31 Foreign Trade and Investment

Manjit Singh

INTRODUCTION

 

Foreign trade plays an important role in the development of any country. Trade can be considered a social activity because it provides goods and services to satisfy the human wants. Each country has to buy the goods and services, which it requires, but cannot produce from the other countries and similarly sell the excess produce goods to other countries. This process of buying required goods and services from the other countries and selling of surplus goods and services to other countries is known as foreign trade.

 

BRIEF HISTORY OF FOREIGN TRADE

 

The growth of foreign trade during the two centuries can divided into following periods: 1757-1813, 1814-1857, 1858-1914, and 1915 onwards. The first period—the early years of the British East India Co`—is known as the ‘age of mercantilism’. During this period trade statistics is not available. The second period from 1814 to 1857 saw some fundamental changes in the composition of trade when India was reduced to a just supplier of agricultural products in exchange for imports of manufactured articles. The third period dating from 1858-1914 displayed structural features relating to the pattern of trade. It has been observed that the value of trade between India during 1793-1813 stood at the average annual figure of 2 million pounds. After 1813 Or India’s foreign trade got the touch of modern character. Virtually, In19th century, there had been a spectacular growth in trade. In the period of 1900-1914 main exports of India were cotton, agriculture produce , oil seeds and tea etc and after the post war period exports has been increased due to increase in demand in raw material all over the world. In 1930’s foreign trade of India was deeply affected due decrease in purchasing power and the corrupt practices of colonial government. During the world war second raw materials from India were exported and the final product was imported from UK which discouraged the production of final product in India. In 1950-1960 main exports of India includes cashew kernels, black pepper, tea, coal, mica, manganese ore, raw and tanned hides and skins, vegetable oils and raw cotton which was 34% of the total exports. India’s foreign trade has changed in terms of composition has been changed from in post independence period. Before the independence primary goods and agriculture commodities were the major portion of the exports and oil, machineries, cotton etc were the major imports of the India, but after independence horizon of Indian exports and imports has increased due many structural changes taken place from time to time. Before independence India’s foreign trade was limited to Britain but after the independence USA, Germany, Japan and UK emerged as new trading partners.

 

MEANING OF FOREIGN TRADE

 

Trade can be considered a social activity because it provides goods and services to satisfy the human wants. The process of buying required goods and services from the other countries and selling of surplus goods and services to other countries is known as foreign trade. We can segregate the trade into two following two types:

 

(a)   Internal trade/ Domestic trade/ home trade

(b)   External trade/ foreign trade/ international trade

 

Trade conducted within the boundaries of the country is known as foreign trade which can be at local, regional or national level also known as domestic trade or home trade. For example trade among the traders of the Punjab and Chennai. Boundaries of the country not only include the geographical boundaries but also include the geographical boundaries. Internal trade can be sub-divided into two parts:

 

(i)   Wholesale trade: whole sale trade consists of buying, selling, generally to ratailers, industrial user, commercial or other wholesalers regardless of the quantities sold. It involves buying of goods from the manufacture in bulk and the selling the goods to retailers.

 

(ii)  Retail trade: Retailers are business firms that engaged in selling goods and services directly to consumers. It involves buying of goods from the wholesaler in relatively small quantities and then selling to the consumers for use.

 

Exchange of goods and services outside the boundaries of the country or between the two or more countries is known as external trade also known as foreign trade or international trade. For example trader of Chennai sells goods to the trader of USA. External trade can be sub-divided into three parts:

 

(i)   Export trade: It involves the selling of the goods from the trader of the domestic country to trader of another country e.g. a trader from India sell his goods to trader located in china.

 

(ii)Import trade: It involves the buying of the goods from the trader of another country, by the trader of domestic country e.g. a trader from India purchase his goods from trader located in china.

