DRIVE- FALL 2013

PROGRAM/SEMESTER- MBADS (SEM 4/SEM 6) / MBAN2 / MBAFLEX (SEM 4) / PGDIB (SEM 2)

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Q1. Analyze the direction of Indias foreign trade since 2001.How has the direction of export and import affected our
foreign trade.
(Overall picture of changes in direction of trade) 10 marks
Answer.
The directional pattern of Indias trade has changed during the last decade. Trade with the top 12 trading partners increased
by over 11.2 percentage points since 2001-02 to 53.8 percentage of total in 2006-07. The share of the United States, the
largest trading partner, declined by 2.5 percentage points to 9.8 per cent in 2006-07, while that of the United Kingdom and
Belgium declined by 1.9 and 2 percentage points, respectively. China became the second largest partner in 2006-07 with its
share increasing by 5.2 per cent points over the decade. Chinas trade share during April-September 2007 is ahead of the
United States (Table 1.7).
Table: Indias Trade with Major Trading Partners

With rising POL prices, and Indias rising exports of refined POL products, the United Arab Emirates (UAE) and Saudi
Arabia have emerged as the third and fourth largest trading partners of India. There is a perceptible change in the share of
Indias trade with Iran and Nigeria (due to rise in import of mineral fuel and oil, etc.) and Australia (due to rise in import of
precious stones, metals, mineral fuel and oil, and ores), while the share of Singapore after increasing in some years has
moderated. Despite Indias large overall trade deficit, there was a large (but declining) trade surplus with the United States
and UAE, and a small surplus with the United Kingdom and Singapore till 2006-07. The surplus with the first three
countries continued in 2007-08. The largest trade deficits are with Saudi Arabia, China and Switzerland. The trade deficit
with China has increased further in April-September 2007. Exports from India had been more or less stagnant during 195160, averaging a little over Rs. 600 crores per annum. There was marginal increase in exports towards the end of Third Five
Year Plan (1965-66) when the exports touched the level of Rs. 816 crores, and this level of exports doubled in seven years
between 1965-66 and 1972-73. Since 1972-73, the rate of growth in exports had been so fast that in a short span of five
years the level of exports reached a figure of Rs. 5142 crores in 1976-77 exceeding imports by Rs. 68 crores. This figure
went up to Rs. 15674 crores in 1987-88 and Rs. 27658 crores in 1989-90. The total value of exports was Rs. 32553 crores in
1990-91.

Q2. Write short notes on:

a)European Union
b)APEC
(countries and formation of EU-5 marks, countries and formation of APEC-5 marks) 10 marks
A) European Union
The European Union (EU) is a political and economic union of twenty-seven member states, located primarily in Europe. It
was established in 1993, as a result of the signing of the Treaty on European Union known as the Maastricht Treaty, adding
new areas of policy to the existing European Community. With almost 500 million citizens, the EU combined generates an
estimated 30% share of the world's nominal gross domestic product (US$16.8 trillion in 2007). The EU traces its origin to

the European Coal and Steel Community formed among six countries in 1951 and the Treaty of Rome in 1957. Since then
the EU has grown in size through the accession of new member states and has increased its powers by the addition of new
policy areas to its remit. The Treaty of Lisbon was signed in December 2007 with the intention to amend the existing
treaties to update the political and legal structure of the union. The ratification process was scheduled to be accomplished by
the end of 2008 but the rejection of this treaty in the Irish referendum of June 2008 has left its future unresolved.

B) Asia-Pacific Economic Cooperation

APEC established in 1989, is the premier forum for facilitating economic growth, cooperation, trade and investment in the
Asia-Pacific region. APEC is the only inter governmental grouping in the world operating on the basis of non-binding
commitments, open dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral trade
bodies, APEC has no treaty obligations required of its participants. Decisions made within APEC are reached by consensus
and commitments are undertaken on a voluntary basis. APEC has 21 members referred to as "Member Economies"
which account for approximately 41% of the world's population, approximately 55% of world GDP and about 49% of world
trade. APEC's 21 Member Economies are Australia; Brunei Darussalam; Canada; Chile; People's Republic of China; Hong
Kong, China; Indonesia; Japan; Republic of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; The
Republic of the Philippines; The Russian Federation; Singapore; Chinese Taipei; Thailand; United States of America;
Vietnam. Since its inception, APEC has worked to reduce tariffs and other trade barriers across the Asia-Pacific region,
creating efficient domestic economies and dramatically increasing exports. Key to achieving APEC's vision are what are
referred to as the 'Bogor Goals' of free and open trade and investment in the Asia-Pacific by 2010 for industrialized
economies and 2020 for developing economies. These goals were adopted by Leaders at their 1994 meeting in Bogor,
Indonesia. APEC also works to create an environment for the safe and efficient movement of goods, services and people
across borders in the region through policy alignment and economic and technical cooperation.

