8.3 SAARC The South Asian Association for Regional Cooperation (SAARC) is the regional inter- governmental organization and geopolitical union of states in South Asia. Its member states are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The SAARC comprises 3% of the world's area, 21% of the world's population and 4.21% (US$3.67 trillion)of the global economy, as of 2019. The SAARC was founded in Dhaka on 8 December 1985. Its secretariat is based in Kathmandu, Nepal. The organization promotes development of economic and regional integration. It launched the South Asian Free Trade Area in 2006. The SAARC maintains permanent diplomatic relations at the United Nations as an observer and has developed links with multilateral entities, including the European Union. The South Asian Association of Regional Cooperation (SAARC) was created in 1985 as an expression of the region's collective decision to evolve a regional cooperative framework. Presently, there are eight member countries in SAARC namely Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. It also has nine Observers, namely China, EU, Iran, Republic of Korea, Australia, Japan, Mauritius, Myanmar and USA. SAARC Summits India was the Chair of SAARC in 2007 and the year was the most productive year that SAARC had ever known. Each of honourable Prime Minister's announcements at the 14th Summit in Delhi has been implemented. The operation of the SAARC Food Bank, the establishment of the SAARC Development Fund, setting up of the South Asian University, the SAARC Cultural Festival, the launching of negotiations to bring services into SAFTA, signing of the Convention of Mutual Assistance in Criminal Matters and our unilateral grant of zero duty access to SAARC LDCs from January 1, 2008 are significant steps to regional integration. SAARC's geographic contours also changed with the formal induction of Afghanistan in to SAARC as the eighth member. The momentum generated by 14th Summit held in New Delhi coupled with India's commitment to discharge its responsibilities in an asymmetric and non-reciprocal manner, was carried over to the 15th SAARC Summit, held in Colombo (2-3 August 2008) and the 16th SAARC Summit held for the first time in Thimphu (28-29 April 2010). The most visible manifestation of this new dynamism in SAARC has been the early operation of the SAARC Development Fund (SDF) and the inauguration of its permanent premises in Bhutan during the Sixteenth SAARC Summit in April 2010. India has transferred its full commitment of US $ 189.9 ($ 89.9 million as assessed contribution and $ 100 million as grant for the social window) to the SDF. Other Member States are also expected to remit their contributions to the SDF shortly. Two regional projects - on women's empowerment and 151 CU IDOL SELF LEARNING MATERIAL (SLM)
maternal and child health care - under SDF are currently being implemented with technical assistance from India. Cooperation in the field of higher education is set to touch a new horizon with the establishment of the South Asian University (SAU) at New Delhi in the near future. India will bear a major part of the cost of establishing the University, including 100% of the capital cost. The University is expected to be fully established by 2015. The Sixteenth SAARC Summit (Thimphu, April 2010) appreciated the progress made towards establishing the University and the announcement of the CEO of the SAU Project Office to initialize the first academic session of the University with effect from August 2010. In a bid to preserve the rich textile and handicraft traditions of the South Asian region, Prime Minister, at the Thirteenth SAARC Summit (Dhaka, November 2005), proposed the establishment of a SAARC Museum of Textiles and Handicrafts in New Delhi. The Museum would be an Intergovernmental Body on the lines of the other SAARC Regional Centres and will be housed in Delhi Haat, Pitampura. Premises for the Museum have been acquired in January 2010. Taking forward the theme of regional connectivity, the Second Meeting of SAARC Transport Ministers held in Colombo (24-25 July 2009) directed that a Special Meeting of the Expert Group be convened to negotiate two draft Regional Agreements on Motor Vehicles and Railways in a time bound manner. The Sixteenth SAARC Summit in Thimphu, reiterating the centrality of connectivity to further deepen and consolidate regional integration, endorsed the recommendation to declare 2010-20 as the \"Decade of Intra-regional Connectivity in SAARC\" and agreed on the need to expedite negotiations with a view to finalizing the two agreements on Motor Vehicles and Railways. Commendable progress has taken place in the full implementation of South Asian Free Trade Agreement (SAFTA). Intra-SAARC trade touched US $ 529 million in 2009, a considerable jump from the previous two years. Member States have appreciated India's gesture to give duty free access to LDCs from January 1, 2008, one year ahead of target date and unilateral reduction of its Sensitive List with respect to LDCs from 744 to 480. The growing synergies in SAARC found expression in a cooperative position on Climate Change presented on behalf of Member States of SAARC to the UNFCCC Secretariat before the Copenhagen Summit in 2009. Cabinet Secretaries from SAARC Member States met in New Delhi on 13-14 November 2009. They exchanged information and best practices on administrative reform initiatives with the aim of accelerating the process of eradication of poverty in the region. Member States noted with appreciation the presentation by India of two Concept Papers on Performance Management and Evaluation and Sharing of Best Practices in Information Technology and expressed the desire for enhanced cooperation. At the request of SAARC 152 CU IDOL SELF LEARNING MATERIAL (SLM)
