1. Trade Policy Reforms
-
Upload
ritwick-banerjee -
Category
Documents
-
view
215 -
download
0
Transcript of 1. Trade Policy Reforms
-
7/31/2019 1. Trade Policy Reforms
1/44
Trade policy reforms over since 1991
have aimed at creating an environment for
achieving rapid increase in exports, raising
Indias share in world exports and making
economic growth.
-
7/31/2019 1. Trade Policy Reforms
2/44
The focus of these reforms have been on
liberalization, openness, transparency and
globalization with a basic thrust on outwardorientation focusing on export promotion
restrictions and improving competitiveness
of Indian industry to meet global market
requirements.
-
7/31/2019 1. Trade Policy Reforms
3/44
Reforms in industrial and trade policy were a
central focus of much of Indias reform effort
in the early stages.
Industrial policy prior to the reforms was
characterized by multiple controls over
private investment which limited the areas inwhich private investors were allowed to
operate, and often also determined the scale
of operations, the location of new investment,and even the technology to be used
-
7/31/2019 1. Trade Policy Reforms
4/44
Trade policy reform has made progress, though
the pace has been slower than in industrial
liberalization. Before the reforms, trade policy
was characterized by high tariffs and pervasive
.
consumer goods were completely banned.
-
7/31/2019 1. Trade Policy Reforms
5/44
For capital goods, raw materials and
intermediates, certain lists of goods were freely
importable, but for most items where domestic
substitutes were being produced, imports wereonly possible with import licenses.
The criteria for issue of licenses werenontransparent, delays were endemic and
corruption unavoidable. The economic reforms
sought to phase out import licensing and alsoto reduce import duties.
-
7/31/2019 1. Trade Policy Reforms
6/44
Import licensing
was abolished relatively early for capital goods and
intermediates which became freely importable in
1993, simultaneously with the switch to a flexibleexchange rate regime. Import licensing had been
traditionally defended on the grounds that it was
necessary to manage the balance of payments, butthe shift to a flexible exchange rate enabled the
government to argue that any balance of payments
impact would be effectively dealt with through
exchange rate flexibility.
-
7/31/2019 1. Trade Policy Reforms
7/44
Removing quantitative restrictions on imports
of capital goods and intermediates wasrelatively easy, because the number of
domestic producers was small and Indian
industry welcomed the move as making itmore competitive.
-
7/31/2019 1. Trade Policy Reforms
8/44
Tariff protection
Progress in reducing tariff protection, the
second element in the trade strategy, has alsotaken place.
The peak duty rate was reduced and a numberof duty rates at the higher end of the existing
structure were lowered, while many low end
duties were raised to 5 percent.
-
7/31/2019 1. Trade Policy Reforms
9/44
Although Indias tariff levels aresignificantly lower than in 1991, they
remain on the higher side because most
other developing countries have also
reduced tariffs in this period.
The weighted average import duty in China
and southeast Asia is currently about half
the Indian level.
-
7/31/2019 1. Trade Policy Reforms
10/44
Foreign Direct Investment
Liberalizing foreign direct investment was another
important part of Indias reforms, driven by the
belief that this would increase the total volume ofinvestment in the economy, improve production
technology, and increase access to world markets.
Now100 percent foreign ownership in a large
number of industries and majority ownership in all
except banks, insurance companies,
telecommunications and airlines is allowed.
-
7/31/2019 1. Trade Policy Reforms
11/44
Procedures for obtaining permission were
greatly simplified by listing industries that areeligible for automatic approval up to specified
levels of foreign equity (100 percent, 74
percent and 51 percent).
Potential forei n investors investin within
these limits only need to register with the RBI.For investments in other industries, or for a
higher share of equity than is automatically
permitted in listed industries, applications areconsidered by a Foreign Investment
Promotion Board that has established a track
record of speedy decisions.
-
7/31/2019 1. Trade Policy Reforms
12/44
-
7/31/2019 1. Trade Policy Reforms
13/44
FERA TO FEMA
-
7/31/2019 1. Trade Policy Reforms
14/44
Why was it necessary to replace FERA by
FEMA? How different is FEMA from FERA?
