materials against the tax on the final product, the excess tax paid on inputs gets built into the price of the product.
  • This makes an Indian-made product more expensive than the imported finished product, affecting the competitiveness of Indian makers.
  • The issue is acute in sectors like textiles and apparels.
  • Correcting duty anomalies is key to attracting investments in manufacturing.

Will new FTAs worsen the problem?

  • Looks unlikely. The FTAs under negotiations are structurally very different from those signed a decade ago.
  • The FTAs signed in the early 2000s were with manufacturing hubs like the 10-nation ASEAN which includes the Philippines, Vietnam, South Korea, and Japan.
  • Most of these countries directly compete with India in a host of manufacturing sectors including apparel, electronics, and engineering goods.
  • They largely produced the same goods as India.
  • By contrast, the new FTAs being signed by India are with countries like the United Arab Emirates (UAE) that share complementarities with India with respect to trade interests.

How is India addressing duty anomalies?

  • India has been increasing import duties since 2014-15 to correct the inverted duty structure for non-FTA countries and the average tariff rose from 13.5% in 2014 to 15% in 2020.
  • In fact, the last two budgets sought to correct it by removing duty exemptions and lowering the duty on raw materials.

How did the earlier FTAs impact India?

  • In old FTAs, India agreed to lower or eliminate duties on finished goods. But import duty on raw materials remained high.
  • That made it cheaper to import the final product than make them in India, hurting domestic manufacturers.
  • This can be seen from the fact that the share of ASEAN in India’s total imports has grown from 8.2% in FY11 to 12% in FY21, while exports have stagnated at 10%.
  • The share of South Korea rose from 2.83% in FY11 to 3.23% in FY21, while exports are up marginally from 1.5% to 1.6% during the same period.

And how are the new FTAs different?

  • The UAE, for example, is a services, oil, and gold-led economy rather than a manufacturer. India benefits from duty-free access for mobile phones, which the UAE does not make.
  • Australia, which signed a pact with India last week is again not a major manufacturing economy, but a services one with key interests in wines and minerals, pears, oranges, etc.
  • Besides, this time around, the government is holding consultations with the industry during the FTA talks, doing a SWOT analysis to ensure FTAs benefit India’s exports.

 

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India to export Wheat

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Wheat

Mains level: Indias export of agricultural commodities

Russia and Ukraine account for about 25% of the world’s wheat exports. However, Russia’s invasion of Ukraine and the subsequent Western sanctions against Moscow have curtailed wheat supplies drastically.

India eyeing the global wheat basket

  • As a result of War, many countries which were sourcing wheat mainly from these two nations are now in a dire need of alternatives.
  • India, the largest wheat producer after China, is reported to be eyeing the void.
  • The government plans to allow increased exports to cash in on the higher price of wheat in the international market.
  • With harvesting season (March to May) coinciding with the supply crunch, a bumper crop is also expected again this year.

Global wheat scenario

  • While Russia and Ukraine exported 183 million tonnes (MT) and 91 MT of wheat, respectively, between 2017 and 2021, India exported just a fraction of its output, or just 12.6 MT, in the period.
  • Five other countries accounted for the bulk of wheat exports in this period, including the European Union (157 MT), the U.S. (125 MT), Canada (112 MT) and Australia (83 MT).
  • India, which had the second-highest wheat supply (including production, existing stocks and imports) in this period at 613 million tonnes, exported only 2% of this, with about 80% used for domestic consumption, and the rest stored.

Impact of the war

  • Many countries in Africa, West Asia and Southeast Asia rely heavily on Russian and Ukrainian wheat.
  • Egypt, the biggest importer of wheat, sources 93% of its needs from the East European neighbors. Indonesia, the second-largest importer, has a 30% dependence on these two nations.
  • African nations such as Sudan (60% reliance), Tanzania (64%), Libya (53%), Tunisia (52%), and West Asian countries including Lebanon (77% dependency), Yemen (50%) and the UAE (42%) are also highly dependent on supplies from the two neighbors now at war.

India’s focus markets

  • India is now focussing on exporting wheat to many nations such as Egypt, Turkey, Nigeria, Algeria, West Asia, Indonesia, Vietnam, Sri Lanka, Bangladesh, Thailand, the Philippines, Morocco and Tanzania.
  • To give impetus to the export promotion of wheat as well as to bring focus on the challenges and bottlenecks faced in production and export, APEDA has created a task group.

Legal hurdles over Wheat Exports

  • If India decides to export wheat from its stocks, some developed nations may raise objections at the World Trade Organisation.
  • Already, in March, India was accused of exporting rice from its stocks.
  • India had replied that its rice exports were not from stocks set aside under the public stockholding programs.

India’s consideration

  • The Supreme Court in the Right to Food case, observed that the peace clause adopted in WTO’s Bali Ministerial in 2014 does not prevent India from exporting foodgrains.
  • With the buffer stocks at hand, India should increase its wheat exports in order to stabilise global prices to the extent that it can.
  • It is also important because the countries that were dependent on Russia and Ukraine for their wheat are looking for an alternative source.

Way ahead

  • There is a need to prioritise local prices and ensure adequate supplies for domestic consumption before deciding on the quantum of exports.
  • Ensuring the stability of prices in India and availability of grain for internal consumption should be of utmost priority to the Indian government
  • The government should plan this move in such a way that it does not impact local consumption.
  • A bumper crop of wheat is expected, so the government can procure enough for its distribution and buffer needs.
  • Further, as of now, there are no export restrictions, so farmers can also get the advantage of higher prices by selling the surplus to private traders for exports.

 

Try this PYQ from CSP 2019:

Q. Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

(a) Spices

(b) Fresh fruits

(c) Pulses

(d) Vegetable oils

 

Answer is subjective to the year. But still you can give it a try.
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Exports in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian exports

Mains level: Balance of Payment/Trade

India’s annual goods exports crossed the $400-billion mark for the first time ever.

The achievement of $400 billion in merchandise exports represents a growth of over 21 per cent from $330 billion achieved in FY2019 prior to the Covid-19 pandemic.

Do you know?

China’s total exports stood at $3.3 trillion ($3300 Billions) in 2021! Almost eight times of what we are celebrating!

How did India achieve this?

  • The milestone was achieved due to increase in shipments of merchandise, including engineering products, apparel and garments, gems and jewellery and petroleum products.
  • The agriculture sector too had recorded its highest-ever export during 2021-22 with the help of export of rice, marine products, wheat, spices and sugar.

Reasons behind the surge

  • One of the major reasons for jump in exports is rise in pent up demand, which had fallen as the Covid pandemic forced nations to remain under strict lockdown, thereby impacting global trade.
  • Beside, boost in domestic manufacturing due to production-liked incentive (PLI) schemes and implementation of some interim trade pacts have also led to surge in exports.
  • The Centre implemented a series of steps to promote exports of both goods and services and that includes the introduction of Refund of Duties and Taxes on Exported Products (RoDTEP) and Rebate of State and Central Levies and Taxes (RoSCTL) Schemes.

External factors

  • One of the key factors driving the surge in exports is pent up demand that was not met during major waves of the Covid-19 pandemic.
  • Expansionary monetary policy by developed economies in response to the economic impact of the pandemic has also boosted demand for Indian exports.

Where has been the increase in imports?

  • While exports have grown sharply, merchandise imports have grown even faster reaching $550 billion in the first 11 months of the fiscal.
  • It has seen sharp growth in imports of crude oil, coal, gold, electronics and chemicals.
  • Rising prices of commodities including crude oil and coal have played a significant role in adding to India’s import bill and taking the trade deficit for the first 11 months to a record high of $176 billion.

Why exports are important?

  • Exports are one of the fundamental drivers of growth for any economy.
  • It can influence a country’s GDP, exchange rate, level of inflation as well as interest rates.
  • A robust export data is beneficial as it leads to increase in job opportunities, enhances foreign currency reserves, boosts manufacturing and also increases government’s revenue collection.
  • It is also a good means by which a country can bring itself out of the recession phase.
  • Besides, it also plays a key role in strengthening the domestic manufacturing units by scaling up their quality to make India made products compete and stand out against global peers.

 

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Make trade deals for Make in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CAROTAR

Mains level: Paper 3- Make in India

Context

It will be a good idea to look at the intent, reality, and other ramifications of India’s trade agreements, especially in regard to goods.

Why PTAs matters

  • Amongst the existing Preferential Trade Agreements (PTAs), the most commonly used by exporters and importers, are the agreements with the ASEAN region, South Korea, Japan, and South Asian countries.
  • It is noteworthy that India has significant trade deficits with three of the aforementioned regions.
  • Another factor to note is that three of these regions have significant manufacturing capacity and investment in their own territories.
  • Thus, India’s ongoing initiatives in trade agreements must consider whether such deals strengthen imports into India or incentivize investment.
  • This is all the more important as the Centre has laid out schemes like Phased Manufacturing Programs (PMPs) and Production Linked Incentives (PLIs) to encourage investment in Make in India.

How existing trade agreements affect Phased Manufacturing Programs(PMP)

  • How does it work? Under the PMP, calibrated reductions in customs duty rates on inputs and intermediate goods have been provided along with higher duty rates on finished products.
  • However, considering that many of the finished products are covered by zero duty rates under existing trade agreements with some regions or countries, manufacturers with existing facilities in such countries may not have a compelling reason to move manufacturing to India.
  • Similar benefits exist under other agreements and may inhibit the uptake of the PMPs by multinational manufacturing entities.

Production Linked Incentives and trade agreements

  • Under PLIs, based on a threshold level of capital investment and incremental production, subsidies are to be given to approved applicants.
  • Such schemes cover 15 product categories as of now.
  • In some cases, the attraction of incentives could score over the benefits of importing goods under low or nil rates of duty under PTAs.

Suggestions:

  • The PLIs could become even more attractive if it is combined with certain pre-existing special governmental schemes that reduce costs and conserve cash flow.
  • While the application window for most of the PLI schemes has closed, a few may be extended and depending on the success of current schemes, more could follow.
  • Improving trade governance: PTAs are governed by written agreements between nation states or groups of nation states and domestic laws of the signatories.
  • Contrary to a violation of a multilateral or plurilateral agreement entered into under the aegis of the WTO, enforcement mechanisms external to the parties, do not exist for PTAs.
  • The committed benefits could be allowed or disallowed by customs rules (for example the CAROTAR in India) and customs officials, conditional upon certifications and validations.
  • Mechanisms exist in the FTAs themselves to solve such matters, but in a situation where entities of different sizes and economic power attempt to resolve such issues, the resolutions may not be acceptable to all parties.
  • Better governance mechanisms are needed.

Conclusion

It is expected that a holistic view, keeping in mind the government’s schemes on investment and trade governance, would inform future negotiations as well as a review of existing trade agreements of India.

Source:

https://www.financialexpress.com/opinion/make-trade-deals-for-make-in-india/2457320/

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Back2Basics: CAROTAR 2020

  • CAROTAR 2020 (“Rules”) aims to add to the existing operational certification procedures which are prescribed under different trade agreements such as Free Trade Agreements (FTAs), Preferential Trade Agreement, Comprehensive Economic Cooperation Agreement and Comprehensive Economic Partnership Agreement.
  • The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020), was notified on 21st August 2020 by the Central Board of Indirect Taxes and Customs.

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Egypt hikes Suez Canal transit fees for ship

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Suez Canal

Mains level: NA

Cash-strapped Egypt increased transit fees for ships passing through the Suez Canal, one of the world’s most crucial waterways, with hikes of up to 10%.

Suez Canal

  • The Suez Canal is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea to the Red Sea through the Isthmus of Suez; and dividing Africa and Asia.
  • Constructed by the Suez Canal Company between 1859 and 1869, it officially opened on 17 November 1869.
  • The canal was earlier controlled by British and French interests in its initial years but was nationalized in 1956 by Egypt’s then leader Gamal Abdel Nasser.
  • It extends from the northern terminus of Port Said to the southern terminus of Port Tewfik at the city of Suez.
  • Its length is 193.30 km including its northern and southern access channels.

Its significance

  • The Suez Canal provides a crucial link for oil, natural gas and cargo being shipping from East to West.
  • About 10% of global trade, including 7% of the world’s oil, flows through the Suez Canal.
  • It provides a major shortcut for ships moving between Europe and Asia, who before its construction had to sail around Africa to complete the same journey.
  • As per a report, the canal is a major source of income for Egypt’s economy, with the African country earning $5.61 billion in revenues from it last year.

Try this PYQ:

Q.Between India and East Asia, the navigation time and distance can be greatly reduced by which of the following?

  1. Deepening the Malacca straits between Malaysia and Indonesia.
  2. Opening a new canal across the Kra isthmus between the Gulf of Siam and Andaman sea.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

 

Post your answers here.
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India, UAE to sign Comprehensive Economic Partnership Agreement (CEPA)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Free Trade Agreement (FTA)

Mains level: India and its trade agreements

India and the United Arab Emirates will sign the first-ever bilateral Free Trade Agreement between the two countries.

What is CEPA?

  • The partnership agreement or cooperation agreement is more comprehensive than an FTA.
  • CECA/CEPA also looks into the regulatory aspect of trade and encompasses an agreement covering the regulatory issues.
  • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment and other areas of economic partnership.
  • It may even consider negotiation in areas such as trade facilitation and customs cooperation, competition, and IPR.
  • India has signed CEPAs with South Korea and Japan.

What is a Free Trade Agreement (FTA)?

  • An FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
  • Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
  • The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key benefits offered by FTA

  • Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
  • Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
  • Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
  • Fair treatment for investors: FTA provides treatment as favorably as the FTA partner country gives equal treatment for investments from the partner country.
  • Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

 

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What is SWIFT?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: SWIFT

Mains level: US sanctions on Russia

As tensions peaks over Ukraine the United States could exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

What is SWIFT?

  • SWIFT is an international network for banks worldwide to facilitate smooth money transactions globally.
  • It is basically a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
  • The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organization in over 200 countries and territories.
  • First used in 1973, it went live in 1977 with 518 institutions from 22 countries, its website states.

What exactly is it?

  • SWIFT is merely a platform that sends messages and does not hold any securities or money.
  • It facilitates standardized and reliable communication to facilitate the transaction.

How does it facilitate banking?

  • Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
  • If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
  • Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.

How is the organization governed?

  • SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
  • It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the UK, the US, Switzerland, and Sweden, alongside the European Central Bank.
  • Its lead overseer is the National Bank of Belgium.
  • The SWIFT oversight forum was established in 2012.
  • The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.
  • Europe, Middle East, and Africa are highest contributors to SWIFT.

What happens if one is excluded from SWIFT?

  • US excluding Russia from SWIFT could have serious repercussions on how Russian banks carry out international financial transactions.
  • If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors.
  • This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
  • An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.

Are any countries excluded from SWIFT?

  • Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
  • This step, while regrettable, was taken in the interest of the stability and integrity of the wider global financial system, and based on an assessment of the economic situation.

 

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What is Cartelization?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Cartelization

Mains level: NA

The Competition Commission of India (CCI) issued its final order in an alleged case of cartelization involving four Japanese shipping firms, asking them to desist from avoiding competition with each other.

What is a Cartel?

  • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
  • The three common components of a cartel are:
  1. an agreement
  2. between competitors
  3. to restrict competition

What is Cartelization?

  • Cartelization is when enterprises collude to fix prices, indulge in bid-rigging, or share customers, etc. But when prices are controlled by the government under law, that is not cartelization.
  • The Competition Act contains strong provisions against cartels.
  • It also has the leniency provision to incentivize a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
  • This has proved a highly effective tool against cartels worldwide.

How do they work?

  • Four categories of conduct are commonly identified across jurisdictions (countries). These are: price-fixing, output restrictions, market allocation and, bid-rigging
  • In sum, participants in hard-core cartels agree to insulate themselves from the rigors of a competitive marketplace, substituting cooperation for competition.

How do cartels hurt?

