MODULE 5

FOREIGN TRADE IN INDIA

Foreign trade in India includes all imports and exports to and from India. At the level of Central
Government it is administered by the Ministry of Commerce and Industry. Foreign trade accounted for
48.8% of India's GDP in 2017. India exports approximately 7500 commodities to about 190 countries, and
imports around 6000 commodities from 140 countries. The Government of India's Economic Survey 2017-
18 noted that five states — Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana — accounted for
70% of India's total exports.
CHARACTERISTICS OF INDIA’S FOREIGN TRADE
Foreign trade plays an important role in the economic development of country. It is said, “Foreign trade is
not simply a device for achieving productive efficiency but is an engine of economic growth.”
(i) Change in the composition of exports:
After independence many changes took place in export trade. India exported tea, jute, cloth, iron, spices
and leather before independence. Now chemicals, readymade garments, gems, jewellery, electronic goods,
processed foods, machines. Computer software etc. are exported along with tea, jute and cotton textiles.
(i) Change in the composition of imports:
India imported consumer goods, medicines, textiles, motor vehicles and electrical goods before
independence. After independence, imports are fertilizers, petroleum, steel, machines, industrial raw
materials, edible oils and unfinished diamonds.
(iii) Direction of foreign trade:
Direction of foreign trade means those countries with which India has trade ties. Before independence, India
has trade relations with England and Commonwealth Nations Now India has trade relations with U.S.A,
Russia, Japan, European Union and Organization of Petroleum Exporting Countries (OPEC).
(iv) Balance of trade: Simply speaking balance of trade means the difference between value of exports
and imports. Balance of payments is favourable if exports exceed imports and un-favourable if imports
exceeds export. India’s balance of payment was favourable before Independence. It was favourable to Rs.
42 crore, but after independence it becomes un-favourable.
(v) Dependent trade:
Before independence, Indian foreign trade was dependent on foreign shipping, insurance and banking
companies. After independence, cargo ships are being built in India. Banks and insurance companies have
started taking interest in foreign trade.

(vi) Trade through sea routes:

India’s foreign trade is through sea routes. India has very little trade relations with neighbouring countries
like Nepal, Afghanistan, Pakistan, Bhutan and Sri Lanka etc.
(vii) Dependence on a few Ports:
Indian foreign trade is through Chennai, Kolkata and Mumbai ports. These ports are always over-crowded.
After independence ports like Kandla, Cochin and Vishakhapatnam have been developed.
(viii) Less percentage of world trade:
India’s share in world trade has been diminishing. It was 1.8% of world’s total imports and 2% of world’s
total exports in 1950-51. In 2003-04 India’s share in total world imports was 1% and in total world exports
was 0.8%.
(ix) Increased Share in Gross National Income:
Foreign trade has significant contribution in Indian national income. In 1950-51, India’s foreign trade
contribution into national income was 12% and rose is 29% in 2003-04.
(x) Increae in value and volume of trade:
The value and volume of imports and exports increased many fold. In 1950-51 imports were Rs. 608 crores
and exports were Rs. 606 crores. So total value was Rs. 1214 crores. In 2003-04, it increased to Rs. 6,
52,475 crore. Value of exports 2, 93,367 crore and of imports 3, 59,108 crore.
EXPORT PROMOTION IN INDIA
Export promotion has been defined as “those public policy measures which enhance exporting activity at
the company, industry, or national level”. Export Promotion strategy promotes only the industries that have
potential for developing and competing with foreign rivals.
NEED FOR EXPORT PROMOTION IN INDIA
1) To Earn Foreign Exchange
2) To Motivate Organisations to Export
3) To Promote Interests of Indian Exporters and Keeping Commitment of WTO
4) To Import Capital Goods
5) To Reduce Bureaucracy
6) To Correct Unfavourable Balance of Trade
7) To Reduce Foreign Loans
8)To Achieve the Objective of Self-Reliance
9) To Sell Surplus Production
10) To Finance Imports
11) For the Defence
12) To contribute Economic Development of Country

MEASURES FOR EXPORT PROMOTION IN INDIA

Govt announced various schemes and incentives for promoting foreign trade in India

Import facilitation scheme

The purpose is to make available the quality inputs for production to the exporters.

