Unit 5

Sector wise Trends and Issues

Q1) Explain the Pre-industrial policy, 1991.

A1) After Independence, the Government of India adopted an approach to develop Industrial sector of India. India adopted several Industrial Policy resolutions to develop the Industrial sector.

Industrial Policy Resolution, 1948.

The resolution was issued on April 6, 1948. The resolution accepted the importance of both private and public sectors for the development of the industrial sector.

The 1948 Resolution also accepted the importance of the small and cottage industries as they are suited for the utilisation of local resources and are highly labour intensive.

Industrial Policy Resolution, 1956.

The Policy Resolution of 1956, laid the following objectives for the growth of the Industrial sector:

1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To Prevent concentration of Business in few hands and Restriction in Creation of Monopolies.

The objectives were chosen carefully with the aim of creating employment and reducing poverty.

Industries (Development & Regulation) Act, 1951.

The Industries Act was passed by the Parliament on October 1951 to control and regulate the process of Industrial development in the country. The Acts main task was to regulate the Industrial sector.

The specific objectives of the Act were:

1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.
4. Balanced Growth and Equitable development of all the regions.
5. It was also believed that the State is best suited to promote balanced growth by; channelizing investment in the most important sectors; Correlate supply and demand; eliminate competition; ensure optimum utilisation of social capital.

Major Provisions of the Act

Restrictive Provisions: It contains all measure provision to curb unfair trade practices.

Registration: The provisions make registration of industries mandatory irrespective of whether they are private or public in nature. The expansion of the existing business also required licencing and permission.

Examination and Monitoring of the Industries: After granting of license, it is the responsibility of the state to monitor the performance of the industries. If at any point in time, the industrial unit was found not up to the mark, underutilising its resources or charging excessive prices, the government could set up an enquiry against the unit.

Cancellation of the Licence: The government has the power to cancel the licence granted to the industrial unit if found, engaging in wrongful behaviour.

Reformative Provisions:

The category involved following provisions.

Direct Control by the Government: Under this provision, the government could set up an enquiry against the industrial unit and can order reform process, if it was not being run properly.

Control on Price, Distribution and Supply: The Government was empowered by the act to control and regulate the prices, supply and distribution of the goods produced.

Q2) What are the Liberalisation measures adopted in the 1980s?

A2) The Liberalisation measures adopted in the 1980s are-

1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who successfully achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into broad categories. For example; cars, jeeps, tractors, light and heavy commercial vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.
9. Promotion of Small-Scale Industries by increasing their investment limits.
10. New Industrial Policy, 1991.

Q3) Explain the Post-industrial policy, 1991.

A3) New Industrial Policy, 1991

In the backdrop of severe Balance of Payment Crisis of 1991, the Government in continuation of the measured announced during the 1980s announced a New Industrial Policy on July 24, 1991.

The new industrial policy was a major structural break for the Indian economy. The policy has deregulated the Industrial sector in a substantial manner. The major aims of the new policy were; to carry forward the gains already made in the industrial sector; Correct the existing market distortion from the industrial sector; to provide gainful and productive employment; to attain global competitiveness.

The Government announced series of Initiative in respect of the following areas:

Abolishment of Industrial Licensing

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones (NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).
4. No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).
5. The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.
8. The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.
10. Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;
• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;
• Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;
• Strengthening IPR infrastructure to nurture innovation; and
• Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

Q4) In which areas, the Government announced series of Initiative?

A4) The Government announced series of Initiative in respect of the following areas:

Abolishment of Industrial Licensing

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Government Policy support under NMP

1.The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.

2.The NMP envisages simplification of business regulations significantly.

3.The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.

4.Skill Development of the youth is the most important part of the NMP.

5.Setting up of National Investment and Manufacturing Zones (NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.

6.A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1.The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.

2.India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.

3.If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).

4.No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).

5.The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.

6.The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.

7.People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.

8.The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.