  • They not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
  • A successful cartel raises the price above the competitive level and reduces output.
  • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

Are there provisions in the Competition Act against monopolistic prices?

  • There are provisions in the Competition Act against abuse of dominance.
  • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in the purchase or sale of goods or services.
  • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
  • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

What is the penalty for cartelization?

  • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
  • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

How might cartels be worse than monopolies?

  • Monopolies are bad for both individual consumer interests as well as society at large.
  • Monopolist completely dominates the concerned market and, more often than not, abuse this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

How to stop the spread of cartelization?

  • Strong deterrence to those cartels that are found guilty of being one.
  • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel and it is not always easy to ascertain the exact gains from cartelization.
  • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

Back2Basics: Competition Commission of India (CCI)

  • The CCI is the chief national competition regulator in India.
  • It is a statutory body within the Ministry of Corporate Affairs.
  • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

 

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Govt. proposes new SEZ Law

Note4Students

From UPSC perspective, the following things are important :

Prelims level: SEZs, Baba Kalyani Committee

Mains level: SEZ and export promotion

The government has proposed to replace the existing law governing Special Economic Zones (SEZs) with new legislation to enable States to become partners in ‘Development of Enterprise and Service Hubs’.

Why amend SEZ Act, 2005?

  • Units in SEZs used to enjoy 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the ploughed back export profit for another five years.
  • SEZs now have started losing their sheen after the imposition of minimum alternate tax and the introduction of a sunset clause for the removal of tax incentives.
  • The new act will cover all large existing and new industrial enclaves to optimally utilize the available infrastructure and enhance the competitiveness of exports.
  • The government will also undertake reforms in customs administration of SEZs with a view to promote ease of doing business.

What are SEZs?

  • A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
  • SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
  • To encourage businesses to set up in the zone, financial policies are introduced.
  • These policies typically encompass investing, taxation, trading, quotas, customs, and labor regulations.
  • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

SEZs in India

  • The SEZ policy in India first came into inception on April 1, 2000.
  • The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
  • The idea was to promote exports from the country and realize the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
  • Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

Who can set up SEZs? Can foreign companies set up SEZs?

  • Any private/public/joint sector or state government or its agencies can set up an SEZ.
  • Yes, a foreign agency can set up SEZs in India.

What is the role of state governments in establishing SEZs?

  • A representative of the state government, who is a member of the inter-ministerial committee on private SEZ, is consulted while considering the proposal.
  • Before recommending any proposals to the ministry of commerce and industry (department of commerce), the states must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.

Are SEZs controlled by the government?

  • In all SEZs, the statutory functions are controlled by the government.
  • The government also controls the operation and maintenance function in the central government-controlled SEZs. The rest of the operations and maintenance are privatized.

Are SEZs exempt from labor laws?

  • Normal labor laws are applicable to SEZs, which are enforced by the respective state governments.
  • The state governments have been requested to simplify the procedures/returns and for the introduction of a single-window clearance mechanism by delegating appropriate powers to development commissioners of SEZs.

Who monitors the functioning of the units in SEZ?

  • The performance of the SEZ units is monitored by a unit approval committee consisting of a development commissioner, custom, and representative of the state government on an annual basis.

What are the special features for business units that come to the zone?

  • Business units that set up establishments in an SEZ would be entitled to a package of incentives and a simplified operating environment.
  • Besides, no license is required for imports, including second-hand machinery.

How do SEZs help a country’s economy?

  • SEZs play a key role in the rapid economic development of a country.
  • In the early 1990s, it helped China and there were hopes that the establishment in India of similar export-processing zones could offer similar benefits – provided, however, that the zones offered attractive enough concessions.
  • Traditionally the biggest deterrents to foreign investment in India have been high tariffs and taxes, red-tapism, and strict labor laws.
  • To date, these restrictions have ensured that India has been unable to compete with China’s massively successful light-industrial export machine.

 

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What is Anti-Dumping Duty?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Anti-dumping duty, Countervailing Duty

Mains level: Read the attached story

India has initiated an anti-dumping probe against imports of a certain type of tiles, used for covering the floors in residential and commercial buildings, from China, Taiwan and Vietnam following a complaint by domestic players.

Why in news?

  • Countries start anti-dumping probes to determine whether their domestic industries have been hurt because of a surge in cheap imports.
  • The dumping has caused material injury to the domestic players. If established, the Directorate General of Trade Remedies (DGTR) would recommend an anti-dumping duty on these imports.
  • As a countermeasure, they India would impose these duties under the multilateral regime of the World Trade Organisation (WTO).

What is Dumping?

  • Dumping is a process wherein a company exports a product at a price that is significantly lower than the price it normally charges in its home (or its domestic) market.
  • This is an unfair trade practice which can have a distortive effect on international trade.
  • Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect.

What is Anti-Dumping Duty?

  • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.
  • In order to protect their respective economy, many countries impose duties on products they believe are being dumped in their national market.
  • In fact, anti-dumping is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry.
  • Such ‘dumped’ products have the potential to undercut local businesses and the local economy.
  • Anti-dumping duties provide relief to the domestic industry against the injury caused by dumping.

Mechanism in India

  • The Department of Commerce recommends the anti-dumping duty, provisional or final.
  • The Department of Revenue in Finance Ministry acts upon the recommendation within three months and imposes such duties.

WTO and Anti-Dumping Duties

  • The WTO operates a set of international trade rules, including the international regulation of anti-dumping measures.
  • It does NOT intervene in the activities of companies engaged in dumping.
  • Instead, it focuses on how governments can—or cannot—react to the practice of dumping.
  • In general, the WTO agreement permits governments to act against dumping if it causes or threatens material injury to an established domestic industry.

Issues with such duties

  • Anti-dumping duties have the potential to distort the market.
  • In a free market, governments cannot normally determine what constitutes a fair market price for any good or service.

Back2Basics:

Countervailing duty (CVD)

  • Countervailing duty (CVD) is a specific form of duty that the government imposes in order to protect domestic producers by countering the negative impact of import subsidies.
  • CVD is thus an import tax by the importing country on imported products.
  • To make their products cheaper and boost their demand in other countries, foreign governments sometimes provide subsidies to their producers.
  • To avoid flooding of the market in the importing country with these goods, the government of the importing country imposes a countervailing duty, charging a specific amount on import of such goods.

How does it work?

  • The duty nullifies and eliminates the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactured.
  • It raises the price of the imported product, bringing it closer to its true market price.
  • In this way, the government is able to provide a level playing field for domestic products.

 CVD and India

  • The World Trade Organization (WTO) permits the imposition of countervailing duty by its member countries.
  • In India, the CVD is imposed as an additional duty besides customs on imported products when such products are given tax concession in the country of their origin.

Who imposes countervailing measures in India?

  • The countervailing measures in India are administered by the Directorate General of Anti-dumping and Allied Duties (DGAD), in the commerce and industry ministry’s department of commerce.

 

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How  do  SDRs  help maintain Balance of Payments (BoP)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves, BoP

Mains level: Balance of Payment/Trade

A recent report by the RBI shows that India received support of $17.86 billion in August 2021 by way of Special Drawing Rights (SDRs) has helped cushion the worsening current account deficit.

What are Special Drawing Rights (SDRs)?

  • SDRs, created by the IMF in 1969, are an international reserve asset and are meant to supplement countries’ reserves.
  • Adding SDRs to the country’s international reserves makes it more financially resilient.
  • Providing liquidity support to developing and low-income countries allows them to tide over the balance of payments (BOP) situations like the one India has been experiencing due to the pandemic and the one it faced earlier in 1991.
  • SDRs being one of the components of foreign exchange reserves (FER) of a country, an increase in its holdings is reflected in the BOP.

What are the key components of BOP?

The BOP divides transactions of a country with the rest of the world into two accounts:

  1. Current Account: It consists of net trade of exports and imports of products and services, net earnings on cross-border investments and net transfer payments.
  2. Capital Account: It constitutes a country’s transactions in financial instruments i.e. assets and liabilities constituting of direct investment, portfolio investment, loans, banking capital, and other capital.

What does the SDR support signify?

  • Pandemic impact: Countries worldwide are going through one of the worst health and economic crises, and India has been no exception.
  • Domestic business underperformance: It is also indicative of the fact that the domestic business environment is failing to attract foreign direct investment.

Is dependence on SDR a matter of concern?

A BOP dependent on an SDR-dependent capital account surplus to cushion the country’s widening current account deficit is not a comfortable position to be in.

  • Compulsion for reforms: Importantly, IMF support comes with a baggage of conditions as was the case in 1991—the support came with the condition that India initiates big-ticket economic reforms.
  • Sovereign decisions: Any democratic country would be more comfortable with sovereign rights to design its policy strategy.

Back2Basics:  Foreign Exchange Reserve

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

India’s forex reserves cover:

  1. Foreign Currency Assets (FCAs)
  2. Special Drawing Rights (SDRs)
  3. Gold Reserves
  4. Reserve position with the International Monetary Fund (IMF)

Significance of these reserves

  • Import support: Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.
  • USD reserves: All international transactions are settled in US dollars and, therefore, required to support India’s imports.
  • Exchange rate regulation: More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
  • Cushion against inflation: It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.

Initiatives taken by the government to increase forex

  • Self reliance: To increase the foreign exchange reserves, the GoI has taken many initiatives like Atmanirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
  • Duty remission: The government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
  • FDI and EoDB: Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

 

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India to seal a Free Trade Agreement (FTA) with UK

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various types of trade agreements

Mains level: Free Trade Agreements

India and the United Kingdom have launched formal Free Trade Agreement (FTA) negotiations with the aim of concluding an early harvest trade agreement over the next few months.

What is a Free Trade Agreement (FTA)?

  • A FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
  • Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
  • The concept of free trade is the opposite of trade protectionism or economic isolationism.

Key benefits offered by FTA

  • Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
  • Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
  • Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
  • Fair treatment for investors: FTA provides treatment as favourably as the FTA partner country gives equal treatment for investments from the partner country.
  • Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

How many FTAs does India have?

  • India has signed it’s first Free Trade Agreement (FTA) with Sri Lanka in 1998.
  • Likewise, India had FTAs with: Nepal, Bhutan, Thailand, Singapore, ASEAN, Japan and Malaysia.
  • The discussion is going for an FTA with Australia.
  • India has signed Preferential Trade Agreements such as:
  1. Asia Pacific Trade Agreement (APTA) with Bangladesh, China, India, Lao PDR, Republic of Korea, and Sri Lanka
  2. Global System of Trade Preferences (GSTP)
  3. India – MERCOSUR PTA etc. with South American countries

Back2Basics: Types of Trade Agreements

(1) Free Trade Agreement – discussed above

(2) Preferential Trade Agreement

  • In this type of agreement, two or more partners give preferential right of entry to certain products.
  • This is done by reducing duties on an agreed number of tariff lines.
  • Here a positive list is maintained i.e. the list of the products on which the two partners have agreed to provide preferential access.
  • Tariff may even be reduced to zero for some products even in a PTA.
  • India signed a PTA with Afghanistan.

(3) Comprehensive Economic Partnership Agreement

  • Partnership agreement or cooperation agreement are more comprehensive than an FTA.
  • CECA/CEPA also looks into the regulatory aspect of trade and encompasses and agreement covering the regulatory issues.
  • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment, and other areas of economic partnership.
  • It may even consider negotiation on areas such as trade facilitation and customs cooperation, competition, and IPR.
  • India has signed CEPAs with South Korea and Japan.

(4) Comprehensive Economic Cooperation Agreement

  • CECA generally cover negotiation on trade tariff and Tariff rate quotas (TRQs) rates only.
  • It is not as comprehensive as CEPA.
  • India has signed CECA with Malaysia.

(5) Framework Agreement

  • Framework agreement primarily defines the scope and provisions of orientation of the potential agreement between the trading partners.
  • It provides for some new area of discussions and set the period for future liberalisation.
  • India has previously signed framework agreements with the ASEAN, Japan etc.

(6) Early Harvest Scheme

  • An Early Harvest Scheme (EHS) is a precursor to an FTA/CECA/CEPA between two trading partners. For example, early harvest scheme of RCEP has been rolled out.
  • At this stage, the negotiating countries identify certain products for tariff liberalization pending the conclusion of actual FTA negotiations.
  • An Early Harvest Scheme is thus a step towards enhanced engagement and confidence building.

 

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India-China trade crossed $125 bn in 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: India-China trade deficit

India’s trade with China in 2021 crossed $125 billion, with imports from China nearing a record $100 billion, underlining continued demand for a range of Chinese goods, particularly machinery.

Note: India-China trade has always been an all-time contested issue. This newscard presents crucial stats which is essential to substantiate your answers in Mains as well as in Interviews.

Highlights of the bilateral trade

  • Bilateral trade reached $125.6 billion in 2021, with India’s imports from China accounting for $97.5 billion.
  • Trade fell from $92.8 billion in 2019 to $87.6 billion in 2020 on account of the pandemic.
  • Trade has boomed in 2021 thanks to a recovery in demand as well as rising imports of new categories of goods such as medical supplies.
  • Also, note that these figures exclude bilateral trade between India and Hong Kong.

Imports-Exports imbalance

  • Imports were higher by 30% from 2019 while India’s exports to China, amounting to $28.1 billion, were up by as much as 56% from two years earlier.
  • The trade deficit last year reached $69.4 billion, up by 22% from the pre-pandemic figure in 2019.
  • While a break-up of imports and exports wasn’t immediately available, India’s biggest exports to China in recent years were iron ore, cotton, and other raw material-based commodities.
  • India has imported large quantities of electrical and mechanical machinery, active pharmaceutical ingredients (APIs), auto components, and over the past two years, a range of medical supplies from oxygen concentrators to PPEs.

A global comparison

  • The 43% year-on-year growth in bilateral trade with India was among the highest that China recorded with its major trading partners.
  • Trade figures with China’s top three trading partners showed growth of 28.1% with ASEAN (to $878.2 billion), 27.5% with the EU (to $828.1 billion), and 28.7% with the US, (to $755.6 billion).

Back2Basics: India-China Bilateral Trade

  • China is India’s largest trading partner.
  • Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulphur, stone, cement; machines, engines, pumps.
  • Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, technical equipment.

 

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Trade Protectionism in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GATT

Mains level: Paper 3- Rising trade protectionism

Context

India’s efforts for deepening India’s trade ties with several countries could be scuttled by rising trade protectionism at home.

Increasing protectionism by India

  • Increase in average tariffs: As Arvind Panagariya has argued, the simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21.
  • These increases in tariff rates have reversed the political consensus on tariff liberalisation that India followed since 1991.
  • Initiator of anti-dumping measures: India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
  • According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June).
  • The anti-dumping initiations by India from 1995 (when the WTO was established) till 2020 stand at 1,071.
  • Expanding the scope of Article 11(2)(f): India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good (not just gold and silver, as this provision applied earlier) if it is necessary to prevent injury to the economy. 
  • Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations.
  • WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
  • Restrictive rules of origin: Finance Minister in her budget speech of 2020 said that undue claims of FTA benefits pose a threat to the domestic industry.
  •  Subsequently, India amended the rules of origin requirement under the Customs Act.
  • Rules of origin determine the national source of a product.
  • This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favoured nation rate (if the product originates from a non-FTA country).
  • But India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
  • The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
  • Impact of vocal for local: The clarion call given by Prime Minister Narendra Modi to be “vocal for local” is creating an ecosystem where imports are looked at with disdain, upsetting competitive opportunities and trading partners.

What are the implications?

  • Protectionist steps are justified on the ground that they would help domestic companies grow into viable competitors.
  • But the fact is that protectionism does not benefit the domestic economy.
  • It rather encourages inefficiency of domestic manufacturers.
  • It is likely to hurt exports, make domestic goods costlier and reduce benefits to consumers from increased competition.
  • So in the long term, protectionism is likely to have only a negative effect on industry’s ability to compete globally.
  • For India to reap the benefits of the summits and partnerships like Quad, there needs to be a fundamental shift in policy.
  • Amore pragmatic approach in line with the recent initiatives to reverse the retrospective tax legislation and provide support to the flailing telecom sector must be expanded.

