Foreign Trade Policy – Foreign Investment and Economic Development | JAIIB IE & IFS Exam

Foreign Trade Policy

Foreign Trade: It is the purchase and sale of goods and services between two countries in the international market. 

Foreign Trade Policy: It refers to the economic policy that controls an economy’s export-import activity. 

A well-planned foreign trade policy adds to the local economy’s output and the nation’s prosperity.

Foreign Trade Policy: 2015-2020

On April 1, 2015, the Indian government launched its Foreign Trade Policy 2015–20.

The Foreign Trade Policy 2015-20, provides a structure for promoting goods and services export, as well as employment generation and value addition in the economy of the country.

Aims of Foreign Trade Policy

• The FTP aims to help both the industrial and service sectors, with a specific emphasis on improving the ease of doing business. 
• The FTP aims to increase India’s merchandise and services exports.
• It also aims to increase India’s share of global exports from 2% to 3.5 percent. 
• The policy seeks to enable India to deal with external challenges.
• To make trade a major contributor to the nation’s economic growth and development.
• Merchandise Exports from India Scheme (MEIS) was introduced for the export of specified goods to specified markets.
• Services Exports from India Scheme (SEIS) was introduced to increase exports of notified services.
• Duty credit scrips are issued under MEIS and SEIS and the goods imported against these scrips are fully transferable.
• Measures have been taken to give a boost to exports of defence and hi-tech items.

Foreign Direct Investment

• A foreign direct investment refers to the purchase of an asset in another country, often by a company, such that it gives direct control to the purchaser over the asset.
• DI results in a long-term interest in the investee company.
• Net FDI has increased from $ 3.7 billion in 2004-05 to $ 36.6 billion by 2021-22. 

Routes of Foreign Direct Investment

1. Automatic Route
2. Government Route

Automatic Route: In the automatic route, the foreign entity does not require the prior approval of the government or the RBI in all activities and sectors specified in the Government of India’s consolidated FDI Policy, as amended from time to time.

Sectors Allowed In Automatic Route:

• Medical devices
• Thermal power
• Insurance
• Ports and shipping
• Railway infrastructure
• Power exchanges
• Petroleum Refining

Government Route:

• Under the Government Route, before any investment, approval from the Government of India is required.
• Proposals/Applications for foreign investment through the government route are reviewed by the relevant administrative ministry/ department.

Sectors allowed in Government Route:

• Broadcasting Content Services
• Banking and public sector
• Food Products Retail Trading
• Core Investment Company
• Multi-Brand Retail Trading
• Mining & Minerals 
• Print Media 
• Satellite 

Types of Foreign Direct Investment(FDI)

Greenfield FDI: It is a sort of investment in which, a parent corporation establishes a subsidiary in the destination country. For instance: McDonald’s, Hyundai India, Pepsi India are examples of greenfield FDIs.

Brownfield FDI: It is an investment in which a multinational corporation buys stock in an established firm in the host country. 

For example, Dalichi Sankyo of Japan acquired Ranbaxy India.

Joint venture: Based on an agreement, a foreign company and a local company join up to share investment, technology, profits, and so on. Example Mahindra-Renault

Foreign Direct Investment(FDI) Prohibited Sectors:

• Lottery Business
• Gambling, Betting, casinos, etc.
• Chit funds
• Nidhi company
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business
• Manufacturing of tobacco or tobacco substitutes, cigars, cheroots, cigarillos and cigarettes.
• Activities/ sectors not open to private sector investment, e.g., Railway operations and Atomic Energy.
• Construction of Farmhouses

Government measures to increase FDI in India

• Government schemes like production-linked incentive (PLI) in 2020 for electronics manufacturing have been launched to attract foreign investments.
• In 2019, under the automatic route, govt permits 100% FDI in coal mining activities.
• In 2019, the government clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.
• GOI permitted 26% FDI in digital sectors. 

Foreign Investment Facilitation Portal (FIFP) is the online single-point interface of the Government of India with investors to facilitate FDI.

FOREIGN INSTITUTIONAL INVESTMENT (FII)

• It refers to short-term capital invested in stocks or hedge funds. Under this arrangement, FIIs/ NRIs can acquire shares/ debentures in Indian companies through Indian stock exchanges.
• Foreign institutional investors are companies, based outside India that offer investment proposals/applications in India.

Economic Growth

Economic growth refers to an increase in the size of a country’s economy over a period of time.

Economic Development

Economic development is a sustained improvement in a society’s material well-being.

Apart from national income growth, it covers social, cultural, political, and economic developments that contribute to material progress in the country. It includes changes in available resources, population size and composition, capital formation rates, technology, organizational and institutional architecture, skills, and efficiency.