9.Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.

10.Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;
• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;
• Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;
• Strengthening IPR infrastructure to nurture innovation; and
• Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

Q5) What measures the Government has taken for the success of Make in India ‘campaign?

A5) The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

Q6) Explain the role of large-scale industries.

A6) The role of large-scale industries is-

Large scale industries use the latest machinery and technology, which helps in improving the production. Due to large scale production, the companies benefit as well as it is beneficial for the economy as a whole.

2. Large scale industries help in the development of industries in the economy, which is essential for industrialisation.

3. Large scale industries require skilled workers and therefore, the development of large-scale industries help in the development of a skilled workforce in the country.

4. Large scale industries require large amounts of raw materials, which opens up employment opportunities in the related sectors.

5. As large-scale industries are involved in large scale production; it provides an opportunity to reduce the cost of goods and services as these are produced in bulk.

6. Large scale industries help in the development of small-scale industries, as the requirement of items cannot be met only by a single industry.

Hence, small scale industries are required to produce the ancillary products and therefore small-scale industries thrive on the growth of large-scale industries.

7. Large scale industries can incur expenses required for research and development as they have a high influx of capital. Such research will help in generating more profits in future.

8. Large scale industries also help improve the quality of life of its employees by providing them with adequate remuneration and other benefits.

Q7) Explain the role of small-scale industries.

A7) Small scale industries play an important role for the development of Indian economy in many ways. About 60 to 70 percent of the total innovations in India comes from the SSIs. Many of the big businesses today were all started small and then nurtured into big businesses. The roles of SSIs in economic development of the country are briefly explained below.

A. Small Scale Industries Provides Employment

1. SSI uses labour intensive techniques. Hence, it provides employment opportunities to a large number of people. Thus, it reduces the unemployment problem to a great extent.

2. SSI provides employment to artisans, technically qualified persons and professionals. It also provides employment opportunities to people engaged in traditional arts in India.

3. SSI accounts for employment of people in rural sector and unorganized sector

B. It provides employment to skilled and unskilled people in India.

1. The employment capital ratio is high for the SSI.

C. SSI Facilitates Women Growth

1. It provides employment opportunities to women in India.

2. It promotes entrepreneurial skills among women as special incentives are given to women entrepreneurs.

D. SSI Brings Balanced Regional Development

1.SSI promotes decentralized development of industries as most of the small-scale industries are set up in backward and rural areas.

2. It removes regional disparities by industrializing rural and backward areas and brings balanced regional development.

3. It promotes urban and rural growth in India.

4. It helps to reduce the problems of congestion, slums, sanitation and pollution in cities by providing employment and income to people living in rural areas. It plays an important role by initiating the government to build the infrastructural facilities in rural areas.

5. It helps in improving the standard of living of people residing in suburban and rural areas in India.

6. The entrepreneurial talent is tapped in different regions and the income is also distributed instead of being concentrated in the hands of a few individuals or business families.

E.SSI Helps in Mobilization of Local Resources

1. It helps to mobilize and utilize local resources like small savings, entrepreneurial talent, etc., of the entrepreneurs, which might otherwise remain idle and unutilized. Thus, it helps in effective utilization of resources.

2.It paves way for promoting traditional family skills and handicrafts. There is a great demand for handicraft goods in foreign countries.

3. It helps to improve the growth of local entrepreneurs and self-employed professionals in small towns and villages in India.

F. SSI Paves for Optimisation of Capital

1. SSI requires less capital per unit of output. It provides quick return on investment due to shorter gestation period. The payback period is quite short in small scale industries.

2. SSI functions as a stabilizing force by providing high output capital ratio as well as high employment capital ratio.

3. It encourages the people living in rural areas and small towns to mobilize savings and channelize them into industrial activities.

G.SSI Promotes Exports

1. SSI does not require sophisticated machinery. Hence, it is not necessary to import the machines from abroad. On the other hand, there is a great demand for goods produced by small scale sector. Thus, it reduces the pressure on the country’s balance of payments.