Conclusion

India can’t maximise its interests at the expense of others. Its experiment with trade protectionism in the decades before 1991 was disastrous. We should recall Winston Churchill’s warning: “Those who fail to learn from history are condemned to repeat it.”

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Customs Duty Waiver on Edible Oil Imports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Customs Duty, Edible Oil Imports

Mains level: Edible oil scarcity in India

The Union Commerce Minister has announced that the government has decided to waive customs duty on import of crude sunflower, palm and soyabean oil, a move aimed at controlling their prices.

Edible Oil Imports and India

  • Given the heavy dependency on imports, the Indian edible oil market is influenced by the international markets.
  • Of the 20-21 million tonnes of edible oil that India consumes annually, around 4-15 mt is imported.
  • India is second only to China (34-35 mt) in terms of consumption of edible oil.
  • Crude and food-grade refined oil is imported in large vessels, mainly from Malaysia, Brazil, Argentina, Indonesia etc.
  • Home-grown oilseeds such as soyabean, groundnut, mustard, cottonseed etc find their way to domestic solvent and expellers plants, where both the oil and the protein-rich component is extracted.

Do you know?

Palm oil (45%) is the largest consumed oil, mainly used by the food industry for frying namkeen, mithai, etc, followed by soyabean oil (20%) and mustard oil (10%), with the rest accounted for by sunflower oil, cottonseed oil, groundnut oil etc.

Prices and politics

  • Prices of edible oil have been rising across the country since few months.
  • Most edible oils are trading between Rs 130-Rs 190/litre.
  • Also, the festive season will see increased buying of edible oils.

Impact of the move

  • Consumers might not see a drastic reduction immediately in prices of edible oil.
  • The reduction in duty is expected to affect the earnings of oilseed growers across the country.

Long-term implications

  • Over the last few years, the government has taken a series of steps to remove India’s import dependency on pulses, and tried to do the same for oilseeds through national missions.
  • However, frequent market interventions that ultimately bring down prices would backfire on the government and veer farmers away from growing oilseeds.
  • We need continuity in prices to help farmers stick to oilseeds or pulses.

Back2Basic: Customs Duty

  • Customs duty refers to the tax imposed on goods when they are transported across international borders.
  • In simple terms, it is the tax that is levied on import and export of goods.
  • Custom duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
  • The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods.
  • The rate of Customs duty varies depending on where the goods were made and what they were made of.

Types of custom duty

  1. Basic Customs Duty (BCD): It is the duty imposed on the value of the goods at a specific rate at a specified rate of ad-valorem basis.
  2. Countervailing Duty (CVD): It is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India.
  3. Additional Customs Duty or Special CVD: It is imposed to bring imports on an equal track with the goods produced or manufactured in India.
  4. Protective Duty: To protect interests of Indian industry
  5. Safeguard Duty: It is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.
  6. Anti-dumping Duty: Manufacturers from abroad may export goods at very low prices compared to prices in the domestic market. In order to avoid such dumping, ADD is levied.

 

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WTO raises 2021 goods trade outlook

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trends in global trade post covid

Mains level: Slowdown in China and opportunities for India

The World Trade Organization (WTO) has upgraded its world merchandise trade growth outlook to nearly 11 percent for this year, higher than 8% estimated in March.

About WTO

  • The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade between nations.
  • Governments use the organization to establish, revise, and enforce the rules that govern international trade.
  • It officially commenced operations on 1 January 1995, pursuant to the 1994 Marrakesh Agreement, thus replacing the General Agreement on Tariffs and Trade (GATT) that had been established in 1948.
  • The WTO is the world’s largest international economic organization, with 164 member states representing over 96% of global trade and global GDP.
  • The WTO facilitates trade in goods, services and intellectual property among participating countries.
  • It prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, and other important goals.

Report on Global trade

  • According to a WTO, global goods trade is expected to grow by 10.8 per cent compared to the forecast of 8 per cent in March, but with varied recovery, depending on the region.
  • The report said export volume growth in 2021 will be 8.7 per cent in North America, 7.2 per cent in South America, 9.7 per cent in Europe, 7 per cent in Africa, 5 per cent in West Asia and the highest for Asia at 14.4 per cent.
  • On the other hand, imports are expected to grow at a faster pace as compared to exports. Inbound shipments into North America are set to grow by 12.6 per cent.
  • It will be 19.9 per cent in South America, 9.1 per cent in Europe, 13.1 per cent in CIS, 11.3 per cent in Africa, 9.3 per cent in West Asia and 10.7 per cent in Asia.

Key highlights for India

  • Exports from India have been rising consistently over the last few quarters, after plummeting for a few months as the outbreak of Covid-19 disrupted global trade.
  • India’s exports to its top trading partners such as the US, European Union, nations in West Asia, among others, are expected to rise.
  • Exports data during the first six months of the current fiscal year is emblematic of the fact that external demand has been robust.
  • Besides, supply-side disruptions can also be exacerbated by the rapid and unexpectedly strong recovery of demand in advanced and many emerging economies.

Competing with China

  • Experts said with rising global demand, India should be able to compete in various segments vis-a-vis China.
  • Currently, China is facing supply-side as well as demand-side issues owing to several internal challenges (energy, debt crisis).
  • Therefore, India is in a good position to increase its exports, and can become a substitute for China across various product categories or sectors.
  • India can take advantage of the increasing global demand, which can ultimately translate into demand for Indian exports.

 

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India’s Current Account Balance sees a spike

Note4Students

From UPSC perspective, the following things are important :

Prelims level: External sector of India, BoP, BoT

Mains level: NA

India’s current account balance saw a far lower surplus of $6.5 billion (0.9% of GDP) in the first quarter compared with a surplus of $19.1 billion (3.7% of GDP) a year earlier.

What is External Sector?

  • The external sector is the portion of a country’s economy that interacts with the economies of other countries.
  • In the goods market, the external sector involves exports and imports.
  • In the financial market it involves capital flows.

Various terminologies related:

[A] Balance of Payment (BoP)

  • BoP is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
  • These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
  • It consists of two components: the current account and the capital account.
  • The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.

(1) Current Account

  • Current account of BoP consists of all transactions relating to goods, services and income, it is functionally classified into merchandise and
  • Current account deficit is the situation where payments on the country are more than the payments into the country.
  • In current account surplus, there is a net inward payment into the country on the current.

(2) Capital Account

  • The capital account records the net flow of investment transaction into an economy.
  • Investments (FDI and FII) and borrowings (ECB) are part of the capital account.

[B] Balance of Trade

  • Trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.
  • If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
  • If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.

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[pib] National Export Insurance Account (NEIA) Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: National Export Insurance Account Scheme

Mains level: NA

The Centre has approved the contribution of Grant-in-aid (Corpus) of ₹1,650 Crore to the National Export Insurance Account (NEIA).

National Export Insurance Account Scheme

  • NEIA Trust was established in 2006 to promote project exports from India that are of strategic and national importance.
  • The NEIA Trust promotes Medium and Long Term (MLT) /project exports.
  • It extends (partial/full) support to covers issued by ECGC (ECGC Ltd, formerly known as Export Credit Guarantee Corporation of India Ltd.) to MLT/project export and to Exim Bank for Buyer’s Credit (BC-NEIA) tied to project exports from India.

Benefits offered

  • The capital infusion in NEIA Trust will help the Indian Project Exporters (IPE) to tap the huge potential of project exports in focus market.
  • Support to project exports with Indian content sourced from across the country will enhance the manufacturing in India.
  • In addition, assuming an average 75% Indian content in the projects, it is estimated that around 12000 workers will move into formal sector.

Performance highlights

  • Since inception, NEIA has extended 213 covers, with a consolidated project value of Rs. 53,000 crores, to 52 countries as of 31st August 2021.
  • Its impact in enabling project exports has been most significant in Africa and South Asia.

 

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Service Exports from India Scheme (SEIS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Service Exports from India Scheme (SEIS)

Mains level: Export promotion schemes in India

The Directorate General of Foreign Trade has imposed a cap on the total entitlement under the Services Exports from India Scheme (SEIS) at Rs 5 crore per exporter for shipments done in 2019-20 (FY20). The move is expected to benefit small businesses in the services sector.

About SEIS

  • Service Exports from India Scheme (SEIS) aims to promote export of services from India by providing duty scrip credit for eligible exports.
  • Under the scheme, service providers, located in India, would be rewarded under the SEIS scheme, for all eligible export of services from India.
  • SEIS was earlier termed as Served from India Scheme (SFIS).

Eligibility

  • Service Providers of notified services, located in India are eligible for the Service Exports from India Scheme.
  • To be eligible, a service provider (Company / LLP / Partnership Firm) should have a minimum net free foreign exchange earnings of USD 15000 in the preceding financial year to be eligible for duty credit scrips.
  • For proprietorships or individual service providers, minimum net foreign exchange earnings of USD10,000 in the preceding financial year is required to be eligible for the scheme.
  • Also, in order to claim reward under the SEIS scheme, the service provider shall have to have an active Import Export Code (IE Code) at the time of rendering such services for which rewards are claimed.

Back2Basics: Merchandise Exports from India Scheme (MEIS)

  • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
  • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
  • It intended to incentivize exports of goods manufactured in India or produced in India.
  • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
  • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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Container shortage and its impact on international trade

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Read the attached story

The government is in talks with exporters to help them deal with an international container shortage that has led to freight rates rising by over 300 per cent in the past year for key shipping routes.

Why is there an international container shortage?

  • The reduction in the number of shipping vessels operating as a result of the Covid-19 pandemic has led to fewer empty containers being picked up.
  • This has left many containers in inland depots and stuck at ports for long durations.
  • Long waiting times at key ports such as those in the US due to congestion are also contributing to lengthening turnaround time for containers.
  • A sustained global economic recovery has added to the impetus to trade.
  • Some countries are willing to pay a premium for empty containers and that this was further adding to the container shortage.

Freight rate impact

  • The lack of availability of containers and the faster than expected recovery in international trade has pushed up freight rates significantly over the past year.
  • Some key international routes are seeing an increase in freight rates of over 500 per cent compared to September last year.
  • Structural problems such as the high turnaround time for ships in India also add to the container shortage issue that exporters are currently facing.

How is the container shortage impacting Indian exporters?

  • Delay: Indian exporters are facing major delays in their shipments and consequent liquidity issues as they have to wait longer to receive payment for exported goods.
  • Liquidity crunch: Exporters noted that shipments that used to take 45 days are now taking 75-90 days leading to a 2–3-month delay in payments leading to liquidity crunch particularly for small exporters.

How can the government help address this issue?

  • Exporters are calling on the government to regulate the export of empty containers.
  • Exporters have asked the government to curb the export of empty containers at all Indian ports in line with a move by the Kolkata port which restricted the number of empty containers permitted to be exported to 100 per vessel for a three month period.
  • Exporters are also calling on the government to release about 20,000 containers that have been abandoned or are detained by government agencies so that they can augment supply.
  • Indian exporters has also called on the government to notify a freight support scheme for all exports till the end of the fiscal when freight rates are expected to normalise.
  • They are also asking the government to push back on a move by shipping lines to offer priority bookings at higher rates, asking that shipping lines revert to taking bookings on a first come first serve basis.
  • In the medium term, exporters have called on the government to take steps to boost the manufacturing of containers in India.

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[pib] Transport and Marketing Assistance (TMA) scheme for Specified Agriculture Products

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Transport and Marketing Assistance Scheme

Mains level: Export promotion schemes in India

The Centre has revised “Transport and Marketing Assistance” (TMA) scheme for Specified Agriculture Products’.

What is the TMA Scheme?

  • The TMA Scheme was introduced in 2019 to provide assistance for the international component of freight, to mitigate the disadvantage of higher freight costs faced by the Indian exporters of agriculture products.
  • All exporters, duly registered with relevant Export Promotion Council as per Foreign Trade Policy, of eligible agriculture products, shall be covered under this scheme.
  • The assistance, at notified rates, will be available for the export of eligible agriculture products to the permissible countries, as specified from time to time.
  • Assistance would be provided in cash through a direct bank transfer as part reimbursement of freight paid.

Following major changes have been made in the revised scheme:

  • Dairy products, which were not covered under the earlier scheme, will be eligible for assistance under the revised scheme.
  • Rates of assistance have been increased, by 50% for exports by sea and by 100% for exports by air.

List of ineligible products

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India becomes 4th largest forex reserves holder globally

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves

Mains level: Balance of Payment/Trade

India’s foreign exchange reserves rose by $835 million to touch a record high of $612.73 billion in the week ended July 16, 2021, the Reserve Bank of India (RBI) data showed.

Forex Reserves

India’s forex reserves cover:

  • Foreign Currency Assets (FCAs) (rose by $463 million to $568.748 billion)
  • Special Drawing Rights (SDRs) (up by $1 million at $1.548 billion)
  • Gold Reserves (up by $377 million to $37.333 billion)
  • Reserve position with the International Monetary Fund (IMF) (up by $1 million at $1.548 billion)

(Note the descending order of the shares of various components of forex reserves. UPSC can go factual here.)

What is Foreign Exchange Reserve?

  • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
  • They are commonly used to support the exchange rate and set monetary policy.
  • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
  • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
  • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

Countries with the highest foreign reserves

Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves.

  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. India – $612.73 Billion
  5. Russia – $597.40 Billion

Why are these reserves so important?

  • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
  • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
  • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
  • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

Initiatives taken by the government to increase forex

  • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
  • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
  • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

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What is RoDTEP Scheme?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: MEIS, RODTEP Scheme

Mains level: Export promotion schemes in India

The Centre has notified the rates and norms for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme asserting that it would put ‘direct cash in the pockets of exporters’ soon.

RoDTEP Scheme

  • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
  • It has been kicked in from January 2021, replacing the earlier Merchandise and Services Export Incentive Schemes (MEIS and SEIS) that were in violation of WTO norms.
  • The new RoDTEP Scheme is a fully WTO compliant scheme.
  • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

Answer this PYQ:

Q.With reference to the international trade of India at present, which of the following statements is/are correct?

  1. India’s merchandise exports are less than its merchandise imports.
  2.  India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.
  3.  India’s exports of services ye more than its imports of services.
  4.  India suffers from an overall trade/current account deficit.

Select the correct answer using the code given below:

(a) 1 and 2 only

(b) 2 and 4 only

(c) 3 only

(d) 1, 3 and 4 only

 

Post your answers here (You need to sign-in for that).
2
Please leave a feedback on thisx

Why need such a scheme?

  • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
  • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

Coverage of the scheme

  • It covers about 75% of traded items and 65% of India’s exports.
  • To enable zero-rating of exports by ensuring domestic taxes are not exported, all taxes, including those levied by States and even Gram Panchayats, will be refunded under the scheme.
  • Steel, pharma, and chemicals have not been included under the scheme because their exports have done well without incentives.

Back2Basics: Merchandise Exports from India Scheme (MEIS)

  • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
  • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
  • It intended to incentivize exports of goods manufactured in India or produced in India.
  • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
  • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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Implications of EU’s new GHG emissions law for Indian industry

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CBAM

Mains level: Paper 3- Way forward for Indian industry after the introduction of CBAM

Context

On July 14, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net-zero by 2050.

Implications of Fit for 55

  • Legal backing: It turns the EU’s announcement into law, protecting it from the winds of political change.
  • Opportunity for India: It opens new markets for Indian industry, for example for electric vehicles.
  • CBAM: However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
  • CBAM is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.

What is CBAM?

  • The EU has had a carbon emission trading system since 2005.
  • With Fit for 55, the EU’s carbon price is likely to go up.
  • High carbon price will make the EU’s domestic products more expensive than imports from countries that do not have such rules.
  • The new CBAM is meant to level the playing field between domestic and imported products.
  • CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products.
  • The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.