Is it merely change of one word, from"Regulation" to "Management"? How
does the chan e from FERA to FEMA
affect common citizens such as you, who
are Indian residents not engaged in
imports or exports?
-
7/31/2019 1. Trade Policy Reforms
15/44
To understand the difference, one needs to
understand the underlying principles of
FERA. FERA was introduced at a time whenforeign exchange (forex) reserves of the
country were low, forex being a scarce
commodity.
-
7/31/2019 1. Trade Policy Reforms
16/44
FERA therefore proceeded on thepresumption that all foreign exchange
earned by Indian residents rightfully
belonged to the Government of India and
had to be collected and surrendered to the
v n n x u y.regulated not only transactions in forex, but
also all financial transactions with non-
residents. FERA primarily prohibited alltransactions, except to the extent permitted
by general or specific permission by RBI.
-
7/31/2019 1. Trade Policy Reforms
17/44
Violation of FERA was a criminal offence. If youhad ever visited a relative abroad, or had non-
resident relatives visiting you, the chances are
high that you had also violated FERA. In suchcases, it is highly likely that your relatives may
have iven ou or our visitin famil members
some small gift in forex, which you spent onbuying some small article which you wanted to
bring back. Or you may have spent some money
on hospitality towards your non-resident relatives
visiting you. Strictly, speaking, till the 1990's,
these were FERA violations.
-
7/31/2019 1. Trade Policy Reforms
18/44
Fortunately, with the winds ofliberalization blowing in the early 1990's,
the Government relaxed many of the
rigours of FERA by issuing notifications.Forex reserves swelled, the rupee was
made convertible on current account.
-
7/31/2019 1. Trade Policy Reforms
19/44
In this liberal atmosphere, the governmentrealized that possession of forex could no longer
be regarded as a crime, but was an economic
offence, for which the more appropriate
punishment was a penaly. Thus, the need of
.
FERA and FEMA therefore lies in the fact that
offences under FEMA are not regarded as
criminal offences and only invite penalties, notprosecution and imprisonment.
-
7/31/2019 1. Trade Policy Reforms
20/44
FEMA now codifies in the legislation and rulesitself various transactions, which had been
permitted by notification under FERA. Under
FEMA, all current account transactions in forex
(such as expenses, which are not for capital
Central Government notifies. However, so far as
capital account transactions are concerned, all
capital account transactions in forex areprohibited, except to the extent as may be
notified by RBI.
-
7/31/2019 1. Trade Policy Reforms
21/44
FEMA now codifies in the legislation and rules
itself various transactions, which had been
permitted by notification under FERA. Under
FEMA, all current account transactions in forex(such as expenses, which are not for capital
purposes) are permitted, except to the extent
that the Central Government notifies. However,so far as capital account transactions are
concerned, all capital account transactions in
forex are prohibited, except to the extent as maybe notified by RBI.
-
7/31/2019 1. Trade Policy Reforms
22/44
CAPITAL AND CURRENT ACCOUNT CONVERTIBILITY (CAC)
-
7/31/2019 1. Trade Policy Reforms
23/44
Capital account convertibility is a feature of a
nation's financial regime that centers on the
ability to conduct transactions of local financial
assets into foreign financial assets freely and atmarket determined exchange rates.
It is sometimes referred to as CAC.
-
7/31/2019 1. Trade Policy Reforms
24/44
CAC was first coined as a theory by the RBI in
1997 by the Tarapore Committee, in an effort tofind fiscal and economic policies that would
enable developing Third World countries
transition to globalized market economies.However, it had been practiced, although
without formal thought or organization of policy
or restriction, since the very early 90's. ArticleVIII of the IMFs Articles of Agreement is agreed
by most economists to have been the basis for
CAC, although it notably failed to anticipateproblems with the concept in regard to outflows
of currency.
-
7/31/2019 1. Trade Policy Reforms
25/44
WHAT IS CURRENT AND CAPITAL ACCOUNT?
-
7/31/2019 1. Trade Policy Reforms
26/44
In an open economy, we buy from abroad (Import)and we sell to abroad. (export)
Similarly Indians invest abroad, foreigners investin India.