Cabinet Secretaries, Workshops on e-Governance (16-17 February 2010) and Government Performance Management (30-31 April 2010) for SAARC countries were held in New Delhi. People-to-people activities in the SAARC region have also witnessed an increase in recent years. In 2009, India hosted the Third SAARC Bands Festival and the Second SAARC Festival of Literature in New Delhi, and the Second SAARC Folklore Festival in Chandigarh. India has also funded regional development projects in the areas of telemedicine, tele- education, solar rural electrification, rainwater harvesting, seed testing laboratories and shuttle breeding of pulses using a hub-and-spokes approach. The projects, in various stages of implementation, have been greatly appreciated by the recipient SAARC countries. SAARC has witnessed increasing cooperation on security matters especially in the last two years. The Thirty-First Session of the SAARC Council of Ministers (Colombo, February 2009) adopted the 'SAARC Ministerial Declaration on Cooperation in Combating Terrorism' to forge deeper collaboration to address the growing menace of terrorism in the region. The SAARC Terrorist Offences Monitoring Desk (STOMD) and SAARC Drug Offences Monitoring Desk (SDOMD) based in Sri Lanka enable exchange of information on terrorist and drug related cases. The infrastructure for the desks is being strengthened with financial assistance from the Government of India. Similarly, an internet based network among police authorities of Member States is being set up by India for exchange of open/unclassified information. The Declaration adopted at the Sixteenth SAARC Summit in Thimphu also included a strong statement on the threat of terrorism. At the Third SAARC Interior/Home Ministers Meeting that took place in Islamabad on June 26, 2010 a SAARC Ministerial Statement on Cooperation against Terrorism was adopted. The Islamabad Statement, inter alia underlined the commitment of Member States to implement measures against the organization, instigation, financing and facilitation of terrorist activity; underscored the commitment to apprehend and prosecute or extradite persons connected with acts of terrorism; reiterated the taking of appropriate measures to ensure that respective territories were not used for terrorist installations or training camps or for the preparation or organization of terrorist acts intended to be committed against other States or their citizens; and reiterated contribution to efforts for the early adoption of the draft UN Comprehensive Convention on International Terrorism. In another significant achievement, the Standard Operating Protocol on Trafficking of Women & Children was finalized at the Third Meeting of the Regional Task Force to Implement the SAARC Conventions relating to Trafficking in Women & Children and Promotion of Child Welfare in South Asia held in Shimla on 28-29 May, 2009. The Sixteenth SAARC Summit was a historic event as it marked the twenty fifth anniversary of the organization. This was also the first gathering of SAARC Leaders in Bhutan. The Summit adopted the Thimphu Silver Jubilee Declaration entitled, \"Towards a Green and Happy South Asia\", and a separate Statement on Climate Change. 153 CU IDOL SELF LEARNING MATERIAL (SLM)
In the Thimphu Declaration, SAARC Heads of State/Government decided to develop a 'Vision Statement' and set up a 'South Asia Forum', which would provide inputs for charting out its future course of the organization and suggest, if necessary, improvements required in the existing mechanisms. The Summit Declaration strongly condemned terrorism in all its forms and manifestations and expressed deep concern over the threat which terrorism continued to pose to peace, security and economic stability of the South Asian region. It directed Commerce Ministers to continue coordinating SAARC positions on WTO Issues and the Doha Development Agenda during the Seventh WTO Ministerial Conference. The leaders emphasized deepening regional efforts on poverty alleviation and called for the expeditious mainstreaming of the SAARC Development Goals (SDGs) in the national processes and completion of the Mid-term Review of the SDGs as scheduled. They further noted the useful finding and recommendations made by successive regional studies through the Regional Poverty Profiles and directed the relevant SAARC mechanisms to act on them. The Thimphu Statement on Climate Change outlined regional actions on the issue of climate change. These included, inter alia, seeking Observer Status for SAARC at the UNFCCC and evolving a common position for the 16th Conference of Parties to be held in Cancun, Mexico; launching a number of studies to better understand changes brought about by global warming in the region; and establishing an Inter-governmental Expert Group on Climate Change to develop a clear policy direction and guidance for regional cooperation as envisaged in the SAARC Plan of Action on Climate Change; and commissioning SAARC Inter-governmental Mountain, Marine and Monsoon Initiatives. Two instruments, the SAARC Convention on Cooperation in Environment and Agreement on Trade in Services, were signed at the Summit. The Summit inter alia took decisions on regional cooperation relating to security, trade, climate change, energy and food security, poverty alleviation and disaster management. 