Why CBAM is a cause for concern for India?

  • India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
  • So, CBAM should be a cause for concern for it.
  • A UNCTAD study predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
  • India’s goods trade with the EU was $74 billion in 2020.

Way forward for Indian Industry

  • Clean technology partnerships: Indian Industry should enter clean technology partnerships with European industry.
  • Invest in renewables:  Indian companies should invest in more renewable electricity and energy efficiency.
  • Incentivise low-carbon choices: They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
  • Schemes and Government financing: The government can extend the perform-achieve-trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies.
  • WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
  • Diversify export: India can try to diversify its exports to other markets and products.

Consider the question “What is carbon border adjustment mechanism (CBAM) introduced by the EU? What are its implications for Indian industry?” 

Conclusion

At present, the CBAM may seem obstructionist. But over the long-term, it can provide regulatory certainty to industry by harmonising carbon prices, and Indian industry can position itself as a strong player in the trade landscape of the future.


Back2Basics: UNCTAD

  • UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
  • Its headquarters are located in Geneva, Switzerland, and have offices in New York and Addis Ababa.
  • UNCTAD is part of the UN Secretariat.
  • IT report to the UN General Assembly and the Economic and Social Council but have own membership, leadership, and budget.
  • It is also part of the United Nations Development Group.

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[pib] India improves score in Ease of Cross-Border Trade

Note4Students

From UPSC perspective, the following things are important :

Prelims level: UNESCAP

Mains level: Ease of Cross-Border Trade

As per the latest UN Global Survey on Digital and Sustainable Trade Facilitation, India’s rank moved up from 78.49% in 2019 to 90.32% in 2021.

About the Survey

  • The Global Survey on Digital and Sustainable Trade Facilitation is conducted every two years by UNESCAP.
  • The 2021 Survey includes an assessment of 58 trade facilitation measures covered by the WTO’s Trade Facilitation Agreement.
  • The Survey is keenly awaited globally as it evidences whether or not the trade facilitation measures being taken have the desired impact and helps draw comparison amongst countries.
  • A higher score for a country also helps businesses in their investment decisions.

Global performance

  • Among developed countries, Australia, New Zealand, Netherlands, Japan, and Belgium have scored more than 93%.
  • In South Asia, Bangladesh and Sri Lanka were behind India with a score of 64.5% and 60.2%, the survey showed.

India’s improvement

  • India has scored 90.32% in United Nation’s Economic and Social Commission for Asia Pacific’s (UNESCAP) latest Global Survey on Digital and Sustainable Trade Facilitation.
  • The Survey hails this as a remarkable jump from 78.49% in 2019.

India’s significant improvement in the scores on all 5 key indicators, as follows:

  1. Transparency:100% in 2021 (from 93.33% in 2019)
  2. Formalities: 95.83% in 2021 (from 87.5% in 2019)
  3. Institutional Arrangement and Cooperation: 88.89% in 2021 (from 66.67% in 2019)
  4. Paperless Trade: 96.3% in 2021 (from 81.48% in 2019)
  5. Cross-Border Paperless Trade: 66.67% in 2021 (from 55.56% in 2019)
  • The Survey notes that India is the best-performing country when compared to the South and southwest Asia region (63.12%) and the Asia Pacific region (65.85%).
  • The overall score of India has also been found to be greater than many OECD countries including France, UK, Canada, Norway, Finland etc. and the overall score is greater than the average score of EU.
  • India has achieved a 100% score for the Transparency index and 66% in the “Women in trade” component.

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Private: Global minimum Corporate tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Base Erosion and Profit Shifting

Mains level: Paper 3- Global minimum tax and its impact

The article deals with the recent proposal from the US Treasury Secretary for the global corporate minimum tax rate and its implications for India.

What is global minimum tax

  • Treasury Secretary Janet Yellen has thrown the weight of the U.S. government behind a push for a global corporate minimum tax rate.
  • It is being proposed that the race to the bottom for corporate tax rates be reversed.

Base Erosion and Profit Shifting programme and issues with it

  • Big tech companies were able to operate in large markets such as India without physical presence and profits could be relatively easily relocated to low-tax jurisdictions through financial manoeuvres.
  • The Base Erosion and Profit Shifting (BEPS) programme was initiated in 2013 to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law.
  • The OECD co-opted countries in the framework by suggesting that a consensus-based outcome would be superior to a patchwork of independent changes.
  • Developing countries weren’t sure if they would receive the right to tax the mobile incomes of tech companies.
  • Addressing this concern, the OECD published a policy note that bifurcated the challenge into two pillars.
  • Pillar one was to address the issue of reallocation of taxing rights whereas all remaining BEPS issues would be addressed by pillar two.
  • Most contentious issue in the blueprint is that only a fraction of the profits will be allocated to markets.
  • So,  the tax base of countries, including India, remains exposed to the risk of under or non-taxation.
  • To fix this, countries have implemented a digital services tax on revenues.
  • In response, the US launched, in 2020, inquiries under the Trade Act 1974 and is now proposing tariffs as means to curb the proliferation of such measures.

Finding consensus-based solution: Minimum tax rate

  • The Biden administration has assured its participation in finding a consensus-based solution.
  • However, recently the US Treasury suggested that it will apply the pillar one proposal to top 100 companies and will not accept any result that is discriminatory to US companies.
  • The US now supports a simplification of the proposal. However, it remains to be seen how the final version pans out for markets such as India.
  • Shifting to pillar two, it is now being proposed that the US corporate tax rate be raised to 28 per cent.
  • It is being suggested that a minimum tax rate be defined for the world. 
  • This minimum rate is not yet defined, but once this rate is fixed, a multinational enterprise’s effective tax rate in each jurisdiction will be compared with the minimum and where a lower rate is paid, a top-up tax will apply.
  • But who gets to tax the remaining profits?
  • As per the current design, the country where the ultimate parent entity resides is where the tax is first applicable.
  • Given that nearly 30 per cent of the Forbes 2000 companies are in the US, the implementation of this proposal best serves the needs of the US.

Impact on India

  • For India, committing to such a global standard needs to be assessed carefully, especially since the proposal will apply to companies with global revenues above Euro 750 million.
  • Moreover, India has witnessed a consistent rise in the effective tax rate which is now close to 26 per cent.

Consider the question “What are the reasons that led to the idea of global minimum tax? How it will impact India?”

Conclusion

For the rise in US tax rates to pay off, it requires other countries to reform their tax systems accordingly and, most importantly, allow for the taxation of incomes that are perceived to be undertaxed.

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Atmanirbhar Bharat & the informal sector

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GVA

Mains level: Paper 3- Role informal sector can play in Atmanirbhar Bharat

The article highlights the important role the informal sector can play in the vision of Atmanirbhar Bharat.

Economic development through Atmanirbhar Bharat

  • The vision of the Atmanirbhar Bharat is rooted in the classical paradigm of economic development, based on demand injection in the economy via two sources, domestic and external.
  • ‘Vocal for local’ exhorts a distinct and decisive shift in consumer preferences towards locally-produced goods and services.
  • ‘Make for the world’ is more ambitious and resembles the export-led growth strategy adopted in East Asia.
  • Thus, the Atmanirbhar Bharat categorically bestows the Indian economy with twin engines of growth.

Important role informal sector can play

  • The strategy is based on an assumption of lack of adequate demand.
  • So a prognosis of supply side with respect to the ability of domestic producers of goods and services to seize the opportunity at the requisite scale and scope is pertinent.
  • The nature, character, structure and contributions of the informal sector require retrospection.
  • The size of India’s informal sector is massive, it accounts for about 50% of GVA and a major share in the export basket.
  • This position proffers it with growth opportunities emanating from domestic as well as external sources.

Constraints faced by informal sector

  • Most firms are micro in size and deploy little capital.
  • They have a small scale of production, substandard/unbranded quality of products, and localised scope of procuring raw material and marketing their products.
  • They are vulnerable to business downturns and other market uncertainties, as reflected in high mortality.
  • Their access to cheap, reliable and long-term credit sources is highly restricted.
  • The sector also endures a lack of official identity and recognition of its existence and contribution.

Three transformations informal sector need to adopt

  • Atmanirbhar Bharat promises enhanced demand for domestically-produced goods and services, but the exposure to stiff global competition, especially for informal sector units, is imminent.
  • In such a scenario, the informal sector must embrace for three tectonic shifts with respect to internal transformation, strategic positioning and labour-market dynamics.

1)  Internal transformation

  • Enterprises must undergo drastic internal transformation, progressively converging at incremental formalisation through spontaneous and self-propelled transition into economically-viable units.
  • It requires infusion of capital to ensure enhanced labour productivity and higher wages.
  • A systemic disruption, fostering natural growth must be ushered in, which would also curb the birth of new informal enterprises.
  • Moreover, internal consolidation in the sector via merger and acquisitions of units would bring benefits accruing from scale economies.

2) Strategic positioning

  • Two, because the vision of the Atmanirbhar Bharat exposes the informal sector to global competition, entrepreneurs must embrace the subtle art of strategic positioning in global mega-supply chains.
  • They must pick their products and markets with utmost care, and engrain two mantras of success at the global stage in the DNA of their business strategies.
  • Global mega-supply chains demand ultra-flexibility in production cycle in addition to heightened resilience to withstand headwinds emanating from not just domestic factors but also global.

3) Labour market dynamics

  • The informal sector employs more than 80% of India’s workforce.
  • The changes in the first two spheres i.e. higher capital intensity-led enhanced labour productivity and ultra-flexibility in production cycles may have severe repercussions on the availability and quality of jobs in India.
  • To alleviate these concerns, the first assumption is that the proportionate increase in expected demand must be more than the enhanced labour productivity to at least retain the currently employed workers.
  • To generate good quality jobs, diversification (both horizontal and vertical) must be encouraged.
  • Vertical diversification entails products not just be partly produced or assembled in India, they must be the end-products of fully indigenised and integrated production and supply chains, from design to made in India.
  • Horizontal diversification involves expansion into newer products and markets, smartly aligning with India’s comparative advantage of surplus labour.

Consider the question ” India’s vast informal sector is poised to play an instrumental, decisive and intriguing role in the vision of the Atmanirbhar Bharat.  But the sector, in its current form, appears severely constrained to harness the opportunities. In lights of this, examine the constraints faced by the sector and suggest the measures needed to transform the sector.” 

Conclusion

The vision of the Atmanirbhar Bharat is an inflexion point for India’s informal sector, which stipulates adroit manoeuvring between contrasting forces of continuity and change.

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India should go all out in its Westward trade push

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Exploring potential for a Westward trade push

After walking away from the RCEP, India needs to find alternative trading partners that can offer the potential for trade expansion. The article suggests a Westward trade push as an alternative.

Forging trade deals with the Western countries

  • Our rejection of RCEP, which covers much of the eastern hemisphere, had exposed us to the risk of losing out on cross-border commercial relations in a highly dynamic part of the world.
  • To compensate for the opportunity cost of that decision, it was imperative to strike other alliances.
  •  As a part of this, India adopted a roadmap for the rest of this decade to elevate ties with the UK and also moving to revive free-trade talks with the EU.
  • An India-UK plan unveiled recently will raise our bilateral relationship to a ‘comprehensive strategic partnership in such areas as economic affairs, defence and health.
  • The two countries signed a £1-billion trade investment pact that is expected to generate jobs in both.
  • Separately, India and the EU are reportedly working out how to resume stalled negotiations for a trade deal.

Issues India may face

  • The signing of pacts would involve mutual tariff reductions and the lowering of other barriers, both of which have proven thorny so far.
  • In general, while the West wants us to lower import duties, our negotiators have been citing India’s sovereign right to protect domestic businesses under World Trade Organization rules.
  • Globally, even before covid knocked the wind out of the sails of cargo ships, commerce across borders had been doing badly under the extended effects of a financial crisis that shook things up in 2008-09.
  • But world trade remains a reliable path to global prosperity and must therefore regain its gusto.
  • For us, deal-making would mean opening up markets to imports in lieu of easier access to foreign ones.

Way forward

  • Concessions that cause very few job losses in India can easily be made. A broad cost-benefit analysis will have to guide our approach to talks, on complex issues like US visa rules which affect our software exports.
  • Since it is governments that thrash out deals, geopolitical convergences are often sought too.
  • We seem to be in a favourable position on this, given the West’s need to keep China’s rise in check.
  • The UK’s Rolls-Royce has just inked a memorandum with Hindustan Aeronautics Ltd for warship engines, a sign of our strategic ties.
  • Technology could come our way from the US, too.
  • If we can leverage an ability to play a role in Asia’s balance of power to our economic benefit, we should.

Conclusion

Mutually assured flexibility on tariff concessions would help India and its Western partners score economic gains and also counterbalance China’s growing dominance of world trade.

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B2B

[pib] India-UK Virtual Summit

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Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Emergency Credit Line Guarantee Scheme (ECLGS) 3.0

Note4Students

From UPSC perspective, the following things are important :

Prelims level: ECLGS 3.0

Mains level: Paper 3-ECLGS 3.0

The Government has extended the scope of Emergency Credit Line Guarantee Scheme (ECLGS) through introduction of ECLGS 3.0 to cover business enterprises in Hospitality, Travel & Tourism, Leisure & Sporting sectors.

ECGL Scheme

  • Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and interested MUDRA borrowers.
  • The credit will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
  • The Scheme would be applicable to all loans sanctioned under GECL Facility during the period from the date of announcement of the Scheme to 31.10.2020.

Aims and objectives

  • The Scheme aims at mitigating the economic distress faced by MSMEs by providing them additional funding in the form of a fully guaranteed emergency credit line.
  • The main objective is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and NBFCs to increase access to, and enable the availability of additional funding facility to MSME borrowers.
  • It aims to provide a 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

Salient features

  • The entire funding provided under GECL shall be provided with a 100% credit guarantee by NCGTC to MLIs under ECLGS.
  • Tenor of the loan under Scheme shall be four years with a moratorium period of one year on the principal amount.
  • No Guarantee Fee shall be charged by NCGTC from the Member Lending Institutions (MLIs) under the Scheme.
  • Interest rates under the Scheme shall be capped at 9.25% for banks and FIs, and at 14% for NBFCs.

ECLGS 3.0

  • It would involve extension of credit of upto 40% of total credit outstanding across all lending institutions.
  • The tenor of loans granted under ECLGS 3.0 shall be 6 years including moratorium period of 2 years.
  • Further, the validity of ECLGS i.e. ECLGS 1.0, ECLGS 2.0 & ECLGS 3.0 have been extended upto 30.06.2021 or till guarantees for an amount of Rs. 3 lakh crore are issued.
  • The revised operational guidelines in this regard shall be issued by National Credit Guarantee Trustee Company Ltd (NCGTC).

 

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Suez Shows Civilization Is More Vulnerable Than We Think

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Vulnerabilities in global trade

The recent closure of the Suez Canal highlights the inherent flaw in the global supply chains. Choking of one of the many such points leads to disruption in the global trade.

Points of vulnerability

  • Suez Canal was blocked this week by a container ship named Ever Given when a gust of wind moved the ship out of the course and grounded it.
  • Egypt has expanded parts of the canal to enable two-way traffic and accommodate larger carriers.
  • The Ever Given ship went off course and got stuck in a part of the waterway that’s still narrow.
  • But it’s also a reminder that even an advanced civilization like ours has points of acute vulnerability. 

Avoiding single points of failures

  • Systems designers strive to avoid these single points of failure, so that transport, energy and communication networks are able to withstand attacks or unexpected calamities.
  • Technological advances and globalization were also supposed to make us less susceptible to this type of problem.
  • The internet, for example, was conceived as a decentralized system that’s pretty difficult to break, as was Bitcoin.
  • But global infrastructure, defined broadly, still has a surprising number of pinch points.
  • These can be difficult to remedy, as creating back-up options is expensive and counteracts economies of scale.
  • In some cases, the problem is even getting worse:
  • Industries are becoming more concentrated due to corporate takeovers.
  • Big chunks of our lives are now mediated by a just handful of technology companies.
  • The governments are now more cognizant of the political and economic power held by those who control choke points.

