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Foreign Sector in Indian Economy

Terminology

Convertibility of Currency – When the currency of a country can be converted into currencies of major foreign countries it is called convertibility of currency.

Floating of currency – It means that the currency exchange rate is not regulated by the Government but is free so that it is determined by the demand and supply of the currency.

Devaluation of Currency – Rise in the price of foreign currencies in comparison with the currency of a country is called devaluation. This makes exports cheaper and imports become dearer. Planned currency devaluation is done to promote exports and investment and discourage imports.

Hard currency – Currencies for which the demand in International market is more than the supply are called hard currencies. Mostly the currencies of developed countries are called hard currencies.

Hawala – Sending money out side a country through illegal and unauthorized channels is called Hawala. People get domestic currency in the country and send foreign currency out of the country for it.

Dumping – To prevent the fall in prices of a commodity in the country where it is produced, it may be sold at a very low price in foreign markets and sometimes even destroyed. This is caled dumping.

Embargo – When vessels of a country are stopped in the port to prevent its goods from entering, it is called embargo.

Free-port – Those ports where there is no taxation on goods which are re-exported are called free-ports.

Exclusive Economic Zone – It is the area till a certain distance from the coastline of a country on which it has monopoly of resources. 24 lakh square Kilo Meter area till 200 nautical miles from the Indian Coast is exclusive economic zone of India.

Special Economic Zone - SEZ – This area is geographically in the domestic area but domestic tariff does not apply here. Its purpose is to provide a tariff free environment to exporters. If goods from this area are sold in domestic market, they are subject to customs duty.

Balance of Trade – The balance of trade (BOT) is the difference between the value of a country's imports and its exports for a given period. The balance of trade is the largest component of a country's balance of payments (BOP). If the value of imports is more than value of exports then balance of trade is adverse and if value of exports is more than balance of trade is favourable. So far balance of trade in India has been favourable only in two years in 1972-73 and 1976-77.

Balance of payment – The balance of payments is the record of all international financial transactions made by a country's residents. A country's balance of payments tells you whether it saves enough to pay for its imports. It also reveals whether the country produces enough economic output to pay for its growth. The balance of payments has three components. They are the financial account, the capital account and the current account. The financial account describes the change in international ownership of assets. The capital account includes any financial transactions that don't affect economic output. The current account measures international trade, the net income on investments and direct payments. Here are the balance of payments components and how they work together.

Foreign help (assistance) – Foreign assistance is of three types – Loans, subsidy and monies to be returned in Rupees under P.L. 470/665 of the USA.

Foreign Exchange Management Act (FEMA) – This is in force from 1st June 2000. It has replaced the FERA of 1973. This has simplified the provisions relating to foreign exchange management for facilitating foreign trade and foreign exchange markets.

Components of Foreign Exchange reserves –

1. Foreign Currency Assets.
2. Gold.
3. Special Drawing Rights (SDRs)
4. Reserve Tranche Position – The primary means of financing the International Monetary Fund is through members' quotas. Each member of the IMF is assigned a quota, part of which is payable in SDRs or specified usable currencies ("reserve assets"), and part in the member's own currency. The difference between a member's quota and the IMF's holdings of its currency is a country's Reserve Tranche Position (RTP). Reserve Tranche Position is accounted among a country's foreign-exchange reserves. Special Drawing Rights – The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US'291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese Yuan, the Japanese yen, and the British pound sterling.

Foreign Capital Investment

Foreign Capital Investment is of two types –

1. Direct foreign Investment (FDI) – When foreign investors invest their money in specific Projects. The countries with highest foreign direct investment in India are – Mauritius, Singapore, Japan, U.K., Netherlands, U.S.A., Cyprus, France and U.A.E. Maximum FDI has come in finance, banking, research, insurance, courier, computer software and hardware. Most of it has come in Maharashtra, Delhi and Tamil Nadu.
2. Portfolio Investment – Investment in financial instruments is called portfolio investment. In this investors invest in share and bonds of companies and other securities.

The story of Imports and Exports in India – Due to recession in the World, there has been a decrease in exports from May 2014 to May 2015 to the tune of 20.2% and there has been a decrease in Imports to the tune of 16.5%. The good thing is that the International trade deficit of India has come down from 11.2 billion dollars to 10.4 billion dollars. This is mainly because of reduction in gold imports and to some extent due to a fall in International oil prices. In comparison with May 2014 there has been a fall in the export of rice by 14.6%, other food grains 77.7%, iron ore by 86% and precious stones and jewelry by 12.9%. Not only there is recession in the USA and Europe but they have also recently adopted protectionist policies.

The impact of China trade on Indian Economy

In the year 2015-16 16% of Indian Imports were from China. The value of these imports was 61.7 billion dollar. Indian exports to China during the same period were 9.05 billion dollars. It is clear that the dependence of Indian Economy on Chinese imports is much more than Chinese dependence on Indian Exports. The commodities imported from China include telecom equipment, computer hardware, mobile phones, fertilizer, electronic equipment used in heavy machinery, organic chemicals, medicines, special type of steel, toys and other consumer products. It has been stated in a reply given in Lok Sabha that the trade deficit with China in the year 2012-13 was 38.67 billionn dollars which increased in the year 2014-15 to 48.45 billion dollars. The main reason for demand of Chinese goods in Indian markets is its low cost and variety. From the decorations used in Diwali to the toys for children everything is being imported from China. Fire crackers and even rakhis are coming from China. During the 12th Five year plan 30% of our electricity generation capacity has been developed by Chinese equipment. From April 2016 to January 2017 87% of solar energy equipment worth 1.9 billion dollars were imported from China.

Chinese economy is three times of Indian economy. According to the IMF during 2016 the GDP of China was 11.4 trillion dollars while the GDP of India was merely 2.25 trillion dollar. The population of China was 137 crores in that year while the population of India was 134 crores. On this basis it can be said that China not only has a land mass which is 3 times bigger than India but the per capita GDP of China being 8,260 dollars and that of India being only 1,718 dollar the people of China are 5 times richer than people of India.