17th SAARC Summit The XVII SAARC Summit takes place in Addu City, in the southern atolls of the Maldives, situated in the Southern Hemisphere. This is the third time that Maldives hosts a SAARC Summit; it did so previously in 1997 (IX Summit) and 1990 (V Summit). The theme for the Summit is \"Building Bridges\". This covers both the direct implication of connectivity between the SAARC Member States, and also the conceptual connotations of connecting peoples of the SAARC region in all facets, including social, economic, cultural, developmental aspects. This harmonizes with the observance of the current decade as the \"SAARC Decade of Intra-Regional Connectivity\". The South Asian Association for Regional Cooperation, (SAARC) was created in 1985 in Dhaka with 7 members, as an expression of the region's collective decision to evolve a regional cooperative framework. With Afghanistan who joining the association in 2007, there are now eight member countries in SAARC namely Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. 154 CU IDOL SELF LEARNING MATERIAL (SLM)
The renewed and reinvigorated engagement of India with SAARC over the past few years has been one of the main factors leading to the gradual and irreversible transition of the organization from a declaratory phase to one of implementation. This phenomenon has been further complemented by India's commitment to discharge its responsibilities in an asymmetric and non-reciprocal manner. SAARC has 9 Observers, namely Australia, China, the European Union, Iran, Japan, the Republic of Korea, Mauritius, Myanmar and the USA. Specialized Bodies The SAARC Member States have created the following Specialized Bodies of the SAARC in the Member States which have special mandates and structures different from the Regional Centres. These bodies are managed by their respective Governing Boards composed of representatives from all the Member States, the representative of H.E. Secretary-General of the SAARC and the Ministry of Foreign/External Affairs of the Host Government. The heads of these Bodies act as Member Secretary to the Governing Board which reports to the Programming Committee of the SAARC. 8.4 SUMMARY ASEAN‟s primary purpose was to create an environment by which each state’s survival could be ensured through the fostering of regional stability and limiting competition between them. ASEAN‟s memberships have become a heterogeneous patchwork and their economies vary dramatically. The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999. The ASEAN Declaration states that the aims and purposes of the Association are: (1) to accelerate economic growth, social progress and cultural development in the region and (2) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. The ASEAN Economic Community shall be the end-goal of economic integration measures as outlined in the ASEAN Vision 2020. Its goal is to create a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities in year 2020. 155 CU IDOL SELF LEARNING MATERIAL (SLM)
The original member states and Brunei are economically more developed countries and capitalistic, free market economies whereas the CLMV states are less developed and quasi-central political economy. South Asian Association for regional co-operation (SAARC) is the only forum in south Asia. Among seven member states India is the largest not only economically but also in physical size and military power. SAARC was established for the wellbeing of seven South Asian countries. Though there have been many summits and intergovernmental talks since the inception of the organization in 1985, SAARC have not made as much headway as was expected. With the flow of multilateralism and regionalism ASEAN is going forward SAARC is still in same position and unsuccessful. SAARC member states should follow ASEAN as a model for regionalism and for the regional prospects and prosperity. ASEAN‟s primary purpose was to create an environment by which each state’s survival could be ensured through the fostering of regional stability and limiting competition between them. India in physical size, the scale of the economy, population and military strength is a single state. India accounts for nearly three-fourths of the total GNP and population of the SAARC region, and nearly 60 per cent of its total international trade. In SAARC member states India the physically largest as well as economic and military power house. So, the suspicions among the other SAARC members vis-à-vis India run strong. From Indian perspectives there is the suspicion that the smaller nations will gang up against her. Any external power can always cultivate a smaller nation to gain in the region and India in particular. From regional stability and security ASEAN is now moving to regional economic integration and cooperation which is another step of their success. Neither in terms of economic co-operation nor in terms of promotion of peace and understanding there have been no signs of regional co-operation in SAARC. Because of India and Pakistan’s suspicion and mistrust of each other SAARC continues to stagnate and will never be as successful as ASEAN. It is an intergovernmental organization of ten Southeast Asian countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The block’s biggest success has been promoting economic integration among members. It also helped negotiate the RCEP agreement to create one of the world’s largest free trade blocs. ASEAN has struggled to form a cohesive response to China’s claims in the South China Sea, which conflict with those of several members. 156 CU IDOL SELF LEARNING MATERIAL (SLM)