How canal can disrupt the global trade

  • The Panama Canal, the Suez Canal and the Strait of Hormuz are places where container ships and oil tankers are forced to navigate narrow passages.
  • The alternative is a long detour or more expensive air freight.
  • For decades these waterways have been recognized as areas of huge strategic importance and as being susceptible to military or terror attacks.
  • Various back-up routes have been mooted but most haven’t materialized.

Vulnerabilities in economic sphere

  • In seeking to rid itself of one pinch point — pipelines that traverse Ukraine provides gas to Europ — Germany has created another: the twin Nord Stream gas pipelines that connect Russia and Germany under the Baltic Sea.
  • The U.S. worries these will weaken eastern Europe and increase Germany’s dependence on Russia.
  • In the realm of finance, trillions of dollars of financial instruments are tied to the London interbank offered rate.
  • This rate was easy to manipulate until they were exposed in the years following the 2008 financial crisis.
  • Libor is now being replaced.
  • Similarly, Europe has long relied on the Swift payments system and the U.S. dollar, but that dependence came into question in 2018 as it disagreed with the U.S. over Iran sanctions.
  • In technology, people have warned for years that the U.S. needs a back-up for the Global Positioning System.
  • The system can be spoofed or otherwise disrupted.
  • Semiconductors are where the clearest pinch points are emerging.
  • A global computer chip shortage during Covid has forced auto manufacturers to tear up production plans.
  • Very few companies are able to produce the most advanced chips, due to the technical challenges and vast cost of constructing foundries.
  • The most important of these, Taiwan Semiconductor Manufacturing Co., is based on an island that’s under constant threat of invasion by Beijing.
  • ASML Holding NV of the Netherlands has a monopoly on the machines needed to fabricate the best chips.
  • Now China’s inability to buy the most cutting edge gear from ASML is holding back its own semiconductor ambitions.

Way forward

  • None of these choke-point problems are easy to resolve.
  • Not only are there geopolitical ambitions at work here but there are also usually trade-offs between building greater resilience and efficiency.
  • But because redundancy offers protection and is therefore a public good, there’s an argument that governments should play a role in providing it.
  • Antitrust polies can be used to challenge monopolies and foster more competition.

Consider the question “What are the threat emanating from the various forms of choke points to the global trade? Suggest the ways to deal with it.”

Conclusion

Having a back-up is a good idea. We learn that when the roof falls in, or when a ship called the Ever Given snarls up the Suez Canal.

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Remission of Duties and Taxes on Export Products (RODTEP) Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RODTEP Scheme

Mains level: Not Much

The notification of benefit rates payable to exporters under the Remission of Duties and Taxes on Export Products (RODTEP) scheme is expected to take more time as it is facing ‘teething issues’.

Try this PYQ:

Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

(a) China

(b) India

(c) Myanmar

(d) Vietnam

RODTEP Scheme

  • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
  • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
  • The new RoDTEP Scheme is a fully WTO compliant scheme.
  • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

Why need such a scheme?

  • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
  • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

Back2Basics: Merchandise Exports from India Scheme (MEIS)

  • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
  • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
  • MEIS intended to incentivize exports of goods manufactured in India or produced in India.
  • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
  • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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[pib] ‘Red Rice’ exports from Assam to the US

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Brown Rice

Mains level: Indian Exports

In a major boost to India’s rice exports potential, the first consignment of ‘red rice’ was flagged off today to the USA.

Try this PYQ from CSP 2019

Q.Among the following, which one is the largest exporter of rice in the world in the last five years?

(a) China

(b) India

(c) Myanmar

(d) Vietnam

Red Rice

  • Iron rich ‘red rice’ is grown in the Brahmaputra valley of Assam, without the use of any chemical fertilizer.
  • The rice variety is referred to as ‘Bao-dhaan’, which is an integral part of Assamese food.
  • Much like brown rice and white rice, red rice also comes with many incredible health benefits.
  • Due to the presence of a component called anthocyanin, this rice is usually consumed either partially hulled or unhulled.
  • Red rice derives this eye-grabbing colour from this component and has much more nutrient value as compared to other varieties of rice.

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India’s trade with China falls at five-year low

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's trade deficit

Mains level: Atmanirbhar Bharat

India’s trade with China last year fell to the lowest since 2017, with the trade imbalance declining to a five-year low on the back of a slump in India’s imports from China.

Try this PYQ:

Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

(a) China

(b) India

(c) Myanmar

(d) Vietnam

India-China Trade

  • Two-way trade in 2020 reached $87.6 billion, down by 5.6%, according to new figures from China’s General Administration of Customs (GAC).
  • India’s imports from China accounted for $66.7 billion, declining by 10.8% year-on-year and the lowest figure since 2016.
  • It, however, rose to the highest figure on record, for the first time crossing the $20 billion-mark and growing 16% last year to $20.86 billion.

What constitutes India’s import from China?

  • While there was no immediate break-up of the data in 2020, India’s biggest import in 2019 was electrical machinery and equipment, worth $20.17 billion.
  • Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion), while India’s top exports were iron ore, organic chemicals, cotton and unfinished diamonds.

India’s exports to China

  • The past 12 months saw a surge in demand for iron ore in China with a slew of new infrastructure projects aimed at reviving growth after the COVID-19 slump.
  • China’s total iron ore imports were up 9.5 per cent in 2020.

A friction-induced low

  • The trade deficit, a source of friction between India and China, declined to a five year-low of $45.8 billion, the lowest since 2015.
  • Whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China remains to be seen.
  • While India’s imports from China declined, so did India’s imports overall with a slump in domestic demand last year.
  • There is, as yet, no evidence to suggest India has replaced its import dependence on China by either sourcing those goods elsewhere or manufacturing them at home.

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What are Digital Services Taxes?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Digital Services Tax, Equalization Levy

Mains level: Digital taxes and related issues

Digital services taxes adopted by India, Italy and Turkey discriminate against U.S. companies and are inconsistent with international tax principles, the U.S. Trade Representative’s office has said.

Do you remember?

GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies.

Fact of the matter: Equalization Levy

  • India has earlier expanded the scope of the Equalization Levy, or digital tax, to the sale of goods and services in the country by overseas e-commerce firms.
  • The Equalization Levy was introduced for the first time in 2016 as 6 per cent tax on revenues earned by non-residents from online advertising and related services.
  • The burden of this tax eventually fell on local firms advertising on these platforms.

Contention for E-Commerce

  • In March 2020, the government expanded the scope of this levy to include the sale of goods and services in the country by overseas e-commerce operators.
  • The transactions were to be taxed at 2 per cent if businesses earned more than Rs 2 crore.
  • Globally, the rate of digital tax varies from 1.5 per cent (in Poland and Kenya) to 15 per cent (Paraguay). In Europe, the tax rate varies from 3 per cent (France, UK, Spain) to 7.5 per cent (Hungary).

Digital Services Taxes

  • The “digital services tax” (DST) is a levy on the overall revenues earned by the supplier of specific digital services.
  • The DST should not be confused with the so-called “Netflix tax,” which one may find in some western countries.
  • The Netflix tax is essentially a “value-added tax” on digital services where the consumer bears the entire tax burden on the value of the final product.

The US Question

  • The need to tax digital companies – the likes of Amazon, Google and Netflix – arises because these companies collect digital revenues from countries where they do not have a significant business presence.
  • These are new-age companies, which can use virtual infrastructure to operate in another country.
  • Countries across the globe have felt the need to tax revenues generated by such companies in a particular jurisdiction.
  • Talks began in 2018 under the aegis of the OECD to formalize a framework on what and how to tax revenues earned by such companies in a country in which they have no physical or significant presence.
  • But an abrupt US decision to pull out of the negotiations, involving 137 countries and threats of retaliatory action against those levying digital taxes have hit the 2020 deadline.

India’s response

  • USTR has concluded the digital taxes imposed by France, India, Italy and Turkey discriminate against big U.S. tech firms, such as Google, Facebook, Apple and Amazon.com
  • For India, it created enormous uncertainty, since the country has always been at the forefront of adopting the concept of taxing foreign digital companies.
  • It is now subject to a probe initiated by the US called the ‘Section 301’ investigations into the digital taxes.

A populist fuss by the US

  • The US is a bit confused and so is the exiting President. They are not able to decide what they want to do.
  • It is being argued that it could lead to tariffs before Donald leaves office or early in the administration of President-elect Biden.
  • This arguably another populist measure that Trump administration wants to leave behind.

Conclusion

  • Given that a global consensus at the OECD or even the UN level may take several more months, countries including India are likely to continue with their unilateral DSTs.
  • At this juncture, when economies are reeling under the ill-effects of the pandemic, no country would want to give up its share of revenue and wait for a global consensus to emerge.

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[pib] Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: MEIS, RODTEP Scheme

Mains level: Export promotion measures

The Union govt. has decided to extend the benefit of the Scheme for Remission of Duties and Taxes on Exported Products (RoDTEP) to all export goods with effect from 1st January 2021.

Try this PYQ:

Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

(a) China

(b) India

(c) Myanmar

(d) Vietnam

RoDTEP Scheme

  • RoDTEP is a scheme for the Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
  • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
  • The new RoDTEP Scheme is a fully WTO compliant scheme.
  • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

Why need such a scheme?

  • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
  • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

Back2Basics: Merchandise Exports from India Scheme (MEIS)

  • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
  • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
  • MEIS intended to incentivize exports of goods manufactured in India or produced in India.
  • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
  • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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Importance of Resilient supply chains

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Atmanirbhar Bharat

Mains level: Paper 3- Importance of resilient supply chains

What does supply chain resilience mean? 

  • When assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production intentionally (economic sanction) or unintentionally (natural disaster)
  • Example: Japan imported $169 billion worth from China, accounting for 24% of its total imports. Japan’s imports from China fell by half in February 2020 that impacted Japan’s economic activity.
  • In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few

Recent incidents that led to supply chain disruption

  • Disruptions in supply chains can be natural or man-made.
  • When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China.
  • In Japan’s case, a nuclear disaster (Fukushima Daiichi) caused a sharp drop in Japanese automobile exports to the United States.
  • Terrorist drone attacks on oil refineries in Saudi Arabia in September 2019 resulted in a drop of 5.7 million barrels of oil per day.
  • That attack triggered a steep plunge in Saudi Arabia’s stock market and a sharp spike in global oil prices.
  • Tensions with China led the United States government to impose restrictions on the export of microchips to China’s biggest semiconductor manufacturer SMIC.

Supply Chain Resilience Initiative (SCRI)

  • Geo-politics and geo-economics can never be truly separated.
  • Also, there is a growing trend of weaponization of trade and technology.
  • China had imposed sanctions on its key exports of grain, beef, wine, coal, etc to Australia for demanding an inquiry into the origins of the coronavirus and advocating a robust Indo-Pacific vision.
  • It is against this backdrop that India, Japan, and Australia initiated the Supply Chain Resilience Initiative (SCRI).
  • It focuses on automobiles and parts, petroleum, steel, textiles, financial services, and IT sectors.
  • The SCRI may be strengthened by the future involvement of France.
  • Kingdom has also shown interest in the SCRI.

“China plus one” strategy

  • For many Japanese companies, global performance and profits are linked to manufacturing facilities and supply chains in China.
  • Yet, they have shown an early capacity for risk mitigation through the “China Plus One” business strategy.
  • The “China plus one” strategy aims at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India, and Bangladesh.
  • Japan announced a 2.2 billion Relocation Package.
  • Of the companies that availed this package, 57 relocated to Japan, 30 to Southeast Asia, and two to India.

India’s vulnerability to supply chain disruptions

  • India can ill-afford the shocks of disruption in supply chains.
  • For instance, the pandemic caused a breakdown in global supply chains in the automotive sector.
  • For India, which imports 27% of its requirement of automotive parts from China, this quandary was a wake-up call.
  • It is t is noteworthy is that despite being the fourth largest market in Asia for medical devices, India has an import dependency of 80%. 
  • Given the renewed thrust in the health-care sector, this is the right time to fill gaps through local manufacturing.

India increasing its presence in global supply chains

1) Electronic industry

  • India’s electronics industry was worth $120 billion in 2018-2019 and is forecast to grow to $400 billion by 2025.
  • India is enhancing its presence in the global supply chains by attracting investments in the semiconductor components and packaging industry.
  • The Indian electronics sector is gradually shifting away from completely knocked down (CKD) assembly to high-value addition.

2) Defence sector

  • Defence is among the key pillars of the ‘Atmanirbhar Bharat’ policy.
  • The government is providing a big boost to defence manufacturing under the ‘Make in India’ program.
  • It has identified a negative import list of 101 items.
  • There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.

Consider the question “Pandemic has demonstrated the damage vulnerable supply chains can cause. It also underscored the importance of resilient supply chains. In light of this, examine the importance of diversification of supply chains.”

Conclusion

India has the capacity and the potential to become one of the world’s largest destinations for investments, and one of the world’s largest manufacturing hubs, in the aftermath of the pandemic.

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Trade-offs for growth revival: Why India’s policymakers need a new roadmap

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Current account and capital account

Mains level: Paper 3- Policy options to revive the Indian economy

The article weighs in the policy options with the Indian policymakers to revive the India economy. This leads to the trilemma of managing the exchange rate, controlling the inflation and maintaining the capital account open all at the same time.

A brief overview of 1991 economic reforms

  • The crisis in 1991 was centred on the balance-of-payments.
  • Allowing the Indian rupee to fall from an artificially high level  was a key part of the solution.
  • Since the reforms, the Indian rupee has steadily depreciated, roughly according to a market-determined equilibrium.
  • Extraordinarily high tariff barriers were reduced, allowing for welfare gains from greater international trade.
  • Reforms of the domestic economy that increased market orientation was, in some sense, opportunistically combined with these externally-oriented measures.

What should be India’s foreign economic policy

  • In terms of connections to the rest of the world, however, it is less clear what the right policy mix should be.
  • We can think of three types of international flows: labour, goods and services, and capital.

1) Internation flow of Indian labour

  • India has benefited from being able to send workers with a variety of skills to different types of economies: construction workers and nurses in the Persian Gulf, software engineers in the US, and so on.
  • Direct benefits came from large remittances back to India.
  • The pandemic and US immigration policy, have had some major impacts on this international connectivity, but new vaccines and a change in the US president are likely to reverse these shocks.
  • In any case, there is not much that Indian policymakers can do or need to do on this front.

2) Trade in Goods and Service

  • India has been able to grow its exports, both in a variety of agricultural and manufactured commodities and in services, from software services to tourism.
  • It has been reasonably competitive in a range of goods and services.
  • It was only in the last few years, even before the pandemic, have Indian exports struggled to register growth.
  • Whereas the export powerhouses of East Asia consistently ran surpluses on the current account of the balance of payments, India has mostly run deficits, albeit manageable ones.

3) Capital Flow: Area where policymakers have option

  • Current account deficits have to be covered somehow, though various forms of foreign capital.
  • Whereas economic theory and economic policymakers mostly agree on the benefits of international trade in goods and services there is less of a consensus on the benefits of international capital flows.
  • Capital flows can raise fears of instability if they are reversed, or make exports less competitive if they push up the value of the rupee. 
  • The country is a relatively attractive destination for foreign capital, both FDI and portfolio investment.
  • But, these flows can make Indian exports less competitive if the rupee appreciates too much, requiring domestic demand to do more of the work of absorbing increased output.

Lesson from Japan

  • Right now, India is trying to build its manufacturing capacity by raising tariffs, in an old-style push for import substitution.
  • It is also providing direct incentives, such as the new scheme rewarding increases in production.
  • Arguably, this did work in Japan in the 1960s, but it is not clear if India is well-off enough to sustain that domestic strategy.
  • In addition, the lack of competitive discipline exporting can hinder the achievement of acceptable quality levels.

