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MCOM 3rd SEMESTER
TUTOR MARKED ASSIGNMENT
COURSE CODE : MCO-15
COURSE TITLE : India’s Foreign Trade and Investment
ASSIGNMENT CODE : MCO-15/TMA/2026
1. How does foreign trade serve as an engine of growth? Discuss the importance of international trade. Also describe the legal framework of foreign trade.
1. Introduction
Foreign trade refers to the exchange of goods and services across national boundaries. It includes exports (selling goods abroad) and imports (buying goods from other countries). In the modern globalised economy, foreign trade plays a crucial role in economic development and national prosperity.
Foreign trade is often described as an “engine of growth” because it stimulates economic expansion, enhances productivity, and promotes overall development.
2. Foreign Trade as an Engine of Growth
Foreign trade contributes to economic growth in the following ways:
(1) Expansion of Markets
International trade allows firms to access larger global markets beyond domestic boundaries. This leads to increased production and higher output levels.
Example:
Indian IT companies earn major revenue from overseas clients.
(2) Efficient Allocation of Resources
Countries specialize in producing goods where they have comparative advantage. This improves resource utilization and increases productivity.
(3) Economies of Scale
Access to international markets enables large-scale production, reducing per-unit costs.
(4) Technological Advancement
Trade facilitates transfer of technology, innovation, and managerial expertise.
Example:
Foreign collaborations bring advanced manufacturing techniques.
(5) Employment Generation
Export-oriented industries create employment opportunities.
(6) Foreign Exchange Earnings
Exports generate foreign currency required to pay for imports and reduce trade deficits.
(7) Improvement in Living Standards
Consumers gain access to diverse goods at competitive prices.
3. Importance of International Trade
International trade is important because:
- Promotes economic development.
- Encourages competition and efficiency.
- Increases national income.
- Strengthens international relations.
- Reduces production costs through specialization.
- Helps stabilize domestic prices.
In developing countries, foreign trade is essential for capital goods imports and industrial growth.
4. Legal Framework of Foreign Trade
Foreign trade is governed by national and international laws to regulate trade practices.
(1) Foreign Trade (Development and Regulation) Act, 1992 (India)
Provides authority to regulate imports and exports. The Director General of Foreign Trade (DGFT) implements policies.
(2) Export-Import (EXIM) Policy
Government policy framework guiding export promotion and import regulation.
(3) Customs Act, 1962
Regulates levy of customs duties and controls illegal trade.
(4) Foreign Exchange Management Act (FEMA), 1999
Regulates foreign exchange transactions.
(5) International Trade Agreements
Countries follow agreements under World Trade Organization, which promotes fair trade practices and dispute settlement.
5. Conclusion
Foreign trade serves as an engine of growth by expanding markets, generating employment, improving productivity, and earning foreign exchange. It plays a vital role in economic development and global integration. A well-defined legal framework ensures orderly conduct of trade and protects national interests while promoting international cooperation.
2. a) Analyse the challenges being faced by India’s foreign trade. What remedies will you suggest to overcome them?
b) Explain changes in the composition of India’s exports. Also indicate areas of weaknesses in export trade.
(a) Analyse the Challenges Faced by India’s Foreign Trade and Suggest Remedies
1. Introduction
India’s foreign trade has expanded significantly over the past decades, especially after economic liberalisation. However, despite growth in exports and imports, India faces several structural and policy-related challenges that affect its trade performance.
2. Major Challenges in India’s Foreign Trade
(1) Trade Deficit
India imports more than it exports, particularly petroleum products, gold, and electronic goods. This creates a persistent trade deficit.
(2) Heavy Dependence on Imports
Dependence on crude oil and high-tech components increases vulnerability to global price fluctuations.
(3) Lack of Diversification
Exports are concentrated in limited markets and products. Overdependence on certain regions exposes India to external shocks.
(4) Infrastructure Constraints
Poor logistics, high transportation costs, and port inefficiencies reduce export competitiveness.
(5) Global Competition
Countries like China and Vietnam offer lower production costs, increasing competitive pressure.
(6) Exchange Rate Fluctuations
Volatility in the rupee affects export pricing and profitability.
(7) Non-Tariff Barriers
Strict quality standards and trade restrictions imposed by developed countries limit export growth.
3. Remedies to Overcome Challenges
(1) Export Diversification
Promote new products and explore untapped markets such as Africa and Latin America.
(2) Infrastructure Development
Improve ports, roads, and digital infrastructure to reduce logistics cost.
(3) Promote ‘Make in India’ and Self-Reliance
Encourage domestic production of critical imports like electronics and defence equipment.