8.5 KEYWORDS Free trade - Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange. ASEAN- The Association of South East Asian Nations, abbreviated as ASEAN, was established on 8 August 1967 in Bangkok (Thailand) to accelerate economic growth, social progress and cultural development and to promote peace and stability in the region. Trade intensity - The trade intensity statistic is the ratio of two export shares. The numerator is the share of the destination of interest in the exports of the region under study. The denominator is the share of the destination of interest in the exports of the world as a whole. Affiliate - When one company is owned or controlled by another company, or shares the same owner or controller as another company, that company is referred to as an ‘affiliate’. Stakeholder - An individual, commercial entity, government body or other party with a real interest, or stake, in a given activity or occurrence. Both a stockholder in a utility and a customer of that utility can be considered stakeholders in that utility’s activities, because they can both be affected by the utility’s actions and policies. SAARC- the South Asian Association for Regional Cooperation, or SAARC, is an economic and geopolitical organization that was established to promote socio- economic development, stability, and welfare economics, and collective self-reliance within its member nations. Founded during a summit in 1985, SAARC’s initial members include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Due to rapid expansion within the region, Afghanistan received full-member status and countries are considered observers. SAARC respects the principles of sovereign equality, territorial integrity, and national independence as it strives to attain sustainable economic growth. Average (Tariff) - A tariff average measures the average level of nominal tariff protection. There are two types of tariff averages: a simple average and a trade weighted average. The example below illustrates how those two types of tariff averages are calculated. Export Processing Zone (EPZ) -A designated area or region in which firms can import duty-free as long as the imports are used as inputs into the production of exports. Traditional EPZs are fenced-in industrial estates specializing in manufacturing for exports. Modern ones have flexible rules that may permit 157 CU IDOL SELF LEARNING MATERIAL (SLM)
domestic sales upon payment of duties when leaving the zone. EPZs generally also provide a liberal regulatory environment for the firms involved as well as infrastructure services. 8.6 LEARNING ACTIVITY 1. Whether agriculture based countries, have surplus production & unable to export due to internal/external factors, need halt production for now? ___________________________________________________________________________ ___________________________________________________________________________ 2. What could be the basis of trade in 21st century among ASEAN countries? ___________________________________________________________________________ ___________________________________________________________________________ 8.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define import tariff. 2. Define foreign trade. 3. What is the full form of SAARC and ASEAN? 4. What is trade balance? 5. Define economic integration. Long Questions 1. Describe the purpose of ASEAN? 2. Discuss SAARC in detail? 3. Discuss the statistics of ASEAN with reference to import and export? 4. Discuss the position of India in ASEAN? 5. What is the difference between ASEAN and SAARC? B. Multiple Choice Questions 1. What does the term Euro Currency market refer to? a. The international foreign exchange market b. The market where the borrowing and lending of currencies take place outside the country of issue c. The countries which have adopted Euro as their currency 158 CU IDOL SELF LEARNING MATERIAL (SLM)
d. The market in which Euro is exchanged for other currencies 2. What does Dumping refers to? a. Reducing tariffs b. Sale of goods abroad at low a price, below their cost and price in home market c. Buying goods at low prices abroad and selling at higher prices locally d. Expensive goods selling for low prices 3. Why do International trade and domestic trade differ? a. Different government policies b. Immobility of factors c. Trade restrictions d. Government policies, immobility of factor and trade restriction 4. What is the term for Govt. policy with respect to exports and imports? a. Commercial policy b. Fiscal policy c. Monetary policy d. Finance policy 5. Which of the following is international trade? a. Trade between countries b. Trade between regions c. Trade between provinces d. Trade between regions and provinces Answers 1-b, 2-b, 3-c, 4- a, 5-a 8.8 REFERENCES References Berry, S., Levinsohn, J. and Pakes, A. (1999).Voluntary Export Restraints on automobiles: evaluating a trade policy. American Economic Review. Bell, M., Ross-Larson, B. and Westphal, L. E. (1984). Assessing the Performance of Infant Industries. Journal of Development Economics. 159 CU IDOL SELF LEARNING MATERIAL (SLM)