 

(iii) Entrepot trade: It involves buying of goods from trader of another country and then selling of the same goods, after doing some processing to another country is known as entrepot trade e.g. an Indian traders purchase some material from a Japanese trader, then assemble it i.e. convert into finished goods and then re-export to an china

 

SUMMARY OF RECENT EXPORT IMPORT

COMPOSITION AND DIRECTION OF FOREIGN TRADE OF INDIA

 

At the time of our independence our export were mainly of primary goods and import, were of manufacturers and during the post independence period composition of India export changed. Composition of Indian trade refers to the major commodity or sector in which India exports or imports. Before the independence primary goods and agriculture commodities were the major portion of the exports and oil, machineries, cotton etc were the major imports of the India, but after independence horizon of Indian exports and imports has increased due many structural changes taken place from time to time. Composition of foreign trade includes:

  • (i) Composition of exports:
  • (ii) Composition of imports:

Table reveals that in 2015-16 all components of exports except chemical and related products & readymade garments registered negative growth. The exports of petroleum and crude oil products have diminished by 49.4%. The exports of agriculture and allied products have decreased by 18%. The gems and jewellery industry, has witnessed a fall in growth by 6.21%.

 

In 2015-16, most of the major components of imports have registered negative growth. The imports of petroleum crude and products have decreased by 40.52%. Fertilizer (11.62), electronic goods, (8.09%) agriculture and allied products (5.75%), Readymade garments (10.2%) witnessed positive growth in the year 2015-16.

 

Direction of trade

 

Direction of trade refers to the countries to whom India exports and countries from which India imports the goods and services. Before independence India’s foreign trade was limited to Britain but after the independence USA, Germany, Japan and UK emerged as new trading partners.

Followings are the major trading partners of India:

  • (i) Export partners: India exports 7500 commodities (value $264 billion) to about 190 countries including USA, Hong Kong, Singapore, Germany, China, Japan , Sri Lanka, Bangladesh and Vietnam etc in 2015.

     (i)   Capital goods like machinery and know how is very essential for the development of the country but with the help of foreign trade we can take the benefit of improved technology through imports.

 

(ii)    It helps in full fill the gap between the domestic demand and supply through imports.

 

(iii)  More exports results into more production which leads to increase in employment because extra production requires more man power.

 

(iv)   Exports also results into the increase of packing and transportation which results into expansion of other industries.

 

(v)  Foreign trade brings improvement in agricultural and industrial sectors of the economy.

 

(vi)  it is helpful for the removal of shortage of goods. If there is shortage of any goods then that commodity can be imported from the international market which will eliminate shortage of that commodity

 

(vii) The foreign Trade helps to improve the quality of local product.

 

(viii)   Foreign competition helps in the price stability of a nation. If the price level is very high of a good then that commodity can be imported which will keep price in stable position.

 

(ix) In the presence of international trade the resources are properly utilized which helpful to increase exports of the nation and as a result per capital income and national income increase.

 

 

Foreign direct investment FDI

 

India has already marked its existence as one of the fastest growing economies of the world. Foreign direct investment (FDI) is very crucial source which is required for the development of Indian economy. Foreign companies invest in developing countries to take the benefit of cheaper resources and dynamic business environment. A foreign direct investment is an investment made by a company or entity based in one country, into a company or entity based in another country. The main characterstic of FDI is that resident companies are managed by the foreign companies. Foreign direct investments differ from indirect investments such as portfolio flows, wherein in a foreign country institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments usually have a vital degree of influence and control over the company into which the investment is made. An example of foreign direct investment (FDI) would be an American company taking a majority share in a company in China. Dr Manmohan Singh and P.V Narasimha Rao brought FDI in India in 1991 which leads to creation of more jobs in India.

According to United Nations figures in 2015 India attracted investment of $ 44 billion which is 26% more than the previous year and becomes the 10th largest destination for FDI globally. Modi government’s efforts such as “Make in India”, increase in foreign investment limits in defence, retail, civil aviations and pharmaceuticals etc positively contributing to attract more FDI in India(blogs.wsj.com). It has been ranked among the top 3 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly.