Way forward

  • Capital controls to some extent can help mitigate the risk in this situation.
  • The Reserve Bank of India do more to keep the rupee at competitive levels, by accumulating foreign exchange reserves.

Consider the question “In terms of links with the rest of the global economy, it is less clear what the right policy mix should be. Do you agree with the view that focus on simultaneously managing the exchange rate and domestic inflation while maintaining an open capital account would help in the revival of India’s economic growth

Conclusion

Lurking under the surface of these issues is the trilemma of being unable to simultaneously manage the exchange rate and domestic inflation while maintaining an open capital account, although foreign exchange reserves provide a way of softening the trade-offs. These are not new challenges, but they will need to be a focus for India’s policymakers as they seek renewed economic growth.


Source:-

https://www.financialexpress.com/opinion/trade-offs-for-growth-revival-why-indias-policymakers-need-a-new-roadmap/2142900/

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Putting India-U.S. trade ties on new footing

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trade Policy Forum

Mains level: Paper 3- India-U.S. trade ties

After tumultuous years of Trump administration in trade policies, the article examines the new possibilities under the next U.S. President in trade ties with India.

Approach towards WTO and India

  • The new U.S. administration will have more constructive stance on multilateral issues in the World Trade Organization (WTO).
  • The Trump administration went out of its way in seriously undermining WTO institutions when the organisation was already in need of reform and new direction.
  • The Biden administration is less likely to engage in unilateral tariff increases and more likely to pursue remedies in the WTO.
  • In case of India, the Trump administration it pursued an aggressive approach to resolve market access concerns through threats to eliminate India’s benefits under the Generalized System of Preferences programme.
  • However, the follow-through was weak.
  • The administration was on the brink of concluding a historic bilateral trade deal, yet it lost focus.

5 likely developements

  • 1) It is clear that Mr. Biden plans to focus on domestic concerns first.
  • There may be trade aspects to some of these efforts, but they may have limited early relevance for a future U.S.-India trade policy.
  • 2) Two, as it turns to trade policy, the Biden administration is not likely to place India among its top few priorities.
  • Among top priorities will include formulating its approach with China, such as finding alternatives to the Regional Comprehensive Economic Partnership to set new global standards that address China’s practices.
  • That said, India should be among the priorities at the next level down.
  • 3) The trade deal still pending with the Trump administration remains compelling.
  • There could be an early opportunity to conclude these negotiations and for the Biden administration to get credit.
  • A bilateral deal will not lead to serious consideration of FTA negotiations any time soon.
  • But this first trade agreement could pave the way for later additional small agreements.
  • 4) The existing Trade Policy Forum (TPF) met only once over the last four years.
  • It seems likely that the Biden administration will see the TPF’s value as a venue for more regular discussions on a range of trade issues.
  • 5) A reinvigorated TPF will present new opportunities for the two countries to take up a range of cutting-edge trade issues that will be critical in determining whether the U.S. and India can converge more over time or will drift further apart.
  • These include digital trade issues, intellectual property rights and approaches to nurturing innovation, better health sector alignment, and more regular regulatory work on science-based agricultural policies.

Conclusion

The future looks bright for U.S.-India trade under a Biden administration, but that does not mean it will be any easier. It will be critical for leadership on both sides to commit to strong efforts to put the trade relationship on a new footing, which will have to involve a ‘can-do’ attitude to solving problems.


Back2Basics: Trade Policy Forum

  • It was established in 2005.
  • The Forum is part of the overall United States-India Economic Dialogue, replacing the Trade Policy Working Group pillar.
  • It  convenes on a regular basis.
  • The Forum provides an opportunity to work together to expand trade between the two countries.
  • The agenda could cover the following subjects: tariff and non-tariff trade barriers; foreign direct investment; subsidies; customs procedures; standards, testing, labeling and certification intellectual property rights protection; sanitary and phytosanitary measures; government procurement; and services.

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Steps needed to achieve Comparative advantage in Manufacturing

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Policy approach for industrial development

The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

Issue of policy binary

  • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
  • Import duties are being raised.
  • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
  • At the same time, there is considerable unease at the rolling back of trade liberalisation.
  • This binary is not very useful.

Steps needed to gain competitive advantage

1) Infrastructure

  • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
  • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
  • Competitive logistics are essential.
  • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
  • High-speed broadband real-time connectivity to the US market was provided through public investment.
  • This was done well before general telecom modernisation began.

2) Closing the financing gap

  • Long-term financing for world-class infrastructure is still a gap.
  • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
  • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

3)  Prevent real exchange rate appreciation

  • Before considering specific increases in import duties, real exchange appreciation should be undone.
  • This would have the effect of raising tariffs across the board.
  • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

4) Change the regime for SEZ

  • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
  • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
  • This would create a level-playing field for production vis-à-vis competitive locations overseas.
  • Large zones would have to be developed by the state.
  • The private sector can be partners in the process, but achievement of scale is only possible by the state.
  • Production for the domestic as well as the global market would become easier.

5) Encourage domestic value addition

  • Domestic value-addition can be incentivised by-
  • 1) Reducing duties to zero for all primary raw materials and inputs.
  • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
  • In short, have just the opposite of the inverted duty structure we have had for computers.
  • This would change investment and production decisions if other costs of production in India have been made competitive.

6) Commitment of procurement of full production

  • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
  • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
  • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
  • If the bid size is large enough, the best global firms would come and invest.
  • If the bids are repeated, prices would come down and a competitive industry structure would be created.

7) Encourage public investment

  • Public investment in firms should not be ruled out altogether.
  • In some cases, it may be the best way to create competitive capacity.
  • Maruti Suzuki is a good example in India.
  • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
  • This is a policy instrument that can be used to create competitive advantage.

8) Creation of fund

  • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

Conclusion

The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.


Source:-

https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/

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India’s no to RCEP could still be a no

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RCEP countries

Mains level: Paper 3- RCEP and India's concerns about it

The article examines the significance of the RCEP and India’s concerns over its provision. 

Significance of RCEP

  • Last week, 15 East Asian countries signed the Regional Comprehensive Economic Partnership (RCEP), the largest free trade agreement (FTA) ever.
  • In 2019, RCEP members accounted for about 30% of world output.
  • More importantly, about 44% of their total trade was intra-RCEP, which is a major incentive for the members of this agreement.
  • The deal could contribute to the strengthening of the regional value chains.

Comparing RCEP with Trans-Pacific Partnership (TPP)

  • The TPP included several regulatory issues including labour and environmental standards and “anti-corruption”.
  • All of these issues could raise regulatory barriers and severely impede trade flows.
  • In contrast, RCEP includes traditional market access issues, following the template provided by the World Trade Organization (WTO).
  • RCEP also includes issues like electronic commerce, investment facilitation that are currently being discussed by WTO members to “reform the multilateral trading system”.

Would RCEP be able to realise trade and investment liberalisation?

  • In case of trade in goods, RCEP members have taken big strides towards lowering their tariffs.
  • However, commitments made by RCEP members for services trade liberalisation do look shallow in terms of the coverage of the sectors.
  • Movement of natural persons, an area in which India had had considerable interest, is considerably restricted.
  • The areas of investment and electronic commerce, in both of which India had expressed its reservations on the template adopted during RCEP negotiations, the outcomes are varied.
  • The text on investment rules shows that it is a work-in-progress.
  • The rules on dispute settlement procedures are yet to be written in.

Will India’s concerns get addressed in near future?

  • The answer seems to be unambiguously in the negative on two counts.
  • 1) Two of the concerns India had raised, namely,  the deep cuts in tariffs on imports from China, and provisions relating to the investment chapter, have become even more significant over the past several months.
  • 2) India’s Atmanirbhar Bharat Abhiyan is primarily focused on strengthening domestic value chains, while RCEP, like any other FTA is solely focused on promoting regional value chains.

Consider the question “What were India’s concerns about RCEP that resulted in India not signing it? ” 

Conclusion

This suggests that the prospects of India joining the RCEP in the near future appears bleak.

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Faultlines in India’s economic liberalism

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RCEP

Mains level: Paper 3- Economic liberalisation and its impact on Indian economy

The article counters the argument made by External Affairs Minister S. Jaishankar about the impact of economic liberalisation on India’s economy.

Impact of liberalism on India

  • India’s External Affairs Minister S. Jaishankar recently disapproved of free trade and globalisation.
  • About FTA’s he said that “the effect of past trade agreements has been to de-industrialise some sectors.”
  • These observations were made days after countries of the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement.
  • He said that , “in the name of openness, we have allowed subsidi[s]ed products and unfair production advantages from abroad to prevail”

Flaws in the argument

  •  There are several flaws in Mr. Jaishankar’s arguments.

1) India cannot be the part of global value chain

  • India is now truly at the margins of the regional and global economy.
  • With trade multilateralism at the World Trade Organisation (WTO) remaining sluggish, FTAs are the gateways for international trade.
  • By not being part of any major FTA, India cannot be part of the global value chains.
  • India’s competitors such as the East Asian nations, by virtue of they being part of mega-FTAs, are in an advantageous position to be part of global value chains and attract foreign investment.

2) Indian economy has bee relatively closed economy

  • India is surely a much more open economy than it was three decades ago, globally, India continues to remain relatively closed when compared to other major economies.
  • According to the WTO, India’s applied most favoured nation import tariffs are 13.8%, which is the highest for any major economy.
  • Likewise, according to the United Nations Conference on Trade and Development, on the import restrictiveness index, India figures in the ‘very restrictive’ category.
  • From 1995-2019, India has initiated anti-dumping measures 972 times (the highest in the world) trying to protect domestic industry.

3) Economic survey accepts the benefits of FTAs

  • The External Affairs Minister is contradicting government’s economic survey presented earlier this year.
  • The survey concluded that India has benefitted overall from FTAs signed so far.
  • Blaming FTAs for deindustrialisation means ignoring real problem of the Indian industry — which is the lack of competitiveness and absence of structural reforms.

4) India has been a major beneficiary of economic globalisation

  • It cannot be ignored that India has been one of the major beneficiaries of economic globalisation — a fact attested by the International Monetary Fund (IMF).
  • Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
  • According to the economist Arvind Panagariya, poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
  • This was due to India clocking an average economic growth rate of almost 8%.

Conclusion

Desire to make India a global destination for foreign investment is a pipe dream because it is naive to expect foreign investors to be gung-ho about investing in India if trade protectionism is the government’s official policy.

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Export remain key to economic growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Importance of export for growth

The article highlights the argument made by Arvind Panagaria about the primacy of export for the progress of the country in his new book India Unlimited: Reclaiming the Lost Glory.

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Forex Reserves hit a record high

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Components of forex reserves

Mains level: Not Much

India’s foreign exchange reserves touched a lifetime high of $555.12 billion, according to RBI data.

Aspirants must make a note here:

  1. Authority managing FOREX in India
  2. Components of FOREX
  3. IMF’s SDRs
  4. Emergency use of FOREX

What are Forex Reserves?

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position
  • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Where are India’s forex reserves kept?

  • The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
  • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
  • 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
  • In value terms, the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020.

Try this PYQ:

Q. Gold tranche(Reserve tranche) refers to (CSP 2020)-

(a) A loan system of World bank

(b) One of the operations of a central bank

(c) A credit system of WTO granted to its members

(d) A credit system granted by IMF to its members

Rising above the 1991 crisis

  • Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring Forex reserves to tackle any crisis on the economic front.
  • The level of Forex reserves has steadily increased by 8,400 per cent from $5.8 billion as of March 1991 to the current level.

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Nudge towards formalisation of MSMEs

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Criteria for MSMEs

Mains level: Paper 3- Formalisation of MSMEs

The lack of formalisation has several implications for MSMEs. Registering them could help them in various ways. The article deals with the issue of formalisation.

Please read the link shared below for issues related to MSME

The missing large in MSMEs

Steps taken by Government to Formalize MSME

  • UAM: In 2015, the government notified the Udyog Aadhaar Memorandum (UAM), an online filing system for MSMEs.
  • As of January, 86 lakh MSMEs had registered on the UAM portal.
  • In 2016, the government notified rules under which MSMEs had to furnish information relating to their enterprises, online, in an MSME databank.
  • As of January, only 1.6 lakh units registered on it.
  • A new process of classification and registration for small businesses took off on July 1 called as “Udyam”.
  • As of October 1, the MSME ministry has confirmed that only 7 lakh registrations have taken place using the new system.Nudge by the government
  • In an attempt to nudge more enterprises to become lifetime Udyam, the government has integrated the system with the Trade Receivables Electronic Discounting System (TReDS) and the Government e-Marketplace (GeM).
  • In its updated Priority Sector Lending (PSL) guidelines, the RBI has established that for the purposes of PSL, MSMEs will be identified as per the gazette notification laying down the new process of classification and registration.

Addressing the concerns

  • While the Udyam initiative holds more promise, it is important to assess if this will be detrimental to accessing formal finance.
  • To this end, the government and RBI should consider whether the registration requirement can be exempted for units with investment and turnover that falls in the lower end of the criteria.
  • In 2018, the International Finance Corporation estimated that the overall supply of finance from formal sources met only one-third of the credit demand of the MSME sector.
  • Enabling strategies such as PSL could provide a fillip to priority sectors including MSMEs which require increased formal financing.

Conclusion

The costs of formalisation and compliance are high and onerous in many states in India. In such an ecosystem, there are perverse incentives to remaining small and informal. Governments’ efforts towards formalisation should be directed towards addressing these issues.

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Next Generation Treasury Application (NGTA)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NGTA, Forex Reserve

Mains level: Not Much

In a bid to improve its functioning, the RBI has decided to move to the Next Generation Treasury Application (NGTA) for managing the country’s foreign exchange and gold reserves.

Aspirants must make a note here:

1.Authority managing FOREX in India

2.Components of FOREX

3.IMF’s SDRs

4.Emergency use of FOREX

What is NGTA?

  • The NGTA, according to the RBI, would be a web-based application providing scalability, manoeuvrability and flexibility to introduce new products and securities, besides supporting multi-currency transactions and settlements.
  • It would be supporting various transactions in asset classes like Fixed Income (FI), Forex (FX), Money Market (MM) and Gold.
  • It would be used for managing the foreign exchange reserves in a more efficient way, mitigate risk, achieve operational efficiencies, dealing in various asset classes and reporting.

Objectives of NGTA

The objectives of the proposed system include:

  • dealing in various asset classes (like Fixed Income Securities, Forex, Money Market, Gold);
  • portfolio management; workflow management; reserve management;
  • integration with various third-party and in-house systems; and dashboards, reports, widgets.

Features of NGTA

  • The NGTA shall automatically fetch all the relevant details of a security/contract from a trading platform.
  • It shall support all internationally accepted conventions pertaining today count, interest computation, holiday logic, shut period-dividend, ex-dividend, cash flows, and odd coupon.
  • With respect to transactions in gold, the NGTA shall support purchase, sale, deposit (including rollover and premature withdrawal).
  • On maturity of a gold deposit, there can be exact, under or over delivery.

Back2Basics: Forex Reserves

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position
  • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

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CAROTAR 2020 Rules

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CAROTAR rules

The Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020) shall come into force from September 21.

Try this PYQ:

Q.In the context of the affairs of which of the following is the phrase “Special Safeguard Mechanisms” mentioned in the news frequently?

(a) United Nations Environment Programme

(b) World Trade Organization

(c) ASEAN- India Free Trade Agreement

(d) G-20 Summits

CAROTAR rules

  • Importers will have to do their due diligence to ensure that imported goods meet the prescribed ‘rules of origin’ provisions.
  • This is the essential availing concessional rate of customs duty under free trade agreements (FTAs).
  • A list of minimum information, which the importer is required to possess, has also been provided in the rules along with general guidance.
  • Also, an importer would now have to enter certain origin related information in the Bill of Entry, as available in the Certificate of Origin.