Q3. Discuss the current situation of FDI in India. List the sectors where 100% FDI id permitted.
(FDI in India-7 marks, Sectors permitted-3 marks) 10 marks
FDI Policy of India
FDI Policy Till 1991
By the beginning of 1980s, the share of FDI in gross capital formation was the lowest for India among all developing
countries. The restrictive policy towards foreign equity investment in India continued without any significant change until
1991.
During 1950-1967, FDI in India was welcome on mutually advantageous terms, preferably through collaboration and
majority domestic ownership. Foreign investors were assured of non-discriminatory treatment on par with domestic
enterprises. They were allowed to transfer their profits without any restriction and assured fair compensation in the event of
nationalization. The FDI policy during this period was cautious but friendly.
FDI POLICY 1968-1980
From 1968, till 1980 the FDI Policy of India was more restrictive which is evident in the form of following measures:

i) No FDI without transfer of technology

ii) Renewals of foreign collaborations were restricted
iii) Foreign Exchange Regulation Act, 1973 restricted FDI in certain core or high priority industries
iv) Equity participation was restricted to 40%
FDI Policy 1981-1990
This period was period of opening up and gradual liberalization. Industry policy was liberalized and policies were framed to
attract more FDI and foreign collaborations. Rules and procedures regarding remittance of profits, dividends, royalties were
relaxed. A fast channel was set up for expediting clearances of FDI proposals.
FDI Policy Since 1991
In 1991, India started process of liberalization. One of the measures was that foreign investment and technology
collaboration would be welcome to obtain higher technology, to increase exports and to expand the production base. Many
concessions were announced for foreign equity capital in 1991-92. The foreign equity capital limit was raised to 51%. FDI
was allowed in exploration, production and refining of oil and marketing of gas. NRIs and Overseas Corporate Bodies were
allowed to invest 100% equity in high priority areas as well as in export houses, hotels and tourism related industries. The
most significant step was replacement of FERA, 1973 with FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA,
1999). The provision of imprisonment was completely abolished under FEMA. Automatic route for FDI was permitted.
Many new sectors were thrown open for FDI. In 2002, 100% FDI in tea including plantations was allowed. Major changes
were effected during 2004-05 to attract more FDI. In certain sectors FDI is permitted upto 100%.
Sector Specific Foreign Direct Investment in India
Hotel & Tourism: FDI in Hotel & Tourism Sector in India 100% FDI is permissible in the sector on the automatic route.
The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering
and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport
operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and
Convention/Seminar units and organizations.
Non-Banking Financial Companies (NBFC) 49% FDI is allowed from all sources on the automatic route subject to
guidelines issued from RBI from time to time. a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities
shall be as per levels indicated below:
i) Merchant banking
ii) Underwriting
iii) Portfolio Management Services
iv) Investment Advisory Services
v) Financial Consultancy
vi) Stock Broking
vii) Asset Management
viii) Venture Capital

ix) Custodial Services

x) Factoring
xi) Credit Reference Agencies
Insurance Sector: FDI in Insurance Sector in India FDI up to 26% in the Insurance sector is allowed on the automatic
route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)
Telecommunication: FDI in Telecommunication Sector
Value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and
security requirements and adherence by the companies (who are investing and the companies in which investment is being
made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other
license provisions.
Trading: FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51% provided it is
primarily export activities, and the undertaking is an export house/trading
house/super trading house/star trading house.
Power: FDI in Power Sector in India
Up to 100% FDI allowed in respect of projects relating to electricity
generation, transmission and distribution, other than atomic reactor power
plants. There is no limit on the project cost and quantum of foreign direct
investment.
Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does
not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted
formulations.
Roads, Highways, Ports and Harbors
FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways,
vehicular bridges, toll roads, vehicular tunnels, ports and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control
systems is permitted on the automatic route.
Call Centers in India
FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India
FDI up to 100% is allowed subject to certain conditions.
Q4. Discuss the salient features of Indias Foreign trade policy 2009-14.
(Foreign trade policy) 10 marks

Answer:
The new Foreign Trade Policy (FTP) takes an integrated view of the overall development of Indias foreign trade and goes
beyond the traditional focus on pure exports.
This would be clear from the following statement in the policy document, "Trade is not an end in itself, but a means to
economic growth and rational development. The primary purpose is not the mere earning of foreign exchange, but the
stimulation of greater economic activity."
The government unveiled a mix of procedural measures and fiscal incentives to trade with non- traditional destinations to
bolster export order books drying out in two top regional markets-the US and the European Union.
New emerging markets have been given a special focus to enable exports to be competitive. Incentive schemes are being
rationalized to identify leading products which would catalyze the next phase of export growth.
The government plans to introduce a nation-wide uniform GST from next year that would subsume the complex web of
indirect taxes imposed by state governments. The introduction of zero duty capital goods scheme will add to expansion and
modernization of production base at a time when investment is drying up in export industries.
Other important features of the policy include:
(i) $ 200 billion or Rs 98,000 crore is the export target for 2010-11.
(ii) 100% growth of Indias export of goods and services by 2014.
(iii) 15% growth target for next two years; 25% thereafter.
(iv) 3.28% targeted Indias share of global trade by 2020 double from the current 1.64%.
(v) Jaipur, Srinagar Anantnag, Kanpur, Dewas and Ambur identified as towns of export excellence.
(vi) 26 new markets added to focus market scheme.
(vii) Provision for state-run banks to provide dollar credits.
(viii) Duty entitlement passbook scheme extended till Dec. 2010.
(ix) Tax sops for export-oriented and software export units extended till March 2011.
(x) New directorate of trade remedy measures to be set up.
(xi) Plan for diamond bourses.