Bergstrand, J. H. (1985). The gravity equation in international trade: some microeconomic foundations and empirical evidence. The Review of Economics and Statistics. Textbooks Barth, J., Marchetti, J. A., Nolle, D. E., and Sawangngoenyuang, W. (2006). Foreign Banking: Do Countries. WTO Staff Working Paper. Barton, J. H., Goldstein, J. L., Josling, T. E. and Steinberg, R. H. (2006). The Evolution of the Trade Regime. Princeton: Princeton University Press. Bayoumi, T. and Eichengreen, B. (1998). Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA. Chicago: University of Chicago Press. Websites https://asean.org/?static_post=external-trade-statistics-3 https://asean.org/wp-content/uploads/2016/11/Table22_as-of-6-dec-2016.pdf https://ustr.gov/countries-regions/southeast-asia-pacific/association-southeast-asian- nations-asean 160 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9 – IMPACT OF EXPORT AND IMPORT ON ECONOMY FDI STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 Meaning of FDI. 9.3 Impact of Export and Import on economy 9.4 Summary 9.5 Keywords 9.6 Learning Activity 9.7 Unit End Questions 9.8 References 9.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Explain the meaning of FDI. Discuss how FDI works. Summarize the impact of export and import on economy. 9.1 INTRODUCTION In today’s global economy, consumers are used to seeing products from every corner of the world in their local grocery stores and retail shops. These overseas products—or imports— provide more choices to consumers. And because they are usually manufactured more cheaply than any domestically-produced equivalent, imports help consumers manage their strained household budgets. When there are too many imports coming into a country in relation to its exports—which are products shipped from that country to a foreign destination—it can distort a nation’s balance of trade and devalue its currency. The devaluation of a country's currency can have a huge impact on the everyday life of a country's citizens because the value of a currency is one of the biggest determinants of a nation’s economic performance and its gross domestic product (GDP). Maintaining the appropriate balance of imports and exports is crucial for a country. 161 CU IDOL SELF LEARNING MATERIAL (SLM)
The importing and exporting activity of a country can influence a country's GDP, its exchange rate, and its level of inflation and interest rates. The global imports and exports can create a paradigm shift in the market economy of every country. If a country’s imports of goods and services exceed its exports, the particular country may lose its balance of trade.This economic context of a country is known as the trade deficit. It will negatively affect the market economy of a country. If a country’s exports exceed its imports, the net exports would be positive. This economic situation is called trade surplus. The trade deficit will definitely lead to the devaluation of that country’s currency. Devaluation is a decline in the value of a country’s currency. It is one of the most significant and the biggest factor in measuring the economic performance of a country. It will pave the way for economic growth. A trade surplus economy can provide more employment opportunities as it requires more products to export. Therefore, more people are needed to keep up the factories running. The consumer spending increases when the net export becomes positive as it stimulates the inflow of funds into the country. Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening stores in China. A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products. A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company already operating in the industry. Example of FDI Examples of foreign direct investments include mergers, acquisitions, retail, services, logistics, and manufacturing, among others. Foreign direct investments and the laws governing them can be pivotal to a company's growth strategy. In 2017, for example, U.S.-based Apple announced a $507.1 million investment to boost its research and development work in China, Apple's third-largest market behind the Americas and Europe. The announced investment relayed CEO Tim Cook's bullishness toward the 162 CU IDOL SELF LEARNING MATERIAL (SLM)
Chinese market despite a 12% year-over-year decline in Apple's Greater China revenue in the quarter preceding the announcement. China's economy has been fuelled by an influx of FDI targeting the nation's high-tech manufacturing and services, which according to China's Ministry of Commerce, grew 11.1% and 20.4% year over year, respectively, in the first half of 2017. Meanwhile, relaxed FDI regulations in India now allow 100% foreign direct investment in single-brand retail without government approval. The regulatory decision reportedly facilitates Apple's desire to open a physical store in the Indian market. Thus far, the firm's iPhone have only been available through third-party physical and online retailers. FDI can help foster and maintain economic growth, both for the recipient country and for the country making the investment. For example, a developing country might benefit from incoming FDI as a way of financing the construction of new infrastructure or providing employment for its local workforce. On the other hand, multinational companies can benefit from FDI as a way to expand their footprint into international markets. One of the main disadvantages of FDI, however, are that it tends to rely on the involvement or oversight of multiple governments, leading to higher levels of political risk. Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company. The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organisation of Economic Co-operation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company's voting shares. 9.2 MEANING OF FDI. A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. Working of FDI Foreign direct investments are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over the decision-making of a foreign business. 163 CU IDOL SELF LEARNING MATERIAL (SLM)