1. Exports promotion of capital goods (EPCG) scheme: this scheme allows import of capital goods,
including computer software, at 5 % customers duty.
 2. Advance authorization: it is used to allow duty free import of inputs which is used to produce
export goods.
Export incentives
1. Export under bond: the exporter has to execute a bond in favour of the central excise
authorities
2. Refund of duty: in case the exporter has already paid the duty, he can file a claim for refund
after verification of the claim
3. Duty entitlement pass book(DEPB): the aim is to neutralize the customs duty paid on the
import content of the export product by way of grant of credit to the exporter
4. Duty-free replenishment certificate (DFRC): an exporter is allowed to import inputs without
payment of customs duty
5. Duty free import authorization: introduced in May 2006. The scheme permits duty free
imports of required inputs before exports
6. Served from India scheme: this scheme seeks to accelerate the export of services and to create
a unique and powerful ‘served from India’ brand.
7. Vishesh krishi and gram udyog yojna: the objective is to promote exports of agricultural
items and village industry products.
8. Focus product scheme: under this incentives are given to exporters of products having high
employment potential
9. Focus market scheme: the objective is to facilitate penetration of strategic markets in which
Indian exports are comparatively low.
10. Cash compensatory support (CCS): it is to provide funds for product/market development
11. Export awards: it is for encourage exporters
Export houses
An export house is a registered exporter who fulfills the prescribed criteria. Established exporters are
recognized as export houses of different grades. An exporter is categorized on the basis of total exports
during current year plus previous three years.
Production assistance
1. Export processing zones have been set up to provide a duty free environment
2. The export oriented units are eligible for several incentives
3. Making inputs of good quality
4. Facilities to set up, modernize, and expand production capacity for exports
5. Provision of infrastructure for the growth of export oriented units
6. Duty free import of capital goods
Marketing assistance
1. Market development assistance
2. Market access initiative
3. Providing foreign exchange
4. Export credit at low interest rate
5. India brand equity fund for promoting made in India image
6. Brand acquisition fund
Organizations for export promotion
 1. Board of trade to studythe problem of external trade
2. Export promotion board for co-ordinating the activities of different authorities
3. Export promotion councils to seek co-operation of consumers, producers and exporters
4. Commodity boards for promoting production and export
5. Export inspection councils for ensuring quality control
6. Indian institute of foreign trade for providing training
7. Export credit guarantee corporation to provide export credit
8. Indians council for fairs and exhibition and directorate of commercial publicity for organizing
fairs and exhibitions
9. Exim bank to provide credit facilities
10. Federation of Indian export organization to serve as a forum
11. Special economic zone
12. Export processing zone
REASONS FOR THE SLOW GROTH OF EXPORTS IN INDIA
1. inadequate infrastructure and incentives
2. low quality of exportable goods
3. high cost of production
4. lack of effective promotion
5. time and cost related delays in export
6. use of traditional technology in production
7. high competition
8. tariff and trade policy of developed countries
Intellectual property (IP)
It is a category of property that includes intangible creations of the human intellect. There are many types
of intellectual property, and some countries recognize more than others. The most well-known types are
copyrights, patents, trademarks, and trade secrets. Intellectual property (IP) refers to creations of the mind,
such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.
Intellectual Property Rights
Intellectual property rights are the rights given to persons over the creations of their minds. They usually
give the creator an exclusive right over the use of his/her creation for a certain period of time.
Types of Intellectual Property Rights
1. patent
A patent grants property rights on an invention, allowing the patent holder to exclude others from making,
selling, or using the invention. Inventions allow many businesses to be successful because they develop
new or better processes or products that offer competitive advantage on the marketplace
2. Trademarks
A trademark is a word, phrase, symbol, or design that distinguishes the source of products (trademarks) or
services (service marks) of one business from its competitors. In order to qualify for patent protection, the
mark must be distinctive. For example, the Nike "swoosh" design identifies athletic footware made by Nike.

3. Trade Secrets
A trade secret is a formula, process, device, or other business information that companies keep private to
give them a business advantage over their competitors. Examples of trade secrets include:

• Soda formulas
• Customer lists
 • Survey results
• Computer algorithms

4. Copyrights
Copyrights protect original works of authorship, such as literary works, music, dramatic works, pantomimes
and choreographic works, sculptural, pictorial, and graphic works, sound recordings, artistic works,
architectural works, and computer software. With copyright protection, the holder has the exclusive rights
to modify, distribute, perform, create, display, and copy the work.
5. Industrial design rights
An industrial design consists of the creation of a shape, configuration, or composition of color or
pattern.
Nature or characteristics of intellectual property rights
1. Territorial: an intellectual property issued should be resolved by national laws.
2. Giving an exclusive right to the owner: this means others, who are not owners, are prohibited from
using the right
3. Assignable: since they are rights, they can be assigned
4. Subject to public policy
5. Indivisible: an unlimited number of people can consume an intellectual good
Advantages or importance
1. Encourage the creation of a wide variety of intellectual goods
2. Encourages innovation
3. Providing financial incentive
4. Essential for economic growth
5. It encourages individuals to distribute and share information and data
6. It helps social and financial development
7. It creates new jobs and industries
Trade reforms made by NDA government
Foreign trade policy of India 2015-20 is announced on 1st April 2015 to support industry and service sectors.
The new policy aimed at making India a significant partner in global trade by 2020. Make in India and
Digital India will be integrated with the new foreign trade policy.
Key features of new foreign trade policy
1. India to be made a significant participant in world trade by 2020
2. Increase exports
3. Promote Merchandize exports from India (MEIS)
4. Reduce export obligations
5. Give boost to domestic manufacturing
6. Extended benefits to merchandize and service trade exports
7. Foreign trade policy 2015-20 introduces two new schemes- Merchandize exports from India
scheme (MEIS) and service export from India scheme(SEIS)
8. higher level support to agricultural products
9. support to industrial products
10. served from India scheme (SFIS) will be replaced with SEIS
11. branding campaigns to support exports
12. SEIS shall be applied to service providers located in India
13. Higher level of support to export of defence, farm produce, and eco friendly products
14. FTP will be reviewed after two and half years
15. Cancelation of repeated submission of exporter importer profile
16. Export obligation reduced to 75% to promote domestic capital goods manufacturing
 17. Manufacturers(status holders) will be enabled to self certify their goods as originating fron India
18. The criteria for export performance for recognition of status holders have been changed from rupees
to US dollar earnings
Foreign capital
It is money entering the country in the form of concessional assistance or non- concessional flows.
Types of foreign capital or foreign investment
There are two types of foreign investments
1. Foreign direct investment (FDI)
FDI includes:
• Wholly owned subsidiaries
• Joint ventures
• acquisition
2. Portfolio investment