(xii) New facility to allow import of cut and polished diamonds for grading and certification.
(xiii) Export units allowed to sell 90% of goods in domestic market.
(xiv) Export oriented instant tea companies can sell up to 50% produce in domestic market.
(xv) Single-window scheme for farm exports.
(xvi) Number of duty-free samples for exporters raised to 50 pieces.
(xvii) Value limits of personal carriage increased to $5 million (Rs 24.5 core) for participation in overseas exhibitions.
Q5. Explain the meaning and objectives of FEMA. Who is an authorized person according to its rules?
(Meaning-3 marks, Objectives-3 marks, Authorized person- 4 marks) 10 marks
Foreign Exchange Management Act (FEMA)
The foreign trade of a country consists of export and import of goods and services and involves inflow and outflow of
foreign exchange. The payments for import and receipts for export trade transactions in terms of foreign exchange, in India,
are governed by Foreign Exchange Management Act, 1999 (FEMA). Earlier to FEMA, India had Foreign Exchange
Regulations Act, 1973 (FERA). The process of economic reforms initiated by Government of India in the year 1991,
necessitated the need for extensive amendments in the
FERA, which were brought about by Foreign Exchange Regulations (Amendment) Act, 1993. In order to further liberalize
the regulated regime, FERA was replaced by FEMA, 1999.
Objective of FEMA
FEMA was brought to consolidate and amend the law relating to foreign exchange. The basic objective of FEMA is to
facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market
in India. FEMA contains 49 sections.
Authorised Person
An authorized person means an authorized dealer, money changer, off-shore banking unit or any other person for the time
being who under FEMA is authorized to deal in foreign exchange or foreign securities.

Q6. What are the major differences between forward and future contracts? What do you mean by currency option?
(Differences-6 marks, Currency options-4 marks) 10 marks
Forward Contracts

Forward exchange contract is used by exporters and importers to get adequate protection against exchange risk. In a forward
exchange contract a banker and a customer or two banks enter into a contract to buy or sell a fixed amount of foreign
currency on a specified future date at a predetermined rate of exchange.
Under forward contracts, date of delivery will be as under:
i) For export documents negotiated, purchased or discounted; date of negotiation, purchase or discount.
ii) In case of export documents sent on collection; date of payment of Indian Rupees to the exporter.
iii) In case of retirement/crystallization of import bills; date of retirement or crystallization of the bill whichever is earlier.
Types of Forward Contracts
Forward contracts can be of two types (i) Fixed Forward Contract and
(ii) Option Forward Contract.
Currency Futures
A futures contract is a form of forward contract conveying
i) Right to buy or sell
ii) A specified amount of foreign currency
iii) At a fixed exchange rate
iv) On a specified future date
Currency futures are different from the forward contract in following respects:
i) A forward contract can be entered into by a person with any bank whereas futures contract can be entered into only with
financial futures exchanges.
ii) In a forward contract, the amount of foreign currency and the due date are decided by the customer whereas in a futures
contract these are standardized, e.g., JPY 12.5 million; GBP 62,500; S. Fr. 1,25,000.
iii) A forward contract is self regulating but futures are regulated by concerned futures exchange.
iv) A forward contract can be for any maturity of 3 days and beyond upto 6 months (in India) whereas futures have due
dates on a specified day in specified month in a year.
v) Forward contracts have mutually agreed price for the contract, whereas in case of futures the exchange may fix minimum
price movement for the contract.
vi) A forward contract is between counter parties, i.e., bank and the customer, futures are through the members of the
exchanges.
Currency Options
A currency option gives to the buyer an option to buy or sell a sum of foreign currency at a predetermined rate on a future
date without creating a liability on him to do so. The buyer has the option to use it or otherwise. Currency options can be
call option or put option. A call option gives the option buyer the right to buy the specified currency and a put option entitles
the option buyer to sell the specified currency. The price at which it is
agreed to buy or sell the specified foreign currency is called the strike price. The fee payable by the buyer of the option to
the option seller (writer of the option) at the time of entering into contract is called premium, which is not refundable.
In an American option, the option can be exercised on any day on or before the maturity date. On the other hand in case of
a European option, the option buyer can exercise his option only on the date of maturity. Under the option contract, the

customer can make a reassessment on the due date and seek either execution of the contract or its non-execution. Option
contract is useful especially for covering exchange risk under contingent situations.

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