2. SSI earns valuable foreign exchange through exports from India.

H. SSI Complements Large Scale Industries

1. SSI plays a complementary role to large scale sector and supports the large-scale industries.

2. SSI provides parts, components, accessories to large scale industries and meets the requirements of large-scale industries through setting up units near the large-scale units.

3. It serves as ancillaries to large Scale units.

I. SSI Meets Consumer Demands

1. SSI produces wide range of products required by consumers in India.

2.SSI meets the demand of the consumers without creating a shortage for goods. Hence, it serves as an anti-inflationary force by providing goods of daily use.

J. SSI Ensures Social Advantage

1. SSI helps in the development of the society by reducing concentration of income and wealth in few hands.

2. SSI provides employment to people and pave for independent living.

3. SSI helps the people living in rural and backward sector to participate in the process of development.

4. It encourages democracy and self-governance.

K. Develops Entrepreneurship

1. It helps to develop a class of entrepreneurs in the society. It helps the job seekers to turn out as job givers.

2. It promotes self-employment and spirit of self-reliance in the society.

3. Development of small-scale industries helps to increase the per capita income of India in various ways.

4. It facilitates development of backward areas and weaker sections of the society.

5. Small Scale Industries are adept in distributing national income in more efficient and equitable manner among the various participants of the society.

Q8) What is Foreign Institutional Investors?

A8) Foreign Institutional Investors (FII) are an investment fund or a gathering of investors. Such a fund is registered in a foreign country, i.e., not in the country it is investing in. Such institutional investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, investment banks etc.

We use this term FII for foreign players investing funds in the financial market of India. They play a big role in the development of our economy. The amount of funds they invest is very considerable.

So, when such FII’s buy shares and securities the market is bullish and trends upwards. The opposite may also happen when they withdraw their funds from the markets. So, they have considerable sway over the market.

Q9) What are the advantages and disadvantages of FII?

A9) Advantages of FII’s

• FII’s will enhance the flow of capital into the country
• These investors generally prefer equity over debt. So, this will also help maintain and even improve the capital structures of the companies they are investing in.
• They have a positive effect on the competition in the financial markets
• FII help with the financial innovation of capital markets
• These institutions are professionally managed by asset managers and analysts. They generally improve the capital markets of the country

Disadvantages of FII’s

• The demand for the local currency (rupee) increases. This can cause severe inflation in the economy.
• These FII’s drive the fortune of big companies in which they invest. But their buying and selling of securities have a huge impact on the stock market. The smaller companies are taken along for the ride.
• Sometimes these FII’s seek only short-term returns. When they pull their investments banks can face a shortage of funds.

Q10) What is Foreign Direct Investment?

A10) Foreign direct investment (FDI) is when a company takes controlling ownership in a business entity in another country. With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills and technology.

Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. 

Q11) Explain the role of foreign trade in Indian economy.

A11) The buying and selling of goods and services across national borders is known as international trade. International trade is the backbone of our modem, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

However, international trade among different countries is not a new a concept. History suggests that in the past there were several instances of international trade. There is plenty of evidence of continuous trade and exchange of ideas between India and China, through the centuries without either political cooperation or conflict. Traders used to transport silk, and spices through the Silk Route in the 14th and 15th century. In the 1700s fast sailing 1 ships called Clippers, with special crew, used to transport tea from China, and spices from Dutch East Indies to different European countries.

The economic, political, and social significance of international trade has been theorized in the Industrial Age. The rise in the international trade is essential for the growth of globalization. The restrictions to international trade would limit the nations to the services and goods produced within its territories, and they would lose out on the valuable revenue from the global trade.