The Bureau of Economic Analysis (BEA), which tracks expenditures by foreign direct investors into U.S. businesses, reported total FDI into U.S. businesses of $4.46 trillion at the end of 2019. Manufacturing represented the top industry, with just over 40% of FDI for 2019. Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company. The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organization of Economic Co-operation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company's voting shares. Characteristics of FDI Foreign direct investments (FDI) are investments made by one company into another located in another country. FDIs are actively utilized in open markets rather than closed markets for investors. Horizontal, vertical, and conglomerate are types of FDI’s. Horizontal is establishing the same type of business in another country, while vertical is related but different, and conglomerate is an unrelated business venture. The Bureau of Economic Analysis continuously tracks FDIs into the U.S. Advantagesof FDI Economic Development Stimulation - Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry. Easy International Trade Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier. Employment and Economic Boost. Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost. Development of Human Capital Resources 164 CU IDOL SELF LEARNING MATERIAL (SLM)
One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labour, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership. Tax Incentives. Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business. Resource Transfer Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills. Disadvantages of FDI Hindrance to Domestic Investment- As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment. Risk from Political Changes- Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high. Negative Influence on Exchange Rates- Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another. Higher Costs- If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations. Economic Non-Viability- Considering that foreign direct investments may be capital- intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable. Expropriation- Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets. Types of Foreign Direct Investment Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening stores in China. A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products. A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company already operating in the industry. Example of Foreign Direct Investments Examples of foreign direct investments include mergers, acquisitions, retail, services, logistics, and manufacturing, among others. Foreign direct investments and the laws governing them can be pivotal to a company's growth strategy. In 2017, for example, U.S.-based Apple announced a $507.1 million investment to boost its research and development work in China, Apple's third-largest market behind the Americas and Europe. The announced investment relayed CEO Tim Cook's bullishness toward the Chinese market despite a 12% year-over-year decline in Apple's Greater China revenue in the quarter preceding the announcement. China's economy has been fuelled by an influx of FDI targeting the nation's high-tech manufacturing and services, which according to China's Ministry of Commerce, grew 11.1% and 20.4% year over year, respectively, in the first half of 2017. Meanwhile, relaxed FDI regulations in India now allow 100% foreign direct investment in single-brand retail without government approval. The regulatory decision reportedly facilitates Apple's desire to open a physical store in the Indian market. Thus far, the firm's iPhone have only been available through third-party physical and online retailers. 9.3 IMPACT OF EXPORT AND IMPORT ON ECONOMY Imports are foreign goods and services bought by citizens, businesses, and the government of another country. It doesn't matter what the imports are or how they are sent. They can be shipped, sent by email, or even hand-carried in personal luggage on a plane. If they are produced in a foreign country and sold to domestic residents, they are imports. Even tourism products and services are imports. When you travel outside the country, you are importing any souvenirs you bought on your trip. Imports and the Trade Deficit 166 CU IDOL SELF LEARNING MATERIAL (SLM)
If a country imports more than it exports it runs a trade deficit. If it imports less than it exports, that creates a trade surplus. When a country has a trade deficit, it must borrow from other countries to pay for the extra imports.It's like a household that's just starting out. The couple must borrow to pay for a car, house, and furniture. Their income isn't enough to cover the necessary expenses that improve their standard of living. But, like the young couple, a country should not continue to borrow to finance its trade deficit. Export More than Import At some point, a mature economy should become a net exporter. At that point, a trade surplus is healthier than a deficit. The reason for the same are below – Exports boost economic output, as measured by gross domestic product.They create jobs and increase wages. Imports make a country dependent on other countries political and economic power. That's especially true if it imports commodities, such as food, oil, and industrial materials. It's dangerous if it relies on a foreign power to keep its population fed and its factories humming. For example, the United States suffered a recession when OPEC embargoed its oil exports. Countries with high import levels must increase their foreign currency reserves. That's how they pay for the import. That can affect the domestic currency value, inflation, and interest rates. Domestic companies should be able to compete with foreign companies that import similar goods and services to their businesses. Small businesses that can’t compete may fail. Small businesses added 1.8 million net new jobs in 2019. The U.S. has 30.7 million small businesses that 47.3 percent of the private workforce. Exports help domestic companies gain a competitive advantage. Through exporting, they learn to produce a variety of globally-demanded goods and services. Four Ways Countries Increase Exports Trade protectionism Countries often increase exports by increasing trade protectionism. That insulates their companies from global competition for a while. They impose tariffs (taxes) on imports, making them more expensive.The problem with this strategy is that other countries soon retaliate. A trade war hurts global trade in the long run. In fact, this was one of the causes of the Great Depression. Subsidies 167 CU IDOL SELF LEARNING MATERIAL (SLM)
