International trade

Statement 1is incorrect. Multilateral Debt is the largest contributor to the external debt of India.

Statement 2 is incorrect. The US dollar is the leading currency of denomination in External Debt of India accounting (about 54 per cent of the total as at-end March 2020).
Indian rupee is the second leading currency with a share of 32 per cent followed by Japanese Yen (5.6 per cent), SDRs (4.5 per cent) and Euro (3.5 per cent).

Data Source: India’s External Debt: A Status Report 2019-20 by Ministry of Finance.

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.
Option 1 is correct. Under current account of the BoP, transactions are classified into merchandise (exports and imports) and invisibles. Lower import bill can lead to a Surplus Current Account.
Option 2 is incorrect. FDI is not part of the Current Account. The main components of capital and financial account include foreign investment, loans and banking capital.
Foreign investment comprising foreign direct investment (FDI) and portfolio investment represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital including non-resident Indian (NRI) deposits are debt liabilities.
# A new convention splits the Capital Account into financial account and capital account. The financial account measures change in international ownership of assets, whether they be individuals, businesses, governments, or central banks. These assets include foreign direct investments, securities like stocks and bonds, and gold and foreign exchange reserves. The capital account measures financial transactions that do not affect income, production, or savings, such as international transfers of drilling rights, trademarks, and copyrights.

The Government of India has recently reviewed the Foreign Direct Investment (FDI) policy in Defence sector.
Statement 1 is incorrect. 100 percent FDI is allowed: Automatic up to 74% and Government route beyond 74% wherever it is likely to result in access to modern technology or for other reasons to be recorded.
FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses.
The existing licensees require mandatory submission of a declaration with the Ministry of Defence in case change in equity/shareholding pattern or transfer of stake by existing investor to new foreign investor for FDI up to 49%, within 30 days of such change. Proposals for raising FDI beyond 49% from such companies will require Government approval.
Statement 2 is correct. Foreign Investments in the Defence Sector shall be subject to scrutiny on grounds of National Security and Government reserves the right to review any foreign investment in the Defence Sector that affects or may affect national security.

Statement 1 is correct. Any donation, delivery or transfer received from a ‘foreign source’ whether in rupees or in foreign currency is construed as ‘foreign contribution’ under FCRA, 2010. Such transactions even in rupees term are considered as foreign contribution.
Statement 2 is correct. United Nations or any of its specialized agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf are not treated as ‘foreign source’ under the act.

Both statements are correct.
Terms of trade are defined as the ratio between the index of export prices and the index of import prices. It measures how many units of exports are required to purchase a single unit of imports.
If the export prices increase more than the import prices, a country has a positive Terms of Trade, as for the same amount of exports, it can purchase more imports.
The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.
When more capital is leaving the country than is entering into the country then the country’s TOT is less than 100%. When the TOT is greater than 100%, the country is accumulating more capital from exports than it is spending on imports.

Both statements are correct.
The India International Exchange (IFSC) Limited (India INX) is India’s first international exchange in International Financial Services Centre (IFSC) located at the Gujarat International Finance-Tec City (GIFT City). India INX is a subsidiary of BSE Limited. The Exchange commenced its operations from Jan 16, 2017.
It has recently signed MoU with the Luxembourg Stock Exchange for cooperation in financial services industry, maintenance of orderly markets in securities respective country, ESG (environmental, social and governance) and green finance in the local market.

Statement 1 is incorrect. Manufacturing sector has consistently received more FDI inflows than the Financial Services.

Statement 2 is correct. Singapore, Mauritius, Netherlands, Cayman Islands and USA are the top sources of FDI inflows to India.
# The data source is recently released Annual Report of the Reserve Bank of India for the Year 2019-20 (Snapshot below).

Both statements are correct.
The IFSCA is a statutory authority established under the International Financial Services Centres Authority Act, 2019.
The Authority will regulate financial products (such as securities, deposits or contracts of insurance), financial services, and financial institutions which have been previously approved by any appropriate regulator (such as RBI or SEBI), in an IFSC.
The appropriate regulators are listed in a Schedule to the Bill, and include the RBI, SEBI, IRDAI, and PFRDA.

Both statements are correct.
NITI Aayog in partnership with the Institute of Competitiveness recently released the first Export Preparedness Index (EPI) 2020.
-Gujarat emerged as the top-performing state in the ‘Coastal States’ category, followed by Maharashtra and Tamil Nadu.
-In the category of ‘Landlocked States’, Rajasthan is the best-performing state. Among ‘Himalayan States’ and ‘City-States’, Uttarakhand and Delhi are the top performing states respectively.
The index ranked states on four key parameters: Policy, Business Ecosystem, Export Ecosystem and Export Performance.