International trading provides countries and consumers the chance to be exposed to those services and goods that are not available in their own country. International trading lets the developed countries use their resources effectively like technology, capital and labour. As many of the countries are gifted with natural resources and different assets (labour, technology, land and capital), they can produce many products more efficiently and sell at cheaper prices than other countries. A country can obtain an item from another country if it cannot effectively produce it within the national boundaries.

International trade has flourished over the years due to many benefits it has offered to different countries across the globe. With the help of modem production techniques, highly advanced transportation systems, transnational corporations, outsourcing of manufacturing and services, and rapid industrialization, the international trade system is growing and spreading very fast.

Q12) Explain the importance of foreign trade in Indian economy.

A12) The importance of foreign trade in India are-

(i)To Meet the Shortage of Essential Consumer Goods: – Indian economy can meet the shortage of essential consumer goods like food grains, edible oils, sugar etc. through imports. For example, in 1994 due to less production of sugarcane in the country, there was shortage of sugar. To meet this shortage of sugar, it was imported in huge quantity from foreign countries.

(ii) To meet the Need of Capital Goods: – India needs many capital goods like machinery, equipment’s etc., for its industrial development. Out of these some capital goods cannot be produced at all in India. In this way, the need of capital goods like machinery can be met through imports.

(iii) To obtain Important Inputs: – For industrial and agricultural development of India, many important inputs like petrol, chemical fertilizers, minerals etc. are needed. These cannot be produced in sufficient quantity in the country. Thus, their shortage can be met through imports.       

The importance of exports in Indian economy is as follows: -

(i) Export of Surplus Production: – In India the production of some products like tea, jute etc. is more than its domestic needs. The advantageous and large scale production of these products is possible

Due to the exports of these to the foreign countries.

(ii) To obtain Foreign Exchange: – India requires foreign exchange for its imports. This foreign exchange can be obtained by exporting its products.

Q13) What is Balance of trade situation?

A13) Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for a given period. Balance of trade is the largest component of a country's balance of payments (BOP). Sometimes the balance of trade between a country's goods and the balance of trade between its services are distinguished as two separate figures.

The balance of trade is also referred to as the trade balance, the international trade balance, commercial balance, or the net exports.

The formula for calculating the BOT can be simplified as the total value of exports minus the total value of its imports. Economists use the BOT to measure the relative strength of a country's economy. A country that imports more goods and services than it exports in terms of value has a trade deficit or a negative trade balance. Conversely, a country that exports more goods and services than it imports has a trade surplus or a positive trade balance.

There are countries where it is almost certain that a trade deficit will occur. For example, the United States, where actually, a trade deficit is not a recent occurrence. In fact, the country has had a persistent trade deficit since the 1970s. Throughout most of the 19th century, the country also had a trade deficit (between 1800 and 1870, the United States ran a trade deficit for all but three years). Conversely, China's trade surplus has increased even as the pandemic has reduced global trade. In July 2020, China generated a $110 billion surplus in manufactured goods off $230 billion in exports—so even counting imported parts, China is getting close to exporting $2 worth of manufactured goods for every manufactured good it imports.

A trade surplus or deficit is not always a viable indicator of an economy's health, and it must be considered in the context of the business cycle and other economic indicators. For example, in a recession, countries prefer to export more to create jobs and demand in the economy. In times of economic expansion, countries prefer to import more to promote price competition, which limits inflation.

In 2019, Germany had the largest trade surplus by current account balance. Japan was second and China was third, in terms of the largest trade surplus. Conversely, the United States had the largest trade deficit, even with the ongoing trade war with China, with the United Kingdom and Brazil coming in second and third.

Q14) How do you calculate Balance of Trade?

A14) For example, the United States imported $239 billion in goods and services in August 2020 but exported only $171.9 billion in goods and services to other countries. So, in August, the United States had a trade balance of -$67.1 billion, or a $67.1 billion trade deficit.

A country with a large trade deficit borrows money to pay for its goods and services, while a country with a large trade surplus lends money to deficit countries. In some cases, the trade balance may correlate to a country's political and economic stability because it reflects the amount of foreign investment in that country.