Why need CAROTAR?

  • CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
  • India has inked FTAs with several countries, including Japan, South Korea and ASEAN members.
  • Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
  • The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.

Its significance

  • The ASEAN FTA allows imports of most items at nil or concessional basic customs duty from the 10-nation bloc.
  • Major imports to India come from five ASEAN countries — Indonesia, Malaysia, Thailand, Singapore and Vietnam.
  • The benefit of concessional customs duty rate applies only if an ASEAN member country is the country of origin of goods.
  • This means that goods originating from China and routed through these countries will not be eligible for customs duty concessions under the ASEAN FTA.

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[pib] Export Preparedness Index (EPI) 2020

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Export Preparedness Index (EPI)

Mains level: Export promotion measures

NITI Aayog in partnership with the Institute of Competitiveness has released the Export Preparedness Index (EPI) 2020.

Try this PYQ:

Q.Which one of the following is not a sub-index of the World Bank’s ‘Ease of Doing Business Index? (CSP 2019)

(a) Maintenance of law and order

(b) Paying taxes

(c) Registering property

(d) Dealing with construction permits

EPI 2020

  • EPI intends to identify challenges and opportunities; enhance the effectiveness of government policies; and encourage a facilitative regulatory framework.
  • The structure of the EPI includes 4 pillars –Policy; Business Ecosystem; Export Ecosystem; Export Performance.
  • It has 11 sub-pillars –Export Promotion Policy; Institutional Framework; Business Environment; Infrastructure; Transport Connectivity; Access to Finance; Export Infrastructure; Trade Support; R&D Infrastructure; Export Diversification; and Growth Orientation.

Highlights of the EPI

  • This edition of the EPI has shown that most Indian states performed well on average across the sub-pillars of Exports Diversification, Transport Connectivity, and Infrastructure.
  • Overall, most of the Coastal States are the best performers. Gujarat, Maharashtra and Tamil Nadu occupy the top three ranks.
  • Six of eight coastal states feature in the top ten rankings, indicating the presence of strong enabling and facilitating factors to promote exports.
  • In the landlocked states, Rajasthan has performed the best, followed by Telangana and Haryana.
  • Among the Himalayan states, Uttarakhand is the highest, followed by Tripura and Himachal Pradesh.
  • Across the UTs, Delhi has performed the best, followed by Goa and Chandigarh.

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Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level: MEIS, RODTEP Scheme

Mains level: Export promotion measures

The outlay for the RoDTEP scheme is expected to be “much higher” than the NITI Aayog’s much-curtailed estimate of Rs 10,000 crore a year.

Overt allocation

  • The central government had envisaged an annual allocation of about Rs 50,000 crore under the RoDTEP scheme to make exports zero-rated.

Try this PYQ:

Q. Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

(a) China

(b) India

(c) Myanmar

(d) Vietnam

RoDTEP Scheme

  • RoDTEP is a scheme for the Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
  • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
  • The new RoDTEP Scheme is fully WTO compliant scheme.
  • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

Back2Basics: Merchandise Exports from India Scheme (MEIS)

  • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
  • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
  • MEIS intends to incentivise exports of goods manufactured in India or produced in India.
  • The incentives are for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
  • The MEIS covers almost 5000 goods notified for the purpose of the scheme.

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What is Balance of Payments?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: BoP, BoT, Current Account

Mains level: BoP Crisis

India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports said the Commerce and Industry Ministry.

Try this PYQ:

Q.In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? (CSP 2019)

  1. The foreign currency earnings of India’s IT sector
  2. Increasing the government expenditure
  3. Remittances from Indians abroad

Select the correct answer using the code given below.

(a) 1 only

(b) 1 and 3 only

(c) 2 only

(d) 1, 2 and 3

Balance of Payment

  • BOP is the oldest and the most important statistical statement for any country.
  • In a nutshell BOP of a country is “a systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year”.
  • Economic Transactions include all the foreign receipts and payments made by a country during a given financial year.
  • Foreign receipts include all the earnings and borrowings by a country from the other countries.

Read the complete thread, here, at:

India’s Balance of Payments: Current Account, Capital Account, Goods and Services Account

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A demand problem contributing to lower imports

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trade surplus

Mains level: Paper 3- India's import and exports

India registered a trade surplus after almost two decades. But this is not the result of a sudden rise in India’s export. It is due to subdued import indicating the low demand.

What latest data indicate

  • Data released by the commerce ministry indicate a contraction in exports observed over the past few months easing slowly.
  • But the continuing contraction in import which indicates low demand is worrying.
  • This is trend is leading to the growing gap between import and export.

India registered a trade surplus: what it indicates

  • This growing gap led to India registering a trade surplus of nearly $800 million in June.
  • This is the first time in almost two decades that the country has registered a trade surplus.
  • But does this mean that India’s exports have grown drastically?
  • No. It is a sign of collapse in domestic demand.

Merchandise exports growing trends

  • India’s merchandise exports continue to witness an upward swing.
  • The pace of contraction fell to 12.4 per cent in June, from 36.2 per cent in May and 60 per cent in April.
  • Exports of items such as iron ore, drugs and pharmaceuticals, chemicals and various agricultural commodities saw an expansion in June.

What growing exports and falling import indicate

  • An upswing in exports could be indicative of a faster recovery of India’s export partners.
  • Restrictions on economic activities in some of these countries had eased earlier.
  • Other reason could be the rush by Indian exporters to ship out orders to meet their seasonal deadlines.
  • Imports continue to remain deep in negative territory.
  • The contraction in non-oil exports has actually worsened with decline observed in both consumer and investment/industrial goods imports.
  • Some movement is visible in imports of electronic goods.
  •  But the import of machinery and transport equipment has not moved significantly.
  • Of the 30 main import items, only four registered mildly positive growth in June — this indicates the pace of the domestic slowdown.

Conclusion

Economic activities across the world will take time to return to normalcy, India’s exports will take time to reach pre-COVID levels. It seems that the chasm between exports and imports could persist, given the plateauing of the post-lockdown spurt in demand/production.

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Trade policy for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Overview of trade statistics

Mains level: India and China trade comparison; Strategy for trade policy

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Why trade openness and national security go together

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Comparative advantage

Mains level: Paper 3- Globalisation and issues with it

Protectionism involves the use of one or more restrictions on free trade between countries. What are the main reasons why this should be avoided?

The main arguments against protectionism are outlined below:

Market Distortion and loss of Economic Efficiency

Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:

Higher Prices for Consumers

Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.

Reduction in Market Access for Producers

Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.

Extra Costs for Exporters

For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

Adverse Effects on Poverty

Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.

Retaliation & Trade Wars

There is the danger that one country imposing import controls will lead to retaliatory action by another.

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India’s rising Forex Reserves

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's Forex reserves, SDR, Reserve tranche

Mains level: Forex Reserves and its significance

India’s foreign exchange reserves are rising and are slated to hit the $500 billion mark soon. In the last month, it jumped by $12.4 billion to an all-time high of $493.48 billion.

Aspirants must make a note here:

1.Authority managing FOREX in India

2.Components of FOREX

3.IMF’s SDRs

4.Emergency use of FOREX

Rising above the 1991 crisis

  • Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring Forex reserves to tackle any crisis on the economic front.
  • The level of Forex reserves has steadily increased by 8,400 per cent from $5.8 billion as of March 1991 to the current level.

What are Forex Reserves?

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position
  • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Why is Forex rising despite the slowdown in the economy?

1.Rise in  FPIand  FII

  • The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).
  • Foreign investors had acquired stakes in several Indian companies in the last two months.
  • Forex inflows are set to rise further and cross the $500 billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign investments totalling Rs 97,000 crore.

2.Crash in oil prices

  • On the other hand, the fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange.

3.Fall in overseas remittances and foreign travel

  • Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion.

What’s the significance of rising forex reserves?

  • The rising forex reserves give a lot of comfort to the government and the RBI in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21.
  • Provides Cushion: It’s a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.
  • Appreciation of Rupees: The rising reserves have also helped the rupee to strengthen against the dollar.
  • The forex reserves to GDP ratio is around 15 per cent.
  • Provides confidence to Market: Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its US dollar needs and external debt obligations and maintain a reserve for national disasters or emergencies.

What does the RBI do with the forex reserves?

  • The RBI functions as the custodian and manager of forex reserves and operates within the overall policy framework agreed upon with the government.
  • The RBI allocates the dollars for specific purposes. For example, under the Liberalized Remittances Scheme, individuals are allowed to remit up to $250,000 every year.
  • The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.

Where are India’s forex reserves kept?

  • The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
  • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
  • 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
  • In value terms, the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020.

Is there a cost involved in maintaining forex reserves?

  • The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible.
  • While the RBI has not divulged the return on forex investment, analysts say it could be around one per cent, or even less than that, considering the fall in interest rates in the US and Eurozone.
  • There was a demand from some quarters that forex reserves should be used for infrastructure development in the country. However, the RBI had opposed the plan.
  • Several analysts argue for giving greater weightage to return on forex assets than on liquidity thus reducing net costs if any, of holding reserves.
  • Another issue is the high ratio of volatile flows (portfolio flows and short-term debt) to reserves which are around 80 per cent. This money can exit at a fast pace.

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World trade fall mustn’t stoke export pessimism

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Relation between value of rupee with export competitiveness.

Mains level: Paper 3- Why we need foreign exchange and ways to improve exports.

Context

The WTO expects a sharp drop-off in global trade in the wake of Covid-19. But India must not withdraw inwards.

Prospects of the exports

  • Impact on global trade: The World Trade Organization (WTO) predicts that global trade could fall by 13-32% this year on account of disruptions and all the turmoil.
  • At this point, we cannot even count on a quick recovery after this health emergency is past its peak.
  • A trade revival may have to wait till 2022 or later.
  • Indian exports have been in a slump for a large part of the past decade, and recent reports point to a rash of cancelled orders from abroad (except, notably, for drugs).
  • This, however, should not mean that we slip into export pessimism.
  • Opportunity in the crisis: Instead, a crisis such as this could serve as an opportunity to sharpen our competitive edge that has got blunt over the years.
  • Rupee and reform: This is best done through reforms, though a rupee on the decline vis-à-vis the US dollar should help too.

Reasons for export orientations

  • The relation between growth and exports: No country is an island unto itself, and nations will continue to exchange goods and services so long as it makes economic sense.
  • Trade partners are usually better off producing what they’re best at, for all users, and buying from the rest what others turn out better—at a lower cost and higher quality.
  • Economies that participate in this game, as the historical record has shown, tend to grow faster.
  • There is another good reason for export orientation.
  • Foreign earnings: India needs foreign earnings, not just for oil imports and suchlike, but also for overall economic stability, given our reliance on foreign capital for growth.
  • In tough times such as these, when we may need to borrow money from abroad to bridge a hugely enlarged fiscal deficit, ensuring a stream of future dollar earnings becomes even more crucial.
  • To enable the issuance of dollar bonds and raise our chances of staging a less painful return to form, we need to get our export act together.

Way forward to increase exports

  • Structural and policy changes: Export success goes by competitiveness, and for domestic businesses to achieve this, India would need to undertake several structural and policy changes.
  • We could begin with reversing the tariff barriers that have been raised in recent years.
  • Exposure to foreign competitors would force them to turn efficient and perform better.
  • Duties on inputs, especially, need to come down. So do other taxes that hold companies back. Other steps to raise productivity will help, too.
  • Good logistical backup is another big requirement.
  • The low value of rupee: The rupee’s slump is a plus for exporters, since their output is cheaper in dollar terms, but we may need to pursue a policy that does not let our currency’s value get over-inflated by inflows of foreign “hot money” (when they return).
  • Cost of capital: The cost of capital in India needs to be low, too, and this would depend on how well the government manages its finances.
  • India’s annual exports currently form less than 2% of the world’s. We should aim for 5%.

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Foreign Trade Policy 2015-2020 extended for one year

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Foreign Trade Policy 2015-20

The Union Commerce and Industry Ministry has announced changes in India’s Foreign Trade Policy (FTP). The Govt. has decided to continue relief under various export promotion schemes by granting an extension of the existing Policy.

Foreign Trade Policy 2015-20

  • It provided a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in keeping with the “Make in India” vision of Prime Minister.
  • The focus of the new policy is to support both the manufacturing and services sectors, with a special emphasis on improving the ‘ease of doing business’.
  • It described the market and product strategy and measures required for trade promotion, infrastructure development and overall enhancement of the trade ecosystem.

Features of the FTP 

  • Goods – Earlier there were 5 different schemes (Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for rewarding merchandise exports with different kinds of duty scrips with varying conditions attached to their use.
  • Duty-free scrips are paper authorisations that allow the holder to import inputs which are used to manufacture products that are exported, or to manufacture machinery used for producing such goods, without paying duty equivalent to the printed value of the scrip.
  • For instance, a duty-free scrip valued at Rupees 1 lakh allows the holder to import goods without paying duty of up to Rupees 1 lakh on the goods.
  • Under the new Foreign Trade Policy, all these schemes have been merged into a single scheme, namely the Merchandise Export from India Scheme (“MEIS“) and there is no conditionality attached to scrips issued under the MEIS.
  • Services – The Served From India Scheme has been replaced with the Service Exports from India Scheme (“SEIS“).
  • SEIS is stated to apply to ‘Service Providers located in India’ instead of ‘Indian Service Providers’.
  • Therefore, SEIS rewards to all service providers of notified services, who are providing services from India, regardless of the constitution or profile of the service provider.
  • Special Economic Zones – The policy outlines extended incentives for Special Economic Zones in India
  • Export Houses – The nomenclature of Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been simplified and changed to One, Two, Three, Four and Five Star Export House.
  • Status Holders – Business leaders who have excelled in international trade and have successfully contributed to India’s foreign trade are proposed to be recognized as Status Holders and given special privileges to facilitate their trade transactions, in order to reduce their transaction costs and time.
  • Resolving Complaints – In an effort to resolve quality complaints and trade disputes between exporters and importers, a new chapter on Quality Complaints and Trade Disputes has been incorporated into the Foreign Trade Policy.
  • There would be no conditionality attached to any scrips issued under these schemes.
  • For grant of rewards under MEIS, the countries have been categorized into 3 Groups, whereas the rates of rewards under MEIS range from 2% to 5%.
  • Under SEIS the selected Services would be rewarded at the rates of 3% and 5%.

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How countries play the tariff game

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- How could higher import tariffs affect the Indian economy?

 Context

It is important to have a stable tariff policy which would help to link effectively to global value chains.

Why countries levy tariff?

  • The tariff is a tax levied on an imported good at the border.
  • Countries use tariffs to-
    • Provide easy market access or restrict them to protect domestic industry.
    • It also serves the purpose of revenue collection and-
    • To achieve some strategic objectives by giving/denying tariff concessions to countries.

Harmonised System in international trade

  • What is it? Goods are classified at 2, 4, 6, 8 digits and some countries have even up to 10 digits, depending upon the level of trade potential of a country.
  • WCO’s system of codes: The classification of these codes is streamlined under an international coding system called ‘Harmonized System’ (HS) under World Customs Organization (WCO) to which 138 countries are contracting parties and about 200 customs authorities are signatories.
  • India’s national tariff lines are about 11,000 at HS 8-digit.

Historic background of the tariffs

  • Colonial-era: During the colonial era tariffs were heavily used to protect the domestic industry, enjoy unbridled access to the colonized markets and raise tariffs against competitors.
  • Adam Smith’s advocacy of free trade: Adam Smith in 18th Century challenged this idea of regimented trade with his advocacy of free trade that was convincingly brought out in his seminal work ‘Wealth of Nations’.
  • Theory of comparative advantage: Further, in the 19th Century, David Ricardo, building on this concept, propagated the ‘theory of comparative advantage’.
    • The theory proposes that nations should remain focused on their specific areas of competence and allowed to trade freely with other countries.
    • This theory is against import substitution and considers raising tariffs as a drag on economic growth.
  • What proponents of high tariff said? Proponents of high tariffs assert that-
    • Developed countries dominated global markets for decades with high tariffs, developing countries should continue to enjoy differential tariff treatment until they catch up with the rest.