Doing Business Report, a World Bank Group flagship publication, is a series of annual studies measuring the regulations that enhance business activity and those that constrain it. Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 190 economies.
Doing Business covers 12 areas of business regulation. Ten of these areas—starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency—are included in the ease of doing business score and ease of doing business ranking.
Doing Business also measures regulation on employing workers and contracting with the government, which are not included in the ease of doing business score and ranking.
# The World Bank Group has ‘paused’ the publication of the Doing Business report to assess the irregularities that have been reported regarding changes to the data used in the report.

Autarky: The idea of self-sufficiency and ‘no’ international trade by a
country. None of the countries of the world has been able to produce all the goods and
services required by its population at competitive prices, however, some tried to live it up at
the cost of inefficiency and comparative poverty.

: The Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund (IMF) defines the Balance of Payments (BoP) as a statistical statement that summarizes economic transactions between residents and non-residents during a specific time period.
The BoP, thus, includes all transactions showing:
• transactions in goods, services and income between an economy and the rest of the world,
• changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs), and financial claims on and liabilities to the rest of the world, and
• Unrequited transfers.

These transactions are categorized into
• The “current account” including “goods and services”, the “primary income”, and the “secondary income”,
• The “capital account”, and
• The “financial account”.

Directorate General of Foreign Trade (DGFT) organization is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade.
• Right from its inception till 1991, when liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation.
• Keeping in line with liberalization and globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”.
• The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.
• This Directorate, with headquarters at New Delhi, is responsible for formulating and implementing the Foreign Trade Policy with the main objective of promoting India’s exports.
• The DGFT also issues scrips/authorization to exporters and monitors their corresponding obligations through a network of 38 regional offices and an extension counter at Indore.

Export-Import Bank of India (EXIM Bank) is a specialized financial institution, wholly owned by Government of India, set up in 1982, for financing, facilitating and promoting foreign trade of India.
EXIM Bank extends Lines of Credit (LOCs) to
• overseas financial institutions,
• regional development banks,
• sovereign governments and
• other entities overseas,

to enable buyers in those countries to import developmental and infrastructure projects, equipments, goods and services from India, on deferred credit terms.

On February 10 – 2020, the U.S. removed more than a dozen countries, including India, from its list of countries that are classified as “developing” for trade purposes.
• These countries will now be classified instead as “developed” economies, thus stripping them of various trade benefits.
• The office of the United States Trade Representative (USTR) maintains a list of countries that it classifies as “developing”, “developed”, and “least-developed”.

•Countries that are classified as “developing” are allowed to export certain goods to the U.S. without being hit by punitive tariffs that are usually imposed on goods from “developed” countries.
• The “developing country” status owes its origin to the U.S. Trade Act of 1974, which authorised the Generalized System of Preferences (GSP) to help poor countries develop faster.
• These benefits were extended further under the World Trade Organization wherein rich countries agreed to grant trade benefits to countries that classified themselves as poor.
• It is worth noting that about two-thirds of countries that are members of the WTO classify themselves as “developing” countries and avail benefits.

The World Economic Forum announced the first global consortium focused on designing a framework for the governance of digital currencies, including stablecoins.
• The Global Consortium for Digital Currency Governance will aim to increase access to the financial system through innovative policy solutions that are inclusive and interoperable.
• This is the first initiative to bring together leading companies, financial institutions, government representatives, technical experts, academics, international organizations, NGOs and members of the Forum’s communities on a global level.
• This consortium will focus on solutions for a fragmented regulatory system. Efficiency, speed, interoperability, inclusivity and transparency will be at the heart of this initiative.
• It will call for innovative regulatory approaches to achieve these goals and build trust.
• A set of guiding principles will be co-designed to support public and private actors exploring the opportunities that digital currencies present.

The Export Credit Guarantee Corporation of India (ECGC) is optimistic that the Nirvik scheme announced by the Union Government would give a fillip to export lending and insurance cover for export credit.

 Under the Nirvik scheme, ECGC will provide 90% cover.

 The additional outgo, if any, due to the enhanced cover would be supported by the government and the scheme would be valid for five years.

 Currently, the average cover given to banks by the ECGC is 60%.

The Reserve Bank of India (RBI) has introduced a separate channel, namely ‘Fully Accessible Route’ (FAR), to enable non-residents to invest in specified government bonds with effect from April 1, 2020.

 The move follows the Union Budget announcement that certain specified categories of government bonds would be opened fully for non-resident investors without any restrictions.