(4) Enhance Technological Upgradation
Adopt advanced manufacturing techniques to improve quality.
(5) Trade Agreements
Enter into favourable Free Trade Agreements (FTAs) to gain market access.
(6) Stable Exchange Rate Policy
Maintain macroeconomic stability to reduce currency risk.
Conclusion (Part a)
India’s foreign trade faces structural and global challenges. Through diversification, infrastructure improvement, and policy reforms, India can enhance its competitiveness and reduce trade imbalances.
(b) Changes in the Composition of India’s Exports and Areas of Weakness
1. Changes in Composition of Exports
Over time, India’s export structure has shifted from primary goods to manufactured and service exports.
(1) Decline in Traditional Exports
Earlier, exports mainly consisted of agricultural products such as tea, jute, and cotton textiles.
(2) Rise in Manufactured Goods
Engineering goods, chemicals, pharmaceuticals, and automobiles now form a major share of exports.
(3) Growth in Services Exports
IT and software services have become significant contributors to foreign exchange earnings.
(4) Petroleum Products
Refined petroleum products have become important export items.
2. Areas of Weakness in Export Trade
(1) Low Share in Global Trade
India’s share in global merchandise trade remains relatively small.
(2) Limited High-Tech Exports
Compared to advanced economies, India’s share in high-technology exports is limited.
(3) Dependence on Few Markets
Exports are concentrated in US and European markets.
(4) Quality and Standard Issues
Indian products sometimes face rejection due to quality standards.
(5) Infrastructure Bottlenecks
High transaction costs reduce competitiveness.
Conclusion
India’s export composition has shifted towards manufactured goods and services, reflecting structural transformation. However, weaknesses such as trade deficit, limited diversification, and infrastructure challenges continue to hinder growth. Addressing these weaknesses is essential for strengthening India’s position in global trade.
3. Comment on the following statements:
a) FEMA has been brought to amend law relating to domestic exchange.
b) Agriculture is not a politically charged issue in India.
c) Indian textile industry is one of the newest and smallest industries of the economy.
d) SAARC began with the establishment of Regional cooperation.
(a) “FEMA has been brought to amend law relating to domestic exchange.”
This statement is incorrect.
The Foreign Exchange Management Act, 1999 (FEMA) was enacted to regulate and manage foreign exchange transactions, not domestic exchange. It replaced the earlier Foreign Exchange Regulation Act (FERA), 1973.
FEMA was introduced to:
- Facilitate external trade and payments
- Promote orderly development of foreign exchange market in India
- Liberalise foreign exchange regulations
Unlike FERA, which was strict and regulatory in nature, FEMA is more flexible and focuses on management rather than control.
Therefore, FEMA deals with foreign exchange, not domestic exchange transactions.
(b) “Agriculture is not a politically charged issue in India.”
This statement is incorrect.
Agriculture is highly sensitive and politically significant in India because:
- A large portion of India’s population depends on agriculture for livelihood.
- Government policies like Minimum Support Price (MSP), subsidies, and loan waivers directly affect farmers.
- Agricultural reforms often lead to political debates and public movements.
- Rural votes play a crucial role in elections.
Thus, agriculture is deeply connected with economic, social, and political issues in India and cannot be considered politically neutral.
(c) “Indian textile industry is one of the newest and smallest industries of the economy.”
This statement is incorrect.
The Indian textile industry is one of the oldest and largest industries in the country.
- It has historical roots dating back to ancient times.
- It was one of the earliest industries established during the industrial period.
- It contributes significantly to employment and exports.
- It is a major source of foreign exchange earnings.
Therefore, the textile industry is neither new nor small; it is a traditional and significant sector of the Indian economy.
(d) “SAARC began with the establishment of Regional cooperation.”
This statement is correct.
The South Asian Association for Regional Cooperation (SAARC) was established in 1985 with the objective of promoting regional cooperation among South Asian countries.
Its main objectives include:
- Promoting economic and social development
- Strengthening mutual trust
- Encouraging trade and cultural cooperation
SAARC was formed to improve regional collaboration in South Asia, making the statement valid.
4. Difference between the following:
a) Inward orientation and Outward orientation
b) Macro impact and Micro impact of capital flows
c) Export oriented units and Special economic zones
d) Balance of Trade and Balance of Payments
(a) Inward Orientation and Outward Orientation
Basis | Inward Orientation | Outward Orientation |
Meaning | Focus on domestic market and import substitution | Focus on exports and integration with global markets |
Trade Policy | Protectionist policies | Liberal trade policies |
Competition | Limited foreign competition | Encourages global competition |
Objective | Self-sufficiency | Export promotion and global expansion |
Example | Pre-1991 Indian economic policy | Post-liberalisation export-led strategy |
Explanation:
Inward orientation emphasizes protection of domestic industries, while outward orientation promotes participation in international trade.