Modes of FDI
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in
one country by an entity based in another country.It is thus distinguished from a foreign portfolio
investment by a notion of direct control. A foreign direct investment (FDI) is an investment made by a firm
or individual in one country into business interests located in another country.
A. On the basis of assets
1. Greenfield investment: setting up of new enterprise in a foreign country
2. Acquisitions: investment is made in an existing enterprise abroad
3. Brownfield investment: it is a combination of Greenfield investment and Acquisitions
B. On the basis of nature of business activity
1. Horizontal FDI: a firm invests abroad in the same industry in which it operates in the home
country
2. Vertical FDI: backward FDI and forward FDI are two forms of vertical FDI. Backward FDI
refers to setting up of a firm abroad to manufacturing intermediaries which can be used in the
domestic firm or by other units. In forward FDI , a firm set up a firm abroad to distribute its
products.
3. Conglomerate FDI: if FDI abroad is to produce goods not produced by the parent company at
home, it is Conglomerate FDI
Foreign portfolio investment (FPI) or foreign indirect investment
If the investor only subscribes to the shares, bonds, debentures or other securities abroad, it is called foreign
portfolio investment
Foreign institutional investment (FII)
Under this scheme , FIIs/NRIs can acquire shares/debentures of Indian companies through the stock
exchanges in India.
Need for FDI
1. To increase investments
2. For getting advanced technologies
3. To generate more employment opportunities
4. Exploitation of natural resources for economic development
5. Development of infrastructure
6. To improve exports
7. Improvement in the balance of payment position
8. To increase government revenue
 9. To get better goods to consumers
10. Training to personnel
MEASURES TAKEN BY GOVT OF INDIA TO ATTRACT FDI
Recent measures taken to promote FDI inflows include FDI policy reforms, measures taken to create ease
of doing business and building world class infrastructure in the country. Regarding reforms in FDI Policy
following steps have been taken:
(1) Construction, maintenance and operation of rail infrastructure are made eligible for 100per cent FDI
under automatic route except for security sensitive areas.
(2) The definition of Non-resident Indians (NRIs) was amended to accommodate Persons of Indian Origin
(PIOs) and Overseas Citizens of India (OCIs). Investment made by NRIs is deemed to be domestic
investment at par with the investment made by residents.
(3) FDI up to 100per cent is permitted under the automatic route for manufacturing of medical devices.
(4) The sectoral cap of foreign investment in insurance sector increased from 26per cent to 49per cent with
foreign investment up to 26per cent to be under automatic route. Similar changes have also been brought
in the FDI Policy on Pension Sector.
(5) 100per cent FDI is permitted in construction development under automatic route subject to certain
conditions. The conditions about floor area restriction, minimum capitalization, exit and repatriation of
foreign investment, transfer of stake and operation and management has been relaxed.
(6) Subject to conditions of industrial license, foreign investment up to 49per cent is permitted under
automatic route in defence sector. Beyond 49per cent under Government route is allowed on case to case
basis wherever to access modern and ‘state-of-art’ technology related manufacturing.
(7) FDI in broadcasting sector is allowed under government and automatic route. FDI up to 100 per cent
(upto 49 per cent automatic route; beyond 49 per cent under government route) is permitted in teleports,
Direct to Home, cable network, mobile TV, headend in the sky broadcasting services. FDI is also permitted
in broadcasting content services include up linking news and nonnews current affairs TV channels and
down linking of TV channels.
(8) 100per cent foreign investment under automatic route is permitted in coffee, tea, rubber, cardamom,
palm oil tree and olive oil tree plantations.
(9) Manufacturer is permitted to sell products through wholesale and / or retail, including through e-
commerce without government approval.
(10) Foreign investment in Single Brand Retail Trading (SBRT) is permitted up to 100per cent where up
to 49 per cent is under automatic route and above 49 per cent is under government route.
(11) 100 per cent FDI is now permitted under automatic route in Duty Free Shops located and operated in
the Custom bonded areas.
(12) 100per cent FDI is now permitted under the automatic route in Limited Liability Partnerships (LLPs)
operating in sectors / activities where 100per cent FDI is allowed, through the automatic route and there are
no FDI-linked performance conditions.
(13) Scheduled Air Transport Service/ Domestic Scheduled passenger Airlines and Regional Air Transport
Service (RSOP) is permitted to have foreign investment up to 49per cent under automatic route. Further,
foreign investment cap of activities of Non- Scheduled Air Transport Service and helicopter services,
Ground Handling Services, repair and maintenance organization have been increased to 100per cent under
the automatic route.
(14) Foreign investment caps on Satellites- establishment and operation subject to the sectoral guideline of
Department of Space / ISRO have been raised to 100per cent.
(15) FDI in Credit Information Companies is permitted under automatic route up to 100per cent.
(16) The threshold limit for FIPB approval has been increased to from Rs. 3000 crore to Rs. 5000 crore.