 

Procedure under Automatic Route

 

(I) FDI in sectors permitted under automatic route does not require any prior approval either by the Reserve Bank of India and Government. The investors are only required to inform the Regional office of RBI within 30 days of receipt of inward remittances and are required to file the documents with that office within 30 days of issue of shares to foreign investors. Following documents are required to file with RBI within 30 days of issue of shares:

 

–          Name of promoter/ collaborator/ shareholders

–          Details of allotment

–          Copy of foreign collaboration agreement

 

Procedure under Government approval

 

(II)   FDI in activities not covered under the automatic route require prior approval of Government and RBI. For this application in form FC-IL is required and decision of FIPB conveyed in 4-6 weeks. Following are the activities where government approval is mandatory:

 

–          Banking

–          NBFC’s activities

–          Civil aviation

–          Venture capital fund

–          Housing and real estate development

–          Infrastructure and service sector

–          Atomic energy

–          Defence

–          Agriculture

–          Print media

–          Broadcasting etc.

 

Government approval is required in the following cases:

 

  • Where a foreign investor has an existing joint venture/technology transfer /collaboration/ trademark agreement in the same field, before January 12, 2005, the proposal for fresh investment / collaboration /technology transfer/ trademark agreement in a new joint venture would have to be under the Government approval route through FIPB.
  • In sectors with caps, including inter-alia defence production, air transport services, private sector banking, broadcasting, commodity exchanges, credit information companies,ground handling services, asset reconstruction companies, insurance, print media, telecommunications and satellites, Government approval / FIPB approval would be required in all cases where:
  • An domestic company is being established with foreign investment and is owned or controlled by a non-resident entity or The control or ownership of an existing Indian company, at present owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by Indian citizens, is being transferred to a non-resident entity as a effect of transfer of shares and/or fresh issue of shares.
  • These guidelines/cases do not apply for those sectors where there are no foreign investment caps, that is, 100% foreign investment is permitted under the automatic route.

 

FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR 2015-16:

Sourcehttp://dipp.nic.in/English/Publications/FDI_Statistics/2016/FDI_FactSheet_JanuaryFebrua ryMarch2016.pdf

 

Investments/ developments

 

Based on the recommendations of Foreign Investment Promotion Board (FIPB), the Government, on September 29, 2015, permitted 18 proposals of FDI amounting to approximately Rs 5,000 crore .

 

Some of the recent major FDI announcements are as follows:

 

Kellogg Co, world’s largest cereal maker, is making big investments in manufacturing and plans to locate its first Research and Development (R&D) facility in India at Taloja, near Mumbai.

 

The Government of Karnataka has signed an agreement with the Electronic Manufacturers Association and Taiwan Electrical for the purpose of creating a Taiwanese electronic manufacturing cluster with an investment of Rs 3,200 crore .

 

Posco Korea, the multinational Korean steel company, has signed an agreement with Shree Uttam Steel and Power to establish a steel plant at Satarda in Maharashtra.

 

Foxconn has signed a Memorandum of Understanding (MoU) with Maharashtra state government to invest US$ 5 billion over the next three years for establishing a manufacturing unit between Pune and Mumba .

 

Swedish home furnishing brand Ikea has made a plan of opening 25 stores in India by making an investment of Rs 12,500 crore . Google plans to invest Rs 1,500 crore for a new campus in Hyderabad which will be focused on three key areas — Google Fibre broadband services and Street view Google Education,. Dalian Wanda Group, one of China’s largest real estate firms, has planned to invest US$ 10 billion in India in the next 10 years which will be used to build up industrial townships, retail properties.

 

2016 BUDGET: MEASURES TO PROMOTE FDI

 

Various relaxations are provided to the foreign investors by the government of India in order to increase FDI in India and to increase employment and GDP. These are as follows:

 

(i)  It is proposed to allow FDI in Indian insurance and pension sector upto 49% through automatic route.

 

(ii)   With a view to reduce non-performing assets (NPA) it was proposed to allow 100%

 

FDI under automatic route in Assets Reconstruction Companies (ARC’s) which mange the NPA and make them profitable.

 

(iii) Investment limit in Indian stock market has been increased to 15% earlier it was 5% which will help the Indian stock exchange to compete globally and to adopt global market practices.

 

(iv) Horizon of eligible instruments for FDI has been widening by including hybrid instruments also.

 

(v)   Introduction of central state agreement to ensure the fulfilment of the obligations of state government under the treaties.

 

(vi)Limit for FDI in public sector enterprises listed on Indian stock exchange, other than banks has been increased from 24% to 49%.