 Under FAR, eligible investors can invest in specified government securities without being subject to any investment ceilings.

 This scheme shall operate along with the two existing routes, viz., the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).

FERA was mainly formulated to deal with deep crunch of foreign exchange post world war II and hence was a rigid piece of legislation which have left all the businesspeople and Indian citizens at the mercy of Enforcement Directorate as violence of FERA was considered a criminal act and there were major penalties associated with it.

 FEMA or Foreign Exchange Management Act was introduced in the year 1999 to replace FERA (Foreign Exchange Regulations Act). FEMA came into act on 1st of June 2000.

 The Scope and Objective of FEMA was mainly to amend the laws related to foreign exchange to facilitate external trade and payments and to develop the foreign exchange market in India.

 FEMA was a liberal from of its prior version (FERA). It extends to whole of the country. It introduced resident ship in place of citizenship.

 FEMA is more human and natural in nature and removed all kinds of restrictions on withdrawal of foreign exchange.

 FEMA also introduced RFC (Resident foreign currency account). It specifically deals with possession and retention of foreign currency and includes all kinds of foreign securities and immovable property.

The Extended Fund Facility is lending facility of the Fund of the IMF and it was established in 1974 to help countries address medium- and longer-term balance of payments problems.

 The EFF is prescribed for a country who is suffering from balance of payment problem caused by structural weaknesses and who need fundamental economic reforms.

 The use of the facility has increased substantially in the recent crisis period.

The Harmonized System, or simply ‘HS’, is a six-digit identification code developed by the World Customs Organization (WCO).

 Called the “universal economic language” for goods, it is a multipurpose international product nomenclature.

 Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and for monitoring goods.

 The system helps in harmonizing of customs and trade procedures, thus reducing costs in international trade.

 The Ministry of Commerce and Industry allocated a separate Harmonized System (HS) code for Khadi, India’s signature handspun and hand-woven cloth that was made iconic by Mahatma Gandhi during the freedom struggle.

 The Ministry of Micro, Small and Medium Enterprises (MSME) in its press release said, “Khadi has once again come out of its customary veil, marking its presence in the exclusive HS code bracket, issued by the central government on November 4, 2019, to categorize its products in export.”

The United States Trade Representative has, in its “2019 Special 301 Report”, placed India on the “priority watch list”, again.

 A move that has been labelled ‘anti public health’ by international humanitarian organisation Médecins Sans Frontières or the Doctors Without Borders.

 The “Special 301 report” assesses US trading partners on their track record when it comes to protecting and enforcing intellectual property.

 And, India has always received a critical review for reasons, including its balancing act between granting pharmaceutical patents and taking policy decisions to keep medicines affordable.

ECGC Ltd. (Formerly Export Credit Guarantee Corporation of India Ltd.), wholly owned by Government of India, was set up in 1957 with the objective of promoting exports from the country by providing Credit Risk Insurance and related services for exports.

 It functions under the administrative control of Ministry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, and insurance and exporting community.

 Over the years it has designed different export credit risk insurance products to suit the requirements of Indian exporters and commercial banks extending export credit.

 ECGC is essentially an export promotion organization, seeking to improve the competitiveness of the Indian exporters by providing them with credit insurance covers. ECGC keeps its premium rates at the optimal level.

The government on August 28, 2019 relaxed FDI rule for foreign single brand retailers and also permitted foreign investment in contract manufacturing and coal mining.

List of the important decisions on FDI by the Cabinet:

 Allows 100% FDI under automatic route in coal mining and associated infrastructure

 Allows 100% FDI in contract manufacturing under automatic route

 Relaxes FDI rules for single brand retail; expands definition of 30% domestic sourcing

• Allows online retailing under single-brand retail; relaxes rule of mandatory brick-and-mortar store

 Approves 26% FDI in digital media

The IMF is a quota-based institution. Quotas are the building blocks of the IMF’s financial and governance structure. An individual member country’s quota broadly reflects its relative position in the world economy. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account.

Both statements are correct.
An IFSC caters to customers outside the jurisdiction of the domestic economy. Such
centres deal with flows of finance, financial products and services across borders. London,
New York and Singapore can be counted as global financial centres.
An expert panel headed by former World Bank economist Percy Mistry submitted a report
on making Mumbai an international financial centre in 2007. However, the global financial
crisis that unfolded in 2008 made countries including India cautious about rapidly opening
up their financial sectors.
Finance Minister announced in the Union Budget 2015 that India’s first IFSC’s would be set
up in GIFT City in Gujarat.
# The United Kingdom has entered into a strategic partnership to develop India’s fledgling
international financial services centre GIFT City, and agreed to set up a new Fund of Funds to
be managed by the State Bank of India group in order to route U.K.’s future capital
investments into India.