Debit items include imports, foreign aid, domestic spending abroad, and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. By subtracting the credit items from the debit items, economists arrive at a trade deficit or trade surplus for a given country over the period of a month, a quarter, or a year.

Q15) What is Balance of payment?

A15) The balance of payment is the statement that files all the transactions between the entities, government anatomies, or individuals of one country to another for a given period of time. All the transaction details are mentioned in the statement, giving the authority a clear vision of the flow of funds.

After all, if the items are included in the statement, then the inflow and the outflow of the fund should match. For a country, the balance of payment specifies whether the country has an excess or shortage of funds. It gives an indication of whether the country’s export is more than its import or vice versa.

Q16) What are the types of balance of payment?

A16) The balance of payment is divided into three types:

Current account: This account scans all the incoming and outgoing of goods and services between countries. All the payments made for raw materials and constructed goods are covered under this account. Few other deliveries that are included in this category are from tourism, engineering, stocks, business services, transportation, and royalties from licenses and copyrights. All these combine together to make a BOP of a country.

Capital account: Capital transactions like purchase and sale of assets (non-financial) like lands and properties are monitored under this account. This account also records the flow of taxes, acquisition, and sale of fixed assets by immigrants moving into the different country. The shortage or excess in the current account is governed by the finance from the capital account and vice versa.

Finance account: The funds that flow to and from the other countries through investments like real estate, foreign direct investments, business enterprises, etc., is recorded in this account. This account calculates the foreign proprietor of domestic assets and domestic proprietor of foreign assets, and analyses if it is acquiring or selling more assets like stocks, gold, equity, etc.

Q17) Explain the importance of Balance of payments.

A17) A balance of payment is an essential document or transaction in the finance department as it gives the status of a country and its economy. The importance of the balance of payment can be calculated from the following points:

1.  It examines the transaction of all the exports and imports of goods and services for a given period.

2. It helps the government to analyse the potential of a particular industry export growth and formulate policy to support that growth.

3. It gives the government a broad perspective on a different range of import and export tariffs. The government then takes measures to increase and decrease the tax to discourage import and encourage export, respectively, and be self-sufficient.

4. If the economy urges support in the mode of import, the government plans according to the BOP, and divert the cash flow and technology to the unfavourable sector of the economy, and seek future growth.

5. The balance of payment also indicates the government to detect the state of the economy, and plan expansion. Monetary and fiscal policy are established on the basis of balance of payment status of the country.

Balance of Payment (BOP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.

1.It indicates whether the country has a surplus or a deficit on trade.

2.When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.

Q18) Explain the purposes of calculation of BOP and components of BOP.

A18) The purposes of calculation of BOP are-

1.Reveals the financial and economic status of a country.

2.Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.

3.Helps the Government to decide on fiscal and trade policies.

4.Provides important information to analyse and understand the economic dealings of a country with other countries.

Components of BOP:

1.For preparing BOP accounts, economic transactions between a country and rest of the world are grouped under – Current account, Capital account and Errors and Omissions. It also shows changes in Foreign Exchange Reserves.

2.Current Account: It shows export and import of visible (merchandise or goods) and invisibles (non-merchandise). Invisibles include services, transfers and income.

3.Capital Account: It shows a capital expenditure and income for a country. It gives a summary of the net flow of both private and public investment into an economy.

Q19) Explain Monetary policy.

A19) Monetary policy is a central bank's actions and communications that manage the money supply. Central banks use monetary policy to prevent inflation, reduce unemployment, and promote moderate long-term interest rates.

Monetary policy increases liquidity to create economic growth. It reduces liquidity to prevent inflation. Central banks use interest rates, bank reserve requirements, and the number of government bonds that banks must hold. All these tools affect how much banks can lend. The volume of loans affects the money supply.