 

(vii)  Presently, foreign investors can take business in India upto 5 years and the provision of residency status for foreign investors will be soon introduced where as presently no such provision exists.

 

 

MEASURES TO ATTRACT FDI IN INDIA

 

India foreign investment policy is the most liberalized policy in the world where 100% FDI is allowed in many areas and various significant changes has been taken place in FDI policy from time to time in order to make it investor-friendly. Some of the latest measures are as follows:

 

(I)  100% FDI has been allowed in specified rail infrastructure projects, White Label ATM operations, duty free shops located and operated in the custom bonded area and manufacturing of medical devices through automatic route.

 

(II) Investments made by person resident outside the India under schedule 4 of FEMA is now considered as domestic investment same as made by residents of India.

  • (III) FDI upto 49% has been allowed in defence sector through automatic route subject to certain conditions.

(IV)      100% FDI has been allowed in certain plantation activities such as coffee, rubber, palm oil tree and olive oil tree etc.

  • (V) Foreign investment cap on satellites and credit information companies has been increased from 74% to 100%.
  • Approval limit of foreign investment promotion board (FIPB) has increased to 5000  crore to make the approval process faster.
  • Various reforms have  been done related  to construction development  sector like removal of restrictions related to floor area and minimum capitalisation, exit and repatriation has been allowed after the lock in period of 3 years and 100% FDI has been permitted in the completed projects related to operation and management of township, malls/shopping complex and business centres.
  • New norms set for FDI in broadcasting sector are as under:

PROBLEMS RELATED TO FDI INFLOWS IN INDIA

 

(I)     Poor  infrastructure  is  the  most  important  hurdle  in  the  way  of  FDI  inflows  for  example shortage of power etc.

 

(II)  Corruption and misuse of public facilities is another problem which restrict the foreign investors to invest in India.

 

(III) Disparities in government policies is another problem which leads to development of only selected areas which attracts FDI and other areas remained untapped even they have plenty of natural resources.

 

(IV) Rigid policies and rules are another obstacle which makes the India unattractive for FDI.

 

POLICY AND REGULATORY FRAMEWORK OF FDI

 

The government of India made framework of FDI in form of FDI policy, which is updated in every six months. The Department of Industrial Policy Promotion (DIPP), Ministry of Commerce & Industry and Government of India make announcements of changes in FDI policy through press releases notified by Reserve Bank of India. Thus regulatory framework of FDI includes Acts, Regulations, Notifications and Press releases etc. Followings aspects are covered under the regulatory framework of FDI policy:

 

(a)    Entry routes for foreign investment:-

 

There are mainly two routes through which foreign direct investment can be brought into India. These are: Automatic route and Government route. Under automatic route no prior approval of government or Reserve Bank of India (RBI) is allowed to invest in India, only a intimation to regional office of RBI is required within 30 days of receipt of inward remittance. But under government route approval of government is required for investing in those activities which are not covered under automatic route. For this application in form FC-IL is required and decision of FIPB conveyed in 4-6 weeks.

 

(b)   Prohibited sectors:- Following are the sectors/ activities where FDI is prohibited:

 

(I)   Gambling and betting

(II)  Lottery business

(III)   Chit funds

(IV)  Nidhi company

(V)  Real estate

(VI)   Retail sector

(VII)   Atomic energy etc.

 

(c)    FDI in limited liability partnership:–

 

FDI in limited liability partnership is allowed only for those areas where FDI is allowed through automatic route and these LLP’s should not be engaged in any activity or business where FDI is not allowed or where FDI is allowed under government route. Government of India recently allowed FDI in LLP’s subject to certain conditions such as foreign capital participation is allowed only through cash, investment in LLP’s by FII’s and foreign venture capital investors (FVCI’s) is not allowed.

 

(d) FDI in EOU or SEZ Government of India allowed 100% FDI in Special Economic Zones (SEZ) and Export Oriented Units (EOU), subject to certain norms. FDI in SEZ is allowed through automatic route in the activities covered in foreign trade policy issued by department of commerce.