(b) Macro Impact and Micro Impact of Capital Flows
Basis | Macro Impact | Micro Impact |
Level of Effect | Economy-wide | Individual firms or sectors |
Focus | GDP, inflation, exchange rate | Firm performance and investment |
Examples | Increase in foreign reserves | Improved production capacity |
Risk | Currency volatility | Financial risk at firm level |
Policy Concern | National economic stability | Corporate profitability |
Explanation:
Macro impact refers to overall economic effects, while micro impact focuses on individual business outcomes.
(c) Export Oriented Units (EOUs) and Special Economic Zones (SEZs)
Basis | Export Oriented Units (EOUs) | Special Economic Zones (SEZs) |
Meaning | Units set up to export entire production | Designated geographical areas with special economic laws |
Location | Can be anywhere in country | Located in specific notified zones |
Incentives | Tax exemptions and duty-free imports | Broader tax and infrastructure benefits |
Objective | Promote exports | Attract foreign investment and boost exports |
Regulation | Governed by export policies | Governed by SEZ Act |
Explanation:
EOUs are specific export-focused firms, whereas SEZs are special zones with policy incentives.
(d) Balance of Trade (BoT) and Balance of Payments (BoP)
Basis | Balance of Trade | Balance of Payments |
Meaning | Difference between exports and imports of goods | Record of all economic transactions with rest of world |
Scope | Narrow concept | Broader concept |
Includes | Visible trade only | Goods, services, capital flows |
Components | Exports and imports | Current account and capital account |
Indicator | Trade surplus or deficit | Overall external position |
Explanation:
Balance of Trade considers only merchandise trade, while Balance of Payments includes all international economic transactions.
5. Write short notes on the following:
a) Export promotion measures
b) Agri Trade
c) ASEAN
d) Export (Quality Control and Inspection) Act, 1963
(a) Export Promotion Measures
Export promotion measures are policies and incentives provided by the government to encourage domestic producers to sell goods and services in international markets.
Since exports earn foreign exchange and improve the country’s trade balance, governments actively support exporters.
Major Export Promotion Measures:
- Financial Incentives – Government provides duty drawback (refund of customs duty), tax exemptions, and subsidies to reduce export cost and increase competitiveness.
- Export Credit Facilities – Banks provide pre-shipment and post-shipment credit at concessional interest rates to exporters.
- Special Economic Zones (SEZs) – Exporters operating in SEZs get tax holidays, duty-free imports, and better infrastructure.
- Trade Promotion Schemes – Assistance for participating in international trade fairs and exhibitions to explore new markets.
- Trade Agreements – Bilateral and multilateral trade agreements reduce tariffs and increase market access.
- Quality Improvement Programs – Help exporters meet international quality standards.
Thus, export promotion measures aim to make domestic goods globally competitive.
(b) Agri Trade
Agri trade refers to the export and import of agricultural products such as rice, wheat, spices, tea, coffee, fruits, and marine products.
Agriculture plays a vital role in India’s economy as a large population depends on it for livelihood.
Importance of Agri Trade:
- Provides income to farmers.
- Generates foreign exchange earnings.
- Expands markets for agricultural products.
- Encourages modern farming techniques.
However, agri trade faces challenges like fluctuating global prices, climate risks, and strict sanitary and phytosanitary standards imposed by importing countries.
Therefore, government support and quality control are important in agri trade.
(c) ASEAN
The Association of Southeast Asian Nations (ASEAN) is a regional organization formed in 1967 to promote economic cooperation among Southeast Asian countries.
Its objectives include:
- Promoting economic growth.
- Enhancing trade and investment cooperation.
- Maintaining regional stability.
- Encouraging social and cultural development.
ASEAN has created a free trade area among its member countries, reducing trade barriers and promoting regional integration. It plays an important role in Asia’s economic development.
(d) Export (Quality Control and Inspection) Act, 1963
The Export (Quality Control and Inspection) Act, 1963 was enacted to ensure that goods exported from India meet international quality standards.
Objectives:
- Prevent export of substandard goods.
- Protect India’s reputation in global markets.
- Establish quality inspection and certification systems.
Under this Act, certain products must undergo compulsory quality inspection before export. This helps build trust among foreign buyers and increases export credibility.
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