As a result, governments are now more likely to provide subsidies to their industries. The subsidy lowers business costs so they can reduce prices. This strategy may lower the risk of retaliation. If other countries complain, the government can say the subsidies are temporary. For example, India claims the subsidy allows its poor to afford basics like fuel and food. Some emerging markets protect new industries. They give them a chance to catch up with technology in developed markets. Trade Agreement A third way countries boost exports is through trade agreements. Once protectionism has lowered trade, countries may see the wisdom in reducing tariffs.The World Trade Organization almost succeeded in negotiating a global trade agreement. But the European Union and the United States refused to end their agricultural subsidies. As a result, countries rely on bilateral and regional agreements. Currency Value Countries try to increase exports by lowering their currency value. That has the same effect as subsidies. It lowers the prices of goods. Central banks reduce interest rates or print more money. They also buy foreign currency to raise its value. Countries like China and Japan are better at winning these currency wars. When a country exports goods, it sells them to a foreign market, that is, to consumers, businesses, or governments in another country. Those exports bring money into the country, which increases the exporting nation's GDP. When a country imports goods, it buys them from foreign producers. The money spent on imports leaves the economy, and that decreases the importing nation's GDP. Net exports can be either positive or negative. When exports are greater than imports, net exports are positive. When exports are lower than imports, net exports are negative. If a nation exports, say, $100 billion dollars worth of goods and imports $80 billion, it has net exports of $20 billion. That amount gets added to the country's GDP. If a nation exports $80 billion of goods and imports $100 billion, it has net exports of minus $20 billion, and that amount is subtracted from the nation's GDP. Conceivably, net exports could be zero, with exports equal to imports and in fact this does occasionally happen in the United States. If net exports are positive, the nation has a positive balance of trade. If they are negative, the nation has a negative trade balance. Virtually every nation in the world wants its economy to be bigger rather than smaller. That means that no nation wants a negative trade balance. Because no nation wants a negative trade balance, some countries try to protect their own markets. This policy is called protectionism, which uses barriers to keep out imports. These barriers include high taxes or surcharges on imported goods and strict rules about what products can be imported. 168 CU IDOL SELF LEARNING MATERIAL (SLM)
Despite some nations' attempts at protectionism, free trade has recently been the dominant trend for most countries. Economists usually favour free trade because it tends to give consumers the greatest choice of products at the lowest prices. That occurs because some nations are better at producing certain products than others. 9.4 SUMMARY A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign- based companies. A 10 per cent ownership is a safe bet because it does not give the investor a controlling interest but it does allow influence over the company’s management, operations, and policies. This ensures the investor to develop a lasting interest in the business and hence we can conclude that FDI is not merely the transfer of funds. It is differentiated in this regard from foreign portfolio investment. Foreign direct investment is significant for developing economies and emerging markets where companies need funding and expertise to expand their international sales. Private investment in infrastructure, energy, and water is a critical driver of the economy as helps in increasing jobs and wages. FDIs are actively utilized in open markets rather than closed markets for investors. Horizontal, vertical, and conglomerate are types of FDI’s. Horizontal is establishing the same type of business in another country, while vertical is related but different, and conglomerate is an unrelated business venture. FDI boost a country’s economic development, employment, human resource development and knowledge transfer. The company also get tax incentive for boosting trade inside the host country. Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate. i. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening stores in China. ii. A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that 169 CU IDOL SELF LEARNING MATERIAL (SLM)