So lot of mone incomin and out oin .
Current and Capital accounts are nothing butmethod of classifying that incoming and outgoing
money.
-
7/31/2019 1. Trade Policy Reforms
27/44
As you know, Balance of Payment (bop)= Import Export.
This BoP is calculated under two heads:
Current Account and Capital Account.
-
7/31/2019 1. Trade Policy Reforms
28/44
-
7/31/2019 1. Trade Policy Reforms
29/44
CURRENT AND CAPITAL ACCOUNT
CONVERTIBILITY
-
7/31/2019 1. Trade Policy Reforms
30/44
Convertibility = converting one currency into
another. Like rupee to dollar, yen topoundanything.
Since money is incoming and outgoing. People
will need to convert the money into different
currencies based on their requirements.
e c ass e e ncom ng an ou go ng
money into Current and Capital account.
Similarly we classify the procedure involved inconverting that money. In brief
-
7/31/2019 1. Trade Policy Reforms
31/44
-
7/31/2019 1. Trade Policy Reforms
32/44
-
7/31/2019 1. Trade Policy Reforms
33/44
which is reversible & why?
-
7/31/2019 1. Trade Policy Reforms
34/44
Current account =Money sent and received
during import and export
You sold something (exported) and received
,
(until you spend it on something else!) So
Current account is permanent and
irreversible.
-
7/31/2019 1. Trade Policy Reforms
35/44
Capital account = Money sent and receivedduring investment and borrowing.
Suppose Japanese guy buys factory in India(capital account), sells it after 5 years and takes
c e ey.
So Capital account inflow is NOT PERMANENT
and hence reversible (because he took back themoney he invested in India).
-
7/31/2019 1. Trade Policy Reforms
36/44
PRO AND CONS
-
7/31/2019 1. Trade Policy Reforms
37/44
ARGUMENT IN FAVOR OF FULL CAPITALACCOUNT CONVERTIBILITY
It facilitates foreign investments and borrowing.So competition is increased = more factories =
= good for economy.
-
7/31/2019 1. Trade Policy Reforms
38/44
ARGUMENTS AGAINST OF FULL CAPITAL
ACCOUNT CONVERTIBILITY
Local producers have to compete withInternational giants. So they lose market and
customers
(
-
7/31/2019 1. Trade Policy Reforms
39/44
Counter-argument#1: Business is about
survival of the fittest, so perform or perish, noneed to get sentimental about Swadeshi.
Why should consumer pay for not-so-good
yet expensive domestic quality, if a foreigner
is offering better stuff at cheaper price?
Counter argument#2: If a few Indians lose
the customers, many more Indians get jobsin those new factories started by foreigners.
-
7/31/2019 1. Trade Policy Reforms
40/44
What if foreigners buy lot of factories in
India and suddenly they find that investing
money in France is better than in India.
So they immediately sell all those factories,
et their Ru ees converted into Euro and run
away! Thatll lead to huge job loss andcollapse in Indian economy
-
7/31/2019 1. Trade Policy Reforms
41/44
(Counter argument#1: Its a two way street: if
Foreigners can do that, Indians can also do it while
investing abroad.
(Counter argument#2: Sudden outflow of money
happens only when governing institutions have weak
foundations and policies. [e.g. when Govt. is busyfirefighting Sugar-Onion prices without any long-term
vision, it makes cronies get involved in speculative
business.If every country has sound economicpolicies, then itll be attractive to invest in every
country.
-
7/31/2019 1. Trade Policy Reforms
42/44
Then there will be no sudden outflow or inflow
of money in any country and hence no-one will
be misusing the full capital account
convertibility.
-
7/31/2019 1. Trade Policy Reforms
43/44
On which account does the
eye?
-
7/31/2019 1. Trade Policy Reforms
44/44
There is no this or that answer.
Government needs to keep an eye on
both accounts to make changes intrade policies, tax rates etc.
But since Capital account inflows come
with a risk (of sudden outflow
collapsing the economy), soGovernment should keep a closer eye
on Capital account.