MULTINATIONAL CORPORATIONS
A multinational corporation (MNC) is usually a large corporation incorporated in one country which
produces or sells goods or services in various countries. The two main characteristics of MNCs are their
large size and the fact that their worldwide activities are centrally controlled by the parent companies.
Factors responsible for the growth of MNCs are-
• Innovations
• Market facilities
• Technological advantages
• Financial superiorities
• Expansion of market
EVIL IMPACTS OF MNCs IN INDIA
1. increases competition in india
2. MNCs may monopolise the Indian markets
3. Adverse effect on domestic companies
4. unfavorable balance of payment position
5. This does not assure larger employment
6. It hampers consumers interests
7. Investments in profitable areas only
8. Bring outdated technology
9. Lead to political interference
10. Social and cultural implications on Indian society
11. Ignoring the needs of India
12. Fast depletion of resources
13. Adverse effect on traditional industries
14. Unethical business practices
15. Avoidance of tax by MNCS
16. No social obligations
17. Outflow of funds from India
TRADE REFORMS AFTER 1991
The current trade policy reforms seem to have been guided mainly by the concerns over globalisation of
the Indian economy, improving competitiveness of its industry, and adverse
1. Freer Imports and Exports:
Substantial simplification and liberalisation has been carried out in the reform period. The tariff line wise
import policy was first announced on March 31, 1996 and at that time itself 6,161 tariff lines were made
free.
2. Rationalisation of Tariff Structure:
Acting on the recommendations of the Chelliah Committee, the government has, over the years, reduced
the maximum rate of duty. The 1993-94, Budget had reduced it from 110 per cent to 85 per cent. The
successive Budgets have reduced it further in stages. The peak import duty on non-agricultural goods is
now only 12.5 per cent.
3. Decanalisation:
A large number of exports and imports used to be canalised through the public sector agencies in India. The
supplementary trade policy announced on August 13, 1991 reviewed these canalised items and decanalised
16 export items and 20 import items. The 1992-97 policy decanalised imports of a number of items
including newsprint, non-ferrous metals, natural rubber, intermediates and raw materials for fertilisers.
However, 8 items (petroleum products, fertilisers, edible oils, cereals, etc.) were to remain canalised. The
Exim Policy, 2001-02 put 6 items under special list — rice, wheat, maize, petrol, diesel and urea. Imports
of these items were to be allowed only through State trading agencies.
4. Devaluation and Convertibility of Rupee on Current Account:
The government made a two- step downward adjustment of 18-19 per cent in the exchange rate of the rupee
on July 1 and July 3, 1991. This was followed by the introduction of LERMS i.e., partial convertibility of
rupee in 1992-93, full convertibility on the trade account in 1993-94 and full convertibility on the current
account in August 1994.
Substantial capital account liberalisation measures have also been announced. The exchange rate of the
rupee is now market-determined. Thus, exchange rate policy in India has evolved from the rupee being
pegged to a market related system (since March 1993).
5. Trading Houses:
The 1991 policy allowed export houses and trading houses to import a wide range of items. The
government also permitted the setting up of trading houses with 51 per cent foreign equity for
the purpose of promoting exports.
The 1994-95 policy introduced a new category of trading houses called Super Star Trading
Houses. These houses are entitled to membership of apex consultative bodies concerned with
trade policy and promotion, representation in important business delegations, special
permission for overseas trading and special import licences at enhanced rate.

6. Special Economic Zones:

A scheme for setting up Special Economic Zones (SEZs) in the country to promote exports was
announced by the government in the Export and Import Policy of March 31, 2000. The SEZs are
to provide an internationally competitive and hassle-free environment for exports and are
expected to give a boost to the country’s exports.

The Policy has provided provisions for setting up SEZs in the public sector, joint sector or by State
governments. It was also announced that some of the existing Export Processing Zones (EPZs) would be
converted into Special Economic Zones.
Some of the distinctive features of SEZ scheme are:
(i) a designated duty-free enclave to be treated as foreign territory for trade operations and duties and
tariffs;
(ii) SEZ units could be for manufacturing services;
(iii) No routine examination of export and import cargo by customs;
(iv) Sale in domestic market on full duty and import policy in force;
(v) SEZ units to be positive net foreign exchange earners in three years; (vi) no fixed wastage norms;
(vii) Duty-free goods to be utilised within the approval period of 5 years;
(viii) Subcontracting of part of production and production process allowed for all sectors, including
jewellery units;
(ix) 100 per cent foreign direct investment through automatic route in the manufacturing sector;
(x) 100 per cent income tax exemption for 5 years and 50 per cent for 2 years thereafter and 50 per cent of
the ploughed back profit for the next 3 years;
(xi) External commercial borrowing through automatic route, etc.
7. EOU Scheme:

The Export Oriented Units (EOUs) scheme introduced in early 1981 is complementary to the SEZ scheme.
It offers a wide option in locations with reference to factors like source of raw materials, ports of export,
hinterland facilities, and availability of technological skills, existence of an industrial base and the need for
a larger area of land for the project. The EOUs have put up their own infrastructure.
8. Agriculture Export Zones:
The Exim Policy 2001 introduced the concept of Agri- Export Zones (AEZs) to give primacy to promotion
of agricultural exports and effect a reorganisation of our export efforts on the basis of specific products and
specific geographical areas.
The scheme is centered on the cluster approach of identifying the potential products, the geographical
region in which these products are grown and adopting an end-to-end approach of integrating the entire
process right from the stage of production till it reaches the market.
9. Market Access Initiative Scheme:
Market Access Initiative Scheme was launched in 2001- 02 for undertaking marketing promotion efforts
abroad. The key features of the scheme are in- depth market studies for select products in chosen countries
to generate data for promotion of exports from India, assist in promotion of India, Indian products and
Indian brands in the international market by display through showrooms and warehouses set up in rental
premises by identified exporters, display in identified leading departmental stores total exhibitions trade
fairs, etc. The scheme shall also assist quality upgradation of products as per requirements of overseas
markets, intensive publicity campaigns, etc.
10. Focus on Service Exports:
The amended Export-Import Policy, 2002-07, announced on March 31, 2003, specifically emphasized
service exports as an engine of growth. It, accordingly, announced a number of measures for the promotion
of exports of services. For instance, import of consumables, office and professional equipment, spares and
furniture upto 10 per cent of the average foreign exchange export earning has been allowed.
The advance licence system has been extended to the tourism sector. Under this, firms will be allowed duty-
free import of consumables and spares upto 5 per cent of their average foreign exchange earnings of the
previous three years, subject to actual user condition.
11. Concessions and Exemptions:
A large number of tax benefits and exemptions have been granted during the 1990s to liberalise imports
and promote exports with the five year Exim Policy 1992-97 and Exim Policy 1997-2002 serving as the
basis for such concessions.
These policies, in turn, have been reviewed and modified on an annual basis in the Exim policies announced
every year. Successive annual Union Budgets have also extended a number of tax benefits and exemptions
to the exporters.
These include reduction in the peak rate of customs duty to 15 per cent; significant reduction in duty rates
for critical inputs for the Information Technology sector, which is an important export sector; grant of
concessions for building infrastructure by way of 10-years tax holiday to the developers of SEZs;
Facilities and tax benefits to exporters of goods and merchandise; reduction in the customs duty on specified
equipment for ports and airports to 10 per cent to encourage the development of world class infrastructure
facilities, etc.
A number of tax benefits have also been announced for the three integral parts of the ‘convergence
revolution’ the Information Technology sector, the Telecommunication sector, and the Entertainment
industry.

EXCHANGE RATE

In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one
country's currency in relation to another currency.

EXCHANGE RATE SYSTEMS OR REGIMES

1. Fixed exchange rate system: under this, the exchange rate is determined by monetary authority. It
means the government will fix the exchange rate . it is at this rate all exchange transactions take
place. The govt (central bank) may fix the exchange rate by legislation or intervention in the
currency market.
2. Flexible or floating or free exchange rate system; under this, the exchange rate is determined by
market forces of demand and supply of foreign exchange. The monetary authority does not
intervene for the purpose of influencing the exchange rate. If there is excess supply of currency,
the value of currency will fall and vice versa.
Difference between fixed and flexible system
Fixed exchange rate Flexible exchange rate
Government intervention in the currency Market is allowed to determine the value of
market exchange rate freely
 Govt or central bank determines the rate Market forces of demand and supply
determines the rate
Govt intervenes when there is fluctuations in The govt never intervenes the currency market
the exchange rate
It assures the stability of exchange rate Exchange rate fluctuates a lot on day to day
basis

EXCHANGE RATE REGIMES ON PRACTICE

1. Managed floating exchange rate:
A managed floating exchange rate is a regime that allows an issuing central bank to intervene
regularly in FX markets in order to change the direction of the currency's float and shore up its
balance of payments in excessively volatile periods. This regime is also known as a “dirty float”.
It lies between fixed and flexible system.

2. Adjustable peg system: An adjustable peg is an exchange rate policy in which a currency
is pegged or fixed to a major currency such as the U.S. dollar or euro but can be readjusted to
account for changing market conditions. The periodic adjustments are usually intended to improve
the country's competitive position in the export market
3. Crawling peg system: Crawling peg is an exchange rate regime that allows depreciation or
appreciation to happen gradually. It is usually seen as a part of a fixed exchange rate regime.
The system is a method to fully use the key attributes of the fixed exchange regimes as well as the
flexibility of the floating exchange rate regime
4. Joint float system: Joint float refers to a situation in which several currencies maintain a fixed
exchange rate to each other. In a joint float, a group of currencies maintain a fixed relationship
relative to each other, but move jointly relative to another currency in response to supply and
demand conditions in the exchange market.