supplies parts or raw materials required for the manufacturing company to make its products. iii. A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company already operating in the industry. If a country imports more than it exports it runs a trade deficit. If it imports less than it exports, that creates a trade surplus. When a country has a trade deficit, it must borrow from other countries to pay for the extra imports. Country can increase their trade surplus by adopting methods such as trade protectionism, subsidies, trade agreement and reducing currency value. Today, India has become one of the most attractive destinations for foreign direct investments thanks to liberalised norms, easy policies and subsidised rates. Foreign investors are also willing to invest in the country due to lower labour costs, market diversification, subsidies, and preferential tariffs. FDI is an important monetary source for India's economic development. Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country. India today is a part of top 100-club on Ease of Doing Business (EoDB) and globally ranks number 1 in the Greenfield FDI ranking. There are a few industries where FDI is strictly prohibited under any route. These industries are i. Any Gambling or Betting businesses ii. Lotteries (online, private, government, etc) iii. Investment in Chit Funds iv. Nidhi Company v. Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc) vi. Housing and Real Estate (except townships, commercial projects, etc) vii. Trading in TDR’s viii. Cigars, Cigarettes, or any related tobacco industry ix. Atomic Energy Generation 9.5 KEYWORDS 170 CU IDOL SELF LEARNING MATERIAL (SLM)
Balance of Payments - The Balance of Payments is a statistical system through which economic transactions occurring during specific time periods between an economy and the rest of the world can be summarised in a systematic way. The IMF Balance of Payments and International Investment Manual provide conceptual guidelines for compiling balance of payments statistics according to international standards. Foreign Direct Investment Enterprise - A foreign direct investment enterprise is an enterprise resident in one economy and in which an investor resident in another economy owns, either directly or indirectly, 10% or more of its voting power if it is incorporated or the equivalent for an unincorporated enterprise. Foreign Direct Investor - A foreign direct investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, resident in another economy. A direct investor could be classified to any sector of the economy and could be any of the following: (i) an individual; (ii) a group of related individuals; (iii) an incorporated or unincorporated enterprise; (iv) a public or private enterprise; (v) a group of related enterprises; (vi) a government body; (vii) an estate, trust or other societal organisation; or (viii) any combination of the above. In the case where two enterprises each own 10% or more of each other are voting power, each is a direct investor in the other. A direct investor has a direct investment enterprise operating in a country other than the economy of residence of the foreign direct investor. Holding Companies - A holding company is a company established to hold participation interests in other enterprises on behalf of its owner. Some holding companies may have a substantial physical presence as evidenced by, for example, office buildings, equipment, and employees. Others may have little or no physical presence and may exist only as shell companies. Ultimate Investing Country - The ultimate investing country is a geographical allocation determining the location of the ultimate source of control of the stocks of inward FDI for a reporting economy. It is recommended to compile, on a supplemental basis, inward FDI positions according to the UIC. Acquisition - An acquisition is a business transaction between unrelated parties based on terms established by the market where each enterprise acts in its own interest. The acquiring enterprise purchases the assets and liabilities of the target enterprise. In some cases, the target enterprise becomes a subsidiary or part of a subsidiary of the acquiring enterprise. Activity of Multinational Enterprises- In principle quantitative or qualitative information directly concerning multinational firms could be classified under activity 171 CU IDOL SELF LEARNING MATERIAL (SLM)
of multinational enterprises. However, within the framework of the OECD Handbook on Economic Globalisation Indicators, data on the activity of multinationals covers all economic and industrial data which are not associated with FDI, portfolio or other financial transactions. Data collected by the OECD within the framework of the surveys on the economic activity of multinationals include 18 variables, notably gross output, turnover, value added, number of people in employment, employee compensation, gross operating surplus, gross fixed capital formation, R&D expenditures, number of researchers, total exports and imports, intra-firm exports and imports, and technological payments and receipts. Balance-of Payments the Balance of Payments is a statistical system through which economic transactions occurring during specific time periods between an economy and the rest of the world can be summarised in a systematic way. The IMF Balance of Payments and International Investment Manual provide conceptual guidelines for compiling balance of payments statistics according to international standards. Centre of Predominant Economic Interest- An institutional unit has a predominant centre of economic interest in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale. The location need not be fixed so long as it remains within the economic territory. In most cases, it is reasonable to assume that an institutional unit has a predominant centre of economic interest in the territory if the unit has already engaged in economic activities and transactions on a significant scale in the country for one year or more