How countries calibrate tariffs?

  • Each country calibrates its tariffs taking into account its-
    • Domestic production.
    • Demand and
    • Sensitivities.
  • Typically, tariff structures of a manufacturing country reveal a pattern:
    • Low tariffs on raw materials and intermediate goods in the range of 0-5%.
    • Slightly higher tariffs for finished goods in the range of 7-10%.
    • Higher tariffs for agriculture products at above 15%, sometimes up to bound rates as allowed under WTO.
    • As agriculture lines are politically sensitive, most countries zealously guard them with high tariffs.

Export-import linkage and effects of high tariffs

  • How tariffs could harm export competitiveness: Availability of cheaper raw materials and intermediate products support making of competitively priced finished goods for export markets.
    • The challenge for an entrepreneur is to find these cheaper inputs.
    • If these inputs are not available domestically at competitive rates, they look to source them from outside.
    • But as high tariffs act as barriers to sourcing cheaper inputs, they undermine export competitiveness of a product.
  • Implications for MSMEs
    • For MSMEs (micro, small and medium enterprises), this dependency linkage is even more critical, without which they might close down their operations under threat of persistent losses or low returns.
    • Impact on jobs and economy: This would have consequential impact on jobs, income and consumer choices in an economy.
  • Inefficiency and corruption at entry points: High tariffs could breed inefficiency and corruption at the entry points as it leaves much scope for discretion at the hands of officials, circumvention through under/over-invoicing and violation of rules of origin.
  • Impairing demand: Overtime, high tariffs run the risks of impairing demand and paralyzing domestic manufacturing.
  • Maintaining judicious balance: Leveraging tariffs for benchmarking domestic prices is not an uncommon practice in any country.
    • But maintaining a judicious balance between the interests of primary producers and user industries is imperative, given that there exists an intimate link between imports and exports.

India and Global Value Chain (GVC)

  • 80% trade through More than 80% of the global trade runs through Global Value Chains (GVCs) which have evolved extensively in various regions of the world.
    • Low tariffs help GVCs to thrive, essentially for the purpose of sourcing and accessing foreign markets.
  • Why stable tariff policy is important for India?
    • For India to emerge as a global hub for “networked products” and make every district an ‘export hub’ for a specific item, as envisaged in this year’s Budget, it is important to have a stable and predictable tariff policy which would help to link effectively to GVCs.
    • For investors: From an investor’s point of view a stable tariff policy is a huge motivation.

Free-trade agreements and hope of getting market access

  • Market access: The assumption that tariff concessions under bilateral free trade agreements (FTAs) would help get market access is misplaced.
    • Why the assumption is misplaced? In reality, this may not happen as same concessions can be offered by a country to other trading partners in a trade arrangement or throw open to all countries on an MFN (most favoured nation) basis.
    • Inverted duties situation: Gradual tariff liberalization is a natural progression and failing to do so could result in a situation of inverted duties where finished products end up being cheaper than raw materials and intermediate goods
    • Thus, calling for tariff correction in course of time.

Revenue Generation through tariffs

  • Why it is not a good idea? The domestic consumers ultimately end up absorbing import duties as they get passed onto products they consume.
  • Taxing own people: This is akin to taxing one’s own people in an indirect way by making them pay more for a product than in other markets.
  • Revenue generation from enhanced activities: For these reasons, the idea of revenue collection from import duties is losing steam, and instead, revenue generation from enhanced economic activity is gaining wider acceptance as a dynamic process.

Conclusion

Increasing tariffs on the import can end up hurting the economy than benefitting it in the long run, so the government must reconsider the policy of tariff increase.

 

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India’s rerun of its protectionist folly mars the liberalization era

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- India's changing stance towards liberalisation.

Context

The latest budget’s import tariff hikes signal that a three-decade commitment to trade openness has been all but abandoned.

Detrimental effects of protectionism

  • In brief, both economic theory and a vast weight of evidence point to the detrimental effects of protectionism. These are-
    • Fostering inefficiency: Far from jump-starting the domestic industry, tariffs, quotas and other trade restrictions foster inefficiency among domestic firms that survive only because of
    • And do not become more productive under it, as the government’s threat to withdraw the protection is never credible.
    • The consumer is the ultimate loser: Meanwhile, upstream industries suffer higher than necessary input costs.
    • Consumers of final goods end up footing the bill.
    • Governments earn some tariff revenue, but never enough to warrant the distortion costs to the economy.
  • Tariff inversion: The tariff “spikes” cause greater distortion than a revenue-equivalent uniform tariff, and may lead to the problem of tariff “inversion”.
    • What is tariff inversion? A situation in which intermediate goods are taxed more heavily than final goods, thus paradoxically further disadvantaging, rather than aiding, domestic producers of final goods.
  • Rent-seeking by domestic industries: Tariffs worsens rent-seeking by domestic industries-
    • Protectionism increases lobbying: A force which would be muted in a world where tariffs are locked at a uniform level by statute, and, as a result, industries individually have less of an incentive to lobby for tariffs that are to be applied economy-wide rather than only for their own benefit.
    • Economists Arvind Panagariya and Dani Rodrik had formalized this intuition many years ago, and it matches both common sense and observation.
    • The apparently random list of sectors that would benefit from tariff increases in the recent budget-strongly suggests the possibility of rent-seeking behaviour.

Conclusion

Ample experience of import substitution in economies across the emerging world and over many decades, including in India until 1991, attest to the fact that protectionism, especially abetted by rent-seeking behaviour, is like a rabbit-hole: once inside, one keeps going deeper and deeper, and egress is difficult at best.

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The high cost of raising trade walls

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various Free Trade Agreements.

Mains level: Paper 3- Should India prefer bilateral trade agreements over multilateral agreements and what are the issues involved in this approach.

Context

India’s international trade posture appeared to turn protectionist in the past week, with two indicators the government sent out.

What were the two indicators?

  • The first-Signal sent out in the Budget: The first indicator, which played out live on television was contained in the Union Budget.
    • Laying out the Budget for the year, the finance minister made several references to the problems with free trade and preferential trade agreements (FTAs and PTAs).
    • Raise in tariffs, changes in the act: The Budget raised tariffs on the import of more than 50 items and changed the Customs Act provisions substantially to penalise imports suspected to originate from third countries.
  • The second- India declined negotiations: The other indicator was that India declined to attend a meeting of trade negotiators in Bali that was discussing the next step in the Association of Southeast Asian Nations (ASEAN)-led Regional Comprehensive Economic Partnership (RCEP) trade agreement.

Issues with the Free Trade Agreement

  • What the FM told Parliament: It has been observed that imports under Free Trade Agreements (FTAs) are on the rise.
    • Undue claims of FTA benefits have posed a threat to the domestic industry.
    • Such imports require stringent checks, adding that the government will ensure that all FTAs are aligned to the conscious direction of our policy.
  • What could be the consequences of the Govt. policy?
    • Discouragement to imports: While the Govt. motive may be to protect Indian markets from dumping-primarily by Chinese goods-
    • The consequence of the changes will be to put Indian importers on notice and discourage imports in general.
    • Even as the government reserves the right to modify or cancel preferential tariffs and ban the import or export of any goods that it deems fit.

The rise in the trade deficit and decision to walk out of FTA

  • The trade deficit with FTA partners: The government’s problem with FTAs was a key theme in its decision to walk out of the RCEP negotiations (of 16 countries) the rise in trade deficits with FTA partners.
  • Review of all agreements: The government says it will now review all those agreements and wants to “correct asymmetry” in negotiations with new partners. The agreement that would be reviewed includes-
    • TAs signed with the 10-nation ASEAN grouping (FTA).
    • Japan (Comprehensive Economic Partnership Agreement, or CEPA).
    • And South Korea (CEPA).

Why it would not be easy to negotiate bilateral treaties

  • The bilateral agreement would not be a priority for other countries: If India makes a complete break with RCEP, negotiating the bilateral trade agreements (TAs) will not be a priority for the other countries until RCEP is done.
    • The process of legal scrubbing is likely to take most of the year, and any talks with India will probably only follow that.
    • Difficulty in getting better deal: It is also hard to see any of them being able to offer India a better deal bilaterally once they are bound into the multilateral RCEP agreement.

India’s pending talks on bilateral treaties

  • Negotiations of CECA with Australia: The case of the Comprehensive Economic Cooperation Agreement (CECA) being negotiated with Australia, will be a difficult task, not the least due to its history.
    • India and Australia began CECA talks in 2011.
    • However, talks hit a dead-end in September 2015. With the focus on RCEP, no progress has been made since then.
  • Negotiations of FTA with the UK: A similar scenario awaits the announcement of the India-United Kingdom FTA talks.
    • It is unlikely that the U.K. will actually be able to talk until next year after terms for the K.’s full withdrawal from the European Union (EU) are completed.
  • Negotiation of BTIA with the EU: Bilateral Trade and Investment Agreement (BTIA) negotiation are also unlikely to make headway until the UK’s complete withdrawal from the EU.
    • Both sides will have to decide how to revive from where they left off in 2013.
    • Why the negotiations are pending? Making the negotiations harder is the government’s decision to scrap all bilateral investment treaties with 57 countries including EU nations, and bringing in a new Bilateral Investment treaty (BIT) model in 2015.
    • Only Kyrgyzstan, Belarus and most recently Brazil have agreed to sign a new investment treaty based on that model.
  • The US-India trade issue: Finally, there is the much-anticipated resolution of U.S.-India trade issues ahead of the visit of U.S. President.
    • The talks in that visit could also include talks on an FTA.
    • At present, there have only been some non-paper talks on the issue.
    • And given that the U.S. has expressed deep misgivings about India’s BIT model, these talks will also take several years to come to fruition.

Why India should rethink its stand on FTA

  • First-Prospect of no dispute settlement mechanism: The decline of multilateralism, accelerated by the retrenchment of the U.S. and China’s intransigence have all meant the World Trade Organization (WTO) has lost steam as a world arbiter.
    • This leaves states that are not part of arrangements without a safety net on dispute settlement mechanisms.
  • The second-trade deficit of other countries with India: The government has invoked the massive $57-billion trade deficit with China to explain protectionist measures, but it forgets its own trade surpluses with smaller economies.
    • Particularly in the neighbourhood, where Indian exports form more than 80% of total trade with Nepal, Bangladesh, Bhutan and Sri Lanka, respectively.
  • Third- The rise of regional agreements: It is clear that most of the world is now divided into regional FTAs, for example-
    • The North American Free Trade Agreement (NAFTA) for North America.
    • The Southern Common Market (MERCOSUR for its Spanish initials) for South America.
    • The EU, the Eurasian Economic Union (Russia and neighbours).
    • The African Continental Free Trade Agreement (AfCFTA).
    • The Gulf Cooperation Council (GCC) FTA in West Asia.
    • And now the biggest of them all, RCEP, which minus India, represents a third of the world’s population and just under a third of its GDP.
  • Fourth- Finally, the trend across the world does not favour trade in services the way it does in goods.
    • India’s strength in the services sector and its demand for more mobility for Indian employees, is thus becoming another sticky point in FTA negotiations.

Conclusion

India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability. India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability.

 

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[op-ed snap] A road map for robust trade ties

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Bilateral trade opportunity with Australia and area of cooperation in Technology and innovation

Context

The challenge for India and Australia is to transform people-to-people ties into a trade relationship.

People-to-people the two countries

  • Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
    • Cricket is a dominant theme that connects the two countries.
    • The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.

Trade relationship scenario

  • $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
  • No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
  • No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
  • India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
    • It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
    • It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.

Development in digital technology and the role of youth

  • Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
    • There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
    • Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
    • About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
    • The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
    • An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.

Scope for engagement in innovation and trade relations

  • Tech. expertise of  Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
  • Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
    • These synergies should add momentum to a growing engagement in trade relations.

India’s weakness and Way forward

  • Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
  • First-Focus on Market Research:  Despite globalisation, markets are country-specific and culturally sensitive.
    • Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
  • Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
    • Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
  • Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.

 

 

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 India’s imports of palm oil — dynamics of the trade with Malaysia

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Types of palm oil, its uses

Mains level: Impact of import restrictions of palm oil

 

India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorized (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

A move against outspoken Malaysia

  • Curbing palm oil imports has been construed as retaliation against Malaysia’s PM Mahathir Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for J&K and CAA.
  • Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik who is wanted by India on charges of money laundering, hate speech, and links to terror.

Has India banned import of Malaysian palm oil because of political reasons?

  • Not really. The import of RBD palm oil has been restricted, not banned — and this is from all countries, not just Malaysia. Also, CPO can still be imported freely.
  • Under the trade classification system that India follows, except for goods that can be imported only by state trading enterprises all goods whose import is not restricted or prohibited are traded freely.
  • Normally, a special licence is required to import a restricted good. The government has neither specified what the restrictions entail nor issued any licences.
  • However, it has been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

How much palm oil does India import?

  • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
  • India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).

Why does India need so much palm oil?

  • It is the cheapest edible oil available naturally.
  • Its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
  • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying. It is the main ingredient in vanaspati (hydrogenated vegetable oil).
  • However, palm oil is not used in Indian homes.
  • That, and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

Who will be impacted by the decision?

  • Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.
  • Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.
  • Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

Why import Crude Palm Oil?

  • The CPO that India imports contains fatty acids, gums and wax-like substances. Refining neutralises the acids and filters out the other substances.
  • The filtrate is bleached so that the oil does not change colour after repeated use. Substances that may cause the oil to smell are removed physically or chemically.
  • This entire process increases the value of a barrel of crude oil by about 4%.
  • Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.
  • But the refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil.
  • The decision to restrict imports of refined oil will benefit refiners, which include big-ticket names like the Adani Wilmar group.

Will restricting imports of RBD palm oil help farmers?

  • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
  • However, the restrictions have caused refined palm oil prices to increase. If prices continue to hold, farmers will get a better realization for their crop.
  • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
  • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

How will Malaysia be affected?

  • Malaysia has said that it cannot retaliate against India because it is “too small”.
  • With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), Malaysian palm oil futures fell by almost 10% in January, although it has recovered since then.
  • India and Malaysia signed a free trade agreement — Malaysia-India Comprehensive Economic Cooperation Agreement — in February 2011.
  • In 2018, Malaysia exported 25.8% of its palm oil to India.
  • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.

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Forex Reserves of India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's Forex reserves, SDR, Reserve tranche

Mains level: Forex Reserves and its significance

India’s foreign exchange reserves rose by $943 million to touch a lifetime high of $462.16 billion according to the latest data from the RBI.

Forex reserves of India

  • They are holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than Indian rupee.
  • The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.
  • They act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs.
  • They facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
  • They act as a cushion against rupee volatility once global interest rates start rising.

Composition of Forex

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position

What is Reserve tranche?

  • Reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.

What are Special Drawing Rights?

  • The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves
  • The SDR is neither a currency nor a claim on the IMF.
  • Initially SDR was defined as equivalent to 0.888671 grams of fine gold, which at the time, was also equivalent to one U.S. dollar.
  • After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
  • This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

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HSN Code

Note4Students

From UPSC perspective, the following things are important :

Prelims level: HSN Code

Mains level: India's Import regulation

 

No imports will be allowed without HSN code into the country clarified the Union Minister of Commerce & Industry.

What is HSN Code?

  • HSN code stands for “Harmonized System of Nomenclature”.
  • This system has been introduced for the systematic classification of goods all over the world.
  • HSN code is a 6-digit uniform code that classifies 5000+ products and is accepted worldwide.
  • It was developed by the World Customs Organization (WCO) and it came into effect from 1988.
  • The main purpose of HSN is to classify goods from all over the World in a systematic and logical manner. This brings in a uniform classification of goods and facilitates international trade.

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