The money supply includes forms of credit, cash, checks, and money market mutual funds. The most important of these forms of money is credit. Credit includes loans, bonds, and mortgages. 

In a recession, central banks might combat high unemployment by giving banks more money. Banks in turn lower interest rates, which allows businesses to hire more employees. This is an example of expansionary monetary policy

How Does Monetary Policy Work?

Central banks have three monetary policy objectives. The most important is to manage inflation. The secondary objective is to reduce unemployment, but only after controlling inflation. The third objective is to promote moderate long-term interest rates.

The U.S. Federal Reserve, like many other central banks, has specific targets for these objectives. It wants the core inflation rate to be around 2%. Beyond that, it prefers a natural rate of unemployment of between 3.5% and 4.5%.

Types of Monetary Policy

Central banks use contractionary monetary policy to reduce inflation. They reduce the money supply by restricting the volume of money banks can lend. The banks charge a higher interest rate, making loans more expensive. Fewer businesses and individuals borrow, slowing growth.

Central banks use expansionary monetary policy to lower unemployment and avoid recession. They increase liquidity by giving banks more money to lend. Banks lower interest rates, making loans cheaper. Businesses borrow more to buy equipment, hire employees, and expand their operations. Individuals borrow more to buy more homes, cars, and appliances. That increases demand and spurs economic growth.

Monetary Policy Tools

All central banks have three tools of monetary policy in common.

Open Market Operations

Central banks all use open market operations (OMO). With OMO, the central bank can create new money by buying government securities, such as Treasury bonds, and issuing new money. The central bank can likewise contract the money supply by selling those securities from its balance sheet and removing the money received from circulation.

The Reserve Requirement

The reserve requirement is when the central banks tell their members how much money they must keep on reserve each night. Not everyone needs all their money each day, so it is safe for the banks to lend most of it out. That way, they have enough cash on hand to meet most demands for redemption. Previously, this reserve requirement has been 10%. However, effective March 26, 2020, the Fed has reduced the reserve requirement to zero.

When a central bank wants to restrict liquidity, it raises the reserve requirement. That gives banks less money to lend. When it wants to expand liquidity, it lowers the requirement. That gives members banks more money to lend. Central banks rarely change the reserve requirement because it requires a lot of paperwork for the members.

The Discount Rate

The discount rate is how much a central bank charges members to borrow funds from its discount window. It raises the discount rate to discourage banks from borrowing. That action reduces liquidity and slows the economy. By lowering the discount rate, it encourages borrowing. That increases liquidity and boosts growth.

Objectives of Monetary Policy

The primary objectives of monetary policies are the management of inflation or unemployment, and maintenance of currency exchange rates.

1. Inflation

Monetary policies can target inflation levels. A low level of inflation is considered to be healthy for the economy. If inflation is high, a contractionary policy can address this issue.

2. Unemployment

Monetary policies can influence the level of unemployment in the economy. For example, an expansionary monetary policy generally decreases unemployment because the higher money supply stimulates business activities that lead to the expansion of the job market.

3. Currency exchange rates

Using its fiscal authority, a central bank can regulate the exchange rates between domestic and foreign currencies. For example, the central bank may increase the money supply by issuing more currency. In such a case, the domestic currency becomes cheaper relative to its foreign counterparts.

Q20) Explain Fiscal policy.

A20) Fiscal policy" refers to decisions the U.S. Government makes about spending and collecting taxes and how these policy changes influence the economy. When the government makes financial decisions, it has to consider the effect those decisions will have on businesses, consumers, foreign markets, and other interested entities.

"Fiscal policy" is the term used to describe the actions a government takes to influence an economy by purchasing products and services from businesses and collecting taxes.

• Alternate definition: Fiscal policy also refers to the economic intent behind the decisions for how the money is used.

For example, governments can lower taxes and raise spending to boost the economy if needed; typically, they spend on infrastructure projects that create jobs and income and social programs.