EXCHANGE RATE POLICY OF INDIA

1. Par value system or bretton wood system (1947-1971)
2. Pegged regime(1971-1991)
3. Market based exchange rate regime(1991)
4. Liberalized exchange rate management system(LERMS)
5. Market based exchange rate system (1993-till present)
Features of current exchange system in India
1. The exchange rate is determined in the market
2. There is exchange control
3. Current receipts are surrendered to the banking system
4. RBI can intervene in the market
5. The US dollar is the principal currency for the RBI transactions
6. The RBI announces a reference rate based on the quotations of selected banks
Intervention by RBI
1. Direct intervention in the currency market ie purchases and sales in international currency
2. Indirect intervention through monetary policies
Current account convertibility of rupee: it is defined as the freedom to buy and sell foreign exchange for
the international transactions like foreign trade, payments for loans, remittances for family living expenses
etc
Capital account convertibility of rupee: it refers to the right to transact financial assets with foreign countries
without restrictions
KERALA ECONOMY
AN OVERVIEW OF KERALA ECONOMY
Kerala is the 11th largest economy in India. It is known as Gods own country.
1. Gross State Domestic Product (GSDP)
Gross State Domestic Product (GSDP) is defined as a measure, in monetary terms, of the volume of all
goods and services produced within the boundaries of the State during a given period of time, accounted
without duplication.
When compared to some states, Kerala’s GDP is low. But it is above Indian average. At current prices,
Kerala’s GSDP was about 106.52 USD billion in 2017-18.
2. Per capita income
Kerala’s per capita income is 60% higher than Indias average.
3. Agriculture
Kerala is an agricultural state. Nearly 50% of the people depend on agriculture. It is the largest producer of
rubber, coir, tapioca, coconut, pepper etc. Kerala is a land of spices.
4. Industry
Kerala is industrially backward. There are no basic or key manufacturing industries. However, there are
few big industries here. The Cochin Shipyard in Cochin is the largest ship building facility in India. The
Cochin Refinary is a public crude oil refinery in the city of Cochi. It is the largest state owned refinery in
India. Aluwa is the largest industrial belt in Kerala. There are more than 247 industries in Kerala.
5. Communication network
Kerala provides high international connectivity and instant data transfer facilities.
6. Infrastructure
The public transport system in the state consists of government buses, private buses, taxis and auto
rickshaws. There are around 200 railway stations in Kerala. Inland water transport system is available and
there are four international airports in kerala.
7. Energy
Power development in Kerala has been guided by resource endowments within the state.
Kerala generates power from four sources-hydro power, thermal power, wind power and solar power. Of
these, hydel and thermal power generations account for the considerable majority whereas wind and solar
power generations make only marginal additions.
Indias largest floating solar power plant was set up on the Banasura Sagar reservoir in Wayanad.
8. Tourism
Kerala is an established destination for both domestic as well as foreign tourists. Kerala is well known for
its beaches, backwaters in Alappuzha and Kollam, mountain ranges and wildlife sanctuaries
9. Unemployment
The unemployment rate in Kerala is 9.43 percent whereas the national average is 6.1 percent only. Sikkim
and Tripura are the only states that have high unemployment rate than Kerala with 19.7 percent and 18.1
percent respectively. Among the unemployed youth, women are higher in number.

10. Poverty
As compared to other states, the poverty rate is low in India
11. Exports
Major items of trade are cashew, coir and coir products, tea, coffee, pepper, cardamom, ginger, other spices
and spices oil, marine products, machinery, chemicals, coal, fertilizers and raw materials
12. Foreign remittance
 Around 30 lakh keralites are working abroad, mainly in gulf countries. Foreign remittance to kerala is
around 30% of the states income.
13. Debt
The state's debt was estimated at 35.53 per cent of GDP in 2013. State's debt liability recorded an increase
of 14.4 per cent and rose from Rs 1,24,081 crore in 2013-14 to Rs 1,41,947 crore in 2014-15.
14. Foreign Direct Investments
• Foreign Direct Investments have brought technological advancements in various industrial sectors in the
state.
• It has increased competition in the major economic areas of Kerala.
• Foreign Direct Investments have also led to the success in export-production.
15. Minerals

Kerala State is endowed with a number of occurrences/deposits of minerals such as Heavy Mineral
Sands ( Ilmenite, Rutile, Zircon, Monazite, Sillimanite) ,Gold, Iron ore, Bauxite, Graphite, China Clay,
Fire Clay, Tile and Brick Clay, Silica Sand, Lignite, Limestone, Limeshell, Dimension Stone (Granite),
Gemstones

16. Public sector undertakings

Kerala has the highest number of state owned enterprises spread over sectors including electrical,
electronics, engineering, chemical, pharmaceutical, public utility services and social welfare.
FEATURES OF KERALA ECONOMY
➢ It is the eleventh largest economy in india
➢ Service sector dominates the kerala economy
➢ Agriculture continues to be the dominant source of livelihood in the state
➢ Industrial development is low in Kerala
➢ Economy is largely dependent on trade in services and foreign remittance
➢ Kerala is eleventh as regards unemployment in India
➢ Kerala is the only state where govt sells liquor to people
➢ The main source of power is hydro electric power
➢ It has second highest population density in India
➢ The percapita GDP is estimated at 3300 USD
➢ Agricultural sector contribute 13% to GSDP, industrial sector 24% and service sector 63%
➢ Main agricultural crops are pepper, rubber, coconut, tea, coffee, cashew, spices etc
➢ Kerala is one of the most popular tourist destinations in the world
➢ Traditional industries include handloom, cashew, coir and handicrafts
➢ One of the main items of export is spices
➢ Kerala has large deposits of some rare minerals such as monosite, elmenite, thorium etc
➢ Kerala is a deficit state
➢ In terms of infrastructure penetration, kerala is a leading state.
Business opportunities in Kerala
There are more business opportunities in Kerala due to the following reasons