(e)    Industrial licensing:-

 

Industries (Development & Regulation) Act, 1995 deals with the industrial licensing. FDI is allowed in all the industries where industrial licensing is compulsory through government approval. Requirements for industrial licensing has been reduced, licensing is compulsory only for followings

 

–          Alcoholic drinks

 

–          Cigars, cigarettes and other tobacco products

 

–          Defence equipments

 

–          Industrial explosives

 

–          Hazardous chemicals

 

–          Drugs and pharmaceuticals

 

–          Items reserved for small sectors etc.

 

 

(f)    FDI in SSI units:-

 

An industrial undertaking is considered as small scale unit if its capital investment in plant and machinery does not exceed Rs. 10 million. For small scale industries foreign equity participation is allowed up to 24%, if equity participation exceeds this limit then it will not be considered as small scale industry even if it has investment of less than 10 million in plant and machinery.

 

(g)   Foreign technology collaborations:-

 

FDI in foreign technology is allowed by the government of India to enhance the technical capability of Indian industry through automatic and government approval. Power to allow payments to foreign collaborations by Indian companies is reserved with RBI subject to following limits:

 

–          Lump sum payment does not exceed 2 million USD.

–          Royalty payments are limited to 5% for domestic sale and 8% for exports.

    (h)   Entry options for foreign investors in India:-A foreign company which wants to set up a business in India can enter through two modes:

 

(a)    As an incorporated entity: A foreign company by incorporating under Companies Act 1956 can enter in to India through joint venture or wholly owned subsidiaries by filling an application to Registrar of Companies (ROC). Once a company registered itself then it is subject to follow the Indian laws as other domestic companies.

 

(b)   As a foreign company: A company can enter into India by setting up representative offices, project offices or branch offices with the approval of RBI. Main role of representative office is limited to just collect the information about prevailing market opportunities but cannot undertake any commercial activity. Project offices are set up the companies which set up any specified project in India and branch offices by the foreign companies, which engaged manufacturing and trading activities, can set up for following purposes:

–          Export/import

 

–          Consultancy services

 

–          Shipping company

 

–          Carrying research work

 

–          Rendering services in IT etc.

 

Government Initiatives

 

1.   The Government of India relaxed the FDI policy norms for Non-Resident Indians. Under this policy, the non-repatriable investments made by the Overseas Citizens of India (OCI), Persons of Indian Origin (PIOs), and NRIs will be treated as domestic investments and will not be subject to FDI(Foreign Direct Investment) caps.

 

2.    Through a notification issued by the DIPP the government has also raised FDI cap in insurance sector from 26 per cent to 49 per cent.

 

3.    The Cabinet Committee on Economic Affairs (CCEA) has raised the entrance for foreign direct investment requiring its approval to Rs 3,000 crore from the present Rs 1,200 crore .

 

4.  India’s cabinet cleared a proposal which permit 100 per cent FDI in railway infrastructure.

 

5.   India is likely to grant most favoured nation (MFN) treatment to major fifteen countries that are in talks regarding an agreement on the Regional Comprehensive Economic Partnership (RCEP), which would result in easing of investment rules for these nation.

 

6.   The Government of India plans to further simplify rules for Foreign Direct Investment (FDI) and include more sectors in the automatic approval route, to attract more investments in the India.

 

FOREIGN INSTITUTIONAL INVESTORS

 

Foreign institutional investors are the entities which make proposals for investment in India but incorporated outside India in other words these are the foreign companies invest in India. According to SEBI “foreign institutional investor” means an institution established or incorporated outside India which proposes to make investment in Indian securities. FII’s are commonly invests in developing countries and considered as the source of development of the countries. Participatory notes are the main source through which FII’s can invest in India these are also known as off shore derivatives. FII’s can invest in the stocks and debentures of India companies through portfolio investment scheme. Entities such as pension funds, insurance companies, mutual funds, hedge funds and charitable trusts etc. are known as FII’s. It is mandatory to get itself registered with Securities Exchange Board of India SEBI before investing in primary and secondary market and registered FII’s can also invest in the dated government securities, mutual funds, commercial papers and derivatives traded on recognized stock exchange.

 

SEBI GUIDELINES FOR FOREIGN INSTITUTIONAL INVESTORS

 

SEBI regulates the activities of FII’s in India and following are the main regulations specified by

 

SEBI for FII’S:

 

1.      Registration

 

Registration is required for FII’s in order to invest in the securities of Indian companies.