Or, if the economy is doing well, a government can reduce spending and increase taxes. Businesses create enough jobs at these times so officials can reduce the amount spent on goods and services from the private sector.

How Fiscal Policy Works?

Economies follow an oscillating pattern where they expand, peak, contract, and trough. This pattern is often called the business or economic cycle. When an economy is experiencing growth—expanding—employment rates and consumer income are generally higher. Business profits are high, investors are happy, and the population spends more on luxury and non-necessity items.

When the economy contracts, investors begin to turn to capital preservation strategies, businesses start cutting expenses, and unemployment tends to rise. Consumers generally have less income and begin to save more than they spend

The objectives of fiscal and monetary policy are to control the expansion and contraction of the economy. During a recession, the government works to keep money in the accounts of businesses and consumers, and The Fed works to increase lending and spending. In a boom, they do the opposite.

The government has two tools it uses when implementing fiscal policy. The first tool is collecting taxes on business and personal income, capital gains, property, and sales. Taxes provide the revenue that funds the government.

The second tool is government spending—funds are directed into subsidies, welfare programs, public works, infrastructure projects, and government jobs. Government spending puts more money back into the economy, which increases demand for products and services

Types of Fiscal Policy

Legislators can take two types of measures to control economic swings—discretionary fiscal policies and automatic stabilizers. Automatic stabilizers are tools built into federal budgets that adjust taxes and spending. They create automated fiscal actions if specific economic conditions are met. Discretionary fiscal policies are the measures most commonly referred to when fiscal policy is talked about. The government has two types of discretionary fiscal policy options—expansionary and contractionary.

Expansionary Fiscal Policy 

Expansionary fiscal policy involves the measures taken by the government to put more money back into the economy. This generally creates demand for products and services. It creates jobs and increases profits—stimulating economic growth.

Congress uses it to slow the contraction phase of the business cycle—usually called a "recession." The government either spends more, cuts taxes, or does both. The idea is to put more money into consumers' hands to induce them to spend more. The increased demand forces businesses to add jobs to increase supply, output, and consumer spending.

Contractionary Fiscal Policy

The second type of fiscal policy is contractionary, used during economic booms. Since expansions can also be dangerous for an economy, the government tries to slow them down lest they become too intense.

Too much growth can fuel investor exuberance and overconfidence (as well as greed), creating market bubbles or other unforeseen economic dangers. Contractionary fiscal policies are enacted to try to slow growth to a more manageable level and control inflation.

The government begins collecting more taxes and reduces spending to keep investment prices down and to raise the unemployment rate. The economy needs a certain number of unemployed workers for businesses to hire—if companies can't find workers, production growth slows down

Recent Fiscal Policy

The coronavirus impacted the U.S. And global economy, causing businesses to shut down and people to lose jobs. The U.S. Economy drifted into a contractionary state.

To stabilize financial markets and provide backstop liquidity, the Federal Reserve implemented a massive monetary easing program. Simultaneously, to stimulate the economy when restrictions kept most people at home, Congress took expansionary measures by passing the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide emergency funding for small businesses and workers hit hard by the virus.

Economic impact payments were sent out to households to help with expenses; businesses received help via the Pay check Protection Program (PPP) to help them cover overhead and keep employees working.

In March 2021, the American Rescue Plan Act sent another round of impact payments to Americans and extended unemployment insurance. It also provided funding for food, health care, education improvements, and small businesses as the pandemic eased its grip.

In the wake of the pandemic the economy demonstrated improvement in many areas, such as job growth, and worry in others, such as a growing budget deficit and record-breaking inflation rates. In early 2022 the FOMC took small measures to combat inflation rates, such as selling assets, and raising interest rates. In the most recent FOMC meeting, on March 15-16, 2022, the Fed announced it would be raising interest rates for the first time since 2018, in order to combat rising inflation. The target range was increased by 0.25% (25 basis points), from 0% to 0.25% to 0.25% to 0.50%.