1. The Kerala advantage: the advantages of Kerala are—

• It has strategic location on the trans-national trade corridor
• Well connected road and rail network
• Four international airports
• International seaport at Kochi
• Excellent communication network
• Highest density of science and technology personnel
• 100% literate work force
 • Highest physical quality life index
• Advanced society
• Abundance of natural resources
• Industry environment
• Quality power and water supply
• Active govt and incentives
• Accelerated industrial growth
• A good management culture
• Assistance for marketing
• Simple and transparent procedures for investment
2. High quality human capital and social development: high literacy rate, high human development
index, best male-female ratio, good medical facilities, lowest infant mortality rate, and low level of
poverty are the main features of Kerala economy.
3. Traditional areas of strength: it has ample opportunities for tourism and ayurveda.the state is also
the leading producer of spices, cashew, tea, pepper etc
4. Economically successful diaspora: non resident Indians from Kerala are economically successful,
and remit significant amounts to their home state.
5. Top quality infrastructure
6. Investment climate: Kerala is the third best in the country in overall ranking

Reasons for the growth of Trade and commerce in Kerala

1. Density of population: there is high demand for goods and services in Kerala
2. Cultural factors: keralites give importance to health, cleanliness and education
3. Development of tourism: large number of foreign tourists are coming to Kerala to enjoy the natural
beauty of the state
4. Development of banking and finance: kerala has an excellent banking infrastructure.
Important industries of Kerala
Kerala is eight largest economy in India, mainly dominated by agriculture and service industry. Kerala’s
economic progress is above the national average, with numerous major corporations and manufacturing
plants being headquartered in Kerala.
Kerala is mainly dominated by handloom, handicraft, bamboo, coir, khadi & village, cashew, tourism etc.
Here is the list of major industries in Kerala-
Agriculture & Livestock
Kerala is mainly involved into the production of pepper, natural rubber, tea, cashew, spices, coffee, coconut.
All its agriculture production is send across the country. It produces various types of spices including
vanilla, cardamom, nutmeg, cinnamon. Kerala has huge workforce for all these tasks. The state is also
known for its huge varieties of rice.
Tourism
Tourism is one of the major industries in Kerala. The state has various tourist places that attract the tourist
from all across the word. Some of the most visited areas are Kovalam, Fort Kochi, Munnar, Ponmudi,
Nelliampathi, , Kozhikode, Alappuzha, Thrissur. The major tourist attractions are coastal areas, mountains,
temples, wildlife sanctuary etc.
Oil Refining & Petrochemicals
The city is also having oil refining and petrochemical industry in the city of Kochi. It has one of the leading
state owned refinery in India with the huge production capacity. Its oil refinery is referred as Kochi Refinery
which was formerly named as Cochin Refineries Ltd. Kochi Refinery is engaged in Refining and marketing
of petroleum products.
Ship Building
Ship Building is one of the major industries in Kerala. The state has largest ship building facility in
India. Cochin Shipyard was started in the year 1972 as fully owned by Government of India company. The
yard is involved into building and repairing of largest vessels in India. It is also building Shipyard for Indian
Navy .Recently Cochin Shipyard won a major repair orders from ONGC.
Energy
India’s largest floating solar power plant set up on the Banasura Sagar reservoir in Wayanad, Kerala. The
state is contributing hugely in the promotion of solar energy.
Chemical Industry
Aluva is one of leading industrial belt in Kerala. The industrial belt is manufacturing of wide range of
chemical products including pesticides, rubber processing chemicals, zinc/ chromium compounds, rare-
earth elements and leather products.
Traditional industries in Kerala
Handloom
Handloom is one of the leading sector in Kerala. The industry in mainly concentrated
in Thiruvananthapuram and Kannur districts.
Handicrafts
Handicraft is one of the major industries in Kerala. It is also contributing into the generation of employment
into that state. The handicrafts products includes coconut shell carving, bamboo and reed weaving, bell
metal casting, straw picture making, mat weaving, ivory carving etc. Handicrafts Development Corporation
and Artisans Development Corporation are the major promotional agencies of the industry.
Bamboo Industry
Bamboo is mainly used in the State for the manufacture of pulp for making paper, bamboo ply and in
traditional bamboo industry. . The Kerala State Bamboo Corporation has created a new product Flattened
Bamboo Board which is going to hit the market along with bamboo ply.
Khadi and Village Industry
The state has Khadi and Village Industries Board. It does various activities through registered institutions,
cooperative societies by the financial assistance from Khadi Commission, Nationalized Banks and State
Government.
Cashew Industry
It has Kerala State Cashew Development Corporation which is involved into development of this
Industry. KSCDC exports cashew kernels and cashew shell liquid. The Institutions promoting industrial
activity in the Sate are the following.