The Advanced Manufacturing HUB or AMHUB is one of the 19 platforms designed by the World Economic Forum (WEF). This platform focuses on engaging entire regional production ecosystems to identify and address regional opportunities and challenges brought by the Fourth Industrial Revolution (4IR) by amplifying regional success stories, sharing best practices & incubating new partnerships
The Global Network of AMHUBs uses the Forum’s platform to aggregate and accelerate regional efforts to adapt to the future of advanced manufacturing and production and highlight key regional case examples on the global stage, while creating a feedback loop wherein best practices from around the world are conveyed to the regional level to further amplify the impact potential of this network.
# Guidance, nodal investment promotion and facilitation agency of the state of Tamil Nadu has partnered with the World Economic Forum (WEF) to establish India’s first advanced manufacturing hub (AMHUB) in Tamil Nadu.

Statement 1 is correct. International Financial Sevices Centres Authority
(IFSCA) is a statutory unified regulatory body under the Department of Economic Affairs
established by an Act of Parliament to develop and regulate the financial products, financial
services and financial institutions located / performed in the International Financial
Services Centres in India.
Statement 2 is correct. The Authority will function as a unified regulator and is empowered
to exercise the powers of RBI, SEBI, IRDAI and PFRDA in respect of financial services,
financial products and financial institutions performed/located in the international
financial services centres in the country.
IFSCA has introduced a framework for “Regulatory Sandbox”. Under this, entities operating
in the capital market, banking, insurance and financial services space shall be granted
certain facilities and flexibilities to experiment with innovative FinTech solutions in a live
environment with a limited set of real customers for a limited time frame.

Foreign Direct Investment (FDI) is the investment of funds by an
organisation from one country into another, with the intent of establishing ’lasting interest’.
The difference between FDI and FPI (Foreign Portfolio Investments): In FPI the investor
purchases equity of foreign companies. FPI means only equity infusion, and does not imply
the establishment of a lasting interest.
Potential advantages of FDI:
Recipient businesses get access to latest financing tools, technologies and operational
practices from across the world.
Human Capital refers to the knowledge and competence of the workforce. Once developed,
human capital is mobile. It can train human resources in other companies, thereby creating
a ripple effect.
Not all goods produced through FDI are meant for domestic consumption. Many of these
products have global markets and thereby increase export potential of a country.
The constant flow of FDI into a country translates into a continuous flow of foreign
exchange. This helps the country’s Central Bank maintain a comfortable reserve of
foreign exchange. This in turn ensures stable exchange rates.

The Foreign Contribution (Regulation) Act, 2010 regulates foreign
donations and ensures that such contributions do not adversely affect internal security.
Some of the Foreign Sources, as defined in Section 2(1) (j) of FCRA, 2010 include:
-the Government of any foreign country or territory and any agency of such Government;
-any international agency, not being the United Nations or any of its specialized agencies,
the World Bank, International Monetary Fund or such other agency as the Central
Government may notify;
Central Govt. has notified several international bodies to be not covered by the definition of
‘foreign source’. The list among others includes Intergovernmental Panel on Climate
Change (IPCC), Geneva.
-a trade union in any foreign country or territory;
-a foreign trust or a foreign foundation;
-a society, club or other association or individuals formed or registered outside India;
-a citizen of a foreign country.

Statement 1 is correct. The UK is among the few countries with which India has a trade surplus and both nations share a trade relation of over $15 billion annually.

Statement 2 is incorrect. India and the UK recently agreed on key elements of a 10-year roadmap to enhance their relationship and pledged to fast track talks on a free trade agreement.

India had earlier been negotiating a broad-based trade and investment agreement (BTIA) with the EU. Although talks on India-EU BTIA started in 2007, it has been stuck in issues including market access for automobiles and alcohol and inclusion of labour and environment matters in the pact.

Statement 1 is incorrect. India’s overall exports (Merchandise and Services combined) in April-November 2020-21 are estimated to be USD 304.25 Billion, exhibiting a negative growth of (-) 14.03per cent over the same period last year. Overall imports in April-November 2020-21 are estimated to be USD 290.66Billion, exhibiting a negative growth of (-) 29.96per cent over the same period last year.

Statement 2 is correct. Taking merchandise and services together, overall trade surplus for April-November 2020-21 is estimated at USD13.59Billion as compared to the deficit of USD61.06Billion in April-November 2019-20.