 

For registration an application should be made to board in form A and applicant has to furnish all the information required by the board. After examining the track record and financial soundness of the applicant board, with the guidelines of government of India issue the certificate of registration to applicant in form B, within three months of furnishing information.

 

2.      Procedure where certificate is not granted

 

When the application made for grant of registration certificate is rejected by the board then board has to make a written intimation to the applicant by specify the reason for rejecting the application. After receiving the intimation applicant can make the application to the board for re-examination within the 30 days of receipt of intimation.

 

3.      Investment restrictions

 

A foreign institutional investor may invest in the followings:

(a)    Securities in primary and secondary capital market, listed on recognized stock exchange.

(b)   Units of mutual funds and UTI listed on recognized stock exchange.

(c)    Dated government securities

 

(d)   Commercial papers

    (e)    Derivates traded on recognized stock exchange.

 

4.      Appointment of domestic custodian

 

FII’s are required to appoint a domestic custodian who performs following activities:

 

(a)    Monitoring of investment of FII’s in India

 

(b)   Reporting of the transactions of FII’s to board on daily basis

 

(c)    Preservation of records of activities of FII’s  FII’s can appoint more than one custodian with prior approval of the board.

 

5.      Appointment of designated bank It is mandatory for FII’s to appoint a branch of bank approved by RBI for opening up of foreign currency denominated account and special non-resident rupee account.

 

6.      Maintenance of proper books of accounts

 

Every FII is required to maintain the following books of accounts for minimum period of five years and to intimate the board in writing the place where these are kept:

 

(a)    True and fair accounts of capital and gain arising from buying and selling of investment and their remittance

 

(b)   Bank statement of account

 

(c)    Contract notes relating to sale and purchase of securities

 

7.      Appointment of compliance officer

 

Every FII is required to appoint a compliance officer who ensure that all the rules and regulations, notifications, instructions and guidelines etc issued by the board and government are properly complied or not.

 

8.      Furnishing information to the board

 

It is compulsory for the FII’s to furnish the any information demanded by board, RBI or government without any delay.

 

9.      Liability in case of default Any FII who controverts the any rules and regulations specified by the board is liable to actions covered under the Chapter V of SEBI Regulation Act 2008.

 

 

SUMMARY

 

The foreign Trade helps to improve the quality of local product. Foreign trade brings improvement in agricultural and industrial sectors of the economy. Foreign competition helps in the price stability of a nation. It helps in increasing employment opportunities, income generation and high living of standard. Foreign trade helpful in full fill the gap between the domestic demand and supply through imports Pattern of foreign trade of India has undergone through a substantial change because of rapid development which results into change in the composition and direction of the foreign trade of India. Before the independence primary goods and agriculture commodities were the major portion of the exports and oil, machineries, cotton etc were the major imports of the India but after independence engineering goods, pearls, gems and jewellery becomes the important exports and capital goods, petroleum, iron and steel become important imports. Foreign direct investment (FDI) is also very crucial source which is required for the development of Indian economy. It helps the foreign companies invest in developing countries to take the benefit of cheaper resources and dynamic business environment. India foreign investment policy is the most liberalized policy in the world where 100% FDI is allowed in many areas and various significant changes has been taken place in FDI policy from time to time in order to make it investor-friendly. With the introduction of liberalization process India’s share in world trade has been increased and trade with the world is continuously increasing. Number of initiatives were also taken by Govt to improve FDI in India. The Government of India plans to further simplify rules for Foreign Direct Investment (FDI) and include more sectors in the automatic approval route, to attract more investments in the India.

 

References

 

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Report

 

Department of Industrial Policy and Promotion Ministry of Commerce and Industry Government of India Consolidated FDI Policy (Effective from June 07, 2016)

 

Books

  • K.Aswathappa(2011),“Essentials of Business Environment’’ Himalaya Publishing House.
  • Paul Justin(2006),“Business Environment’’ Tata Mc Graw-Hill Publishing Company limited.
  • Cherunilam Francis(2012),“Business Environment’’ Himalaya Publishing House.

References