▪ Kerala Financial Corporation (KFC)

▪ Centre for Management Development (CMD)
▪ Small Industries Development Corporation of India (SIDBI)
▪ Kerala State Industrial Development Corporation (KSIDC)
▪ Infrastructure Kerala Limited (INKL)
▪ Kerala Industrial Infrastructure Development Corporation (KINFRA)
▪ Kerala Small Industries Development Corporation (SIDCO)
▪ Directorate of Industries & Commerce (DIC)
▪ Kerala Industrial and Technical Consultancy Organization (KITCO)
▪ MSME Development Unit (formerly SISI)
▪ Kerala Bureau of Industrial Promotion (K-bip)
Causes for industrial backwardness of Kerala
1. Geographical location of the state: kerala lies on the southernmost tip of India, so the cost of
transportation would be high
2. Technological backwardness: the major industries in the state are using lowest productive
technologies.
 3. Lack of large tracts of land: kerala is small and highly eco sensitive. Construction of big factories
is not possible in Kerala
4. Population density: kerala has one of the highest population densities in the country.
5. Higher price for land: in major cities the land price is abnormally high
6. Higher cost of labour: the minimum wages are high in the state
7. Public agitations against wrong doings of factory:
8. Procedural formalities are high
9. Lack of raw materials
10. Ecological problems
11. Corruption is very high
12. Low central investment
13. Other cause like strikes, militant trade union, media activism etc
Measures taken by the government to promote industries in Kerala
1. Special economic zones: the special policy of central government provides for setting up of special
economic zones for inviting world class industrial ventures in the public, private or joint sector.
The first zone in Kerala is the Cochin export processing zone.
2. Restructuring and revival of public sector undertakings: several initiatives were taken to restructure
and revive PSUs under the industries department.
3. Strengthening of IT industry: developments in the IT sector in the state affirms that Kerala’s efforts
to catch up with other important centers of information technology development like Banglore,
Hyderabad, and Chennai are becoming fruitful.
4. Industrial policy of 2018: with a view to speed up the process of industrialization in the state, the
govt has announced its industrial policy in the year 2018.
5. Directorate of industries and commerce: it co-ordinates industrial development activity in various
sectors- micro, small, medium and large- throughout the state.
6. Establishment of industries for promoting industries: the institutions promoting industrial activity
in the state are the following-
• Kerala financial corporation(KFC)
• Kerala state industrial development corporation (KSIDC)
• Small industries development corporation of India(SIDCI)
• Kerala industrial infrastructure development corporation(KINFRA)
• Infrastructure Kerala Ltd(INKL)
• Directorate of industries and commerce( DIC)
• Kerala small industries development corporation (SIDCO)
• MSME development unit
• Kerala industrial and technical consultancy organization(KITCO)
• Kerala bureau of industrial promotion (K-bip)
• Centre for management development (CMD)

7. Incentives and subsidies: govt provides various incentives and subsidies to entrepreneurs in the
state, thereby motivating them to undertake ventures in the state.
8. Simplification of procedural formalities: the govt has taken steps to improve the investment climate
in the state and to simplify the formalities so as to make a feeling of ease of doing business.
Small scale industries (SSIs)/micro small and medium enterprises (MSMEs)
MSMES is defined as:
Micro enterprise- this is a unit where the annual turnover does not exceed Rs. 5 crore.
Small enterprise- this is one where annual turnover is between Rs. 5 crore and Rs. 75 crore.
Medium enterprise- this is one where the turnover is more than Rs. 75 crore but does not exceed
Rs.250 crore.
Ancillary units
These units provide inputs to other industries. An ancillary unit needs to supply at least 50% of its
products to other industries. These are engaged in the production of parts, components, tools etc.
Export oriented units
These units are those SSI units which export at least 30% of its annual production by the end of the
3rd year of commencement of production
Role of small scale industries or MSMEs in Kerala economy

1. Industrialization of rural and backward areas: with the development of small industries the
rural areas will also develop.
2. Large employment opportunities: small scale industries are labour intensive and it provides
large employment opportunities in the rural areas.
3. Balanced regional development: generally, small enterprises are located in villages,
backward areas and small towns. This leads to balanced regional growth.
4. Mobilization of local resources: the small industries facilitate the growth of local
entrepreneurs and self employed professional in small towns and villages.
5. Promotion of self employment: generally keralites want white collar jobs. So educated
unemployed people are compelled to star small scale industrial units of their own.
6. Promotion of exports:some of the small scale industries export their products such as coir,
cashew, rubber etc
7. Protection to environment: majority of small scale industries do not pollute the
environment
8. Contributes to socio-economic development of the state: small scale industries helps to
improve the standard of living of the people.
Problems of MSMEs/SSI in Kerala
1. Inadequate finance
2. Lack of technical know how
3. Lack of proper machinery and equipment
4. Problems in marketing
5. Labour problems
6. Inadequate power supply
7. Corruption and red tapism
8. Procedural delays
9. Buden of local taxes
10. Lack of managerial experience
Measures taken by the govt of kerala for the development of SSI/MSMEs
1. Establishment of industrial co operative societies for the development of industries
2. Industrial development plot/areas: DIC develops infrastructure facilities for small scale
industries
3. Mini industrial estates:there are 112 mini estates in kerala to provide employment
4. Industrial estates under SIDCO: there are 17 major industrial estates, which include 882
working units inder the control of SIDCO
5. Promotional events: many exhibitions are conducting for the promotion of industries
6. Bank credit to MSME sector: commercial banks provides bank credit to small industries
7. Infrastructure development schemes for improving facilities
8. Entrepreneur support scheme: support schemes are provided to women scst entrepreneurs
etc
9. Capacity building programmes: skill development training is provided to improve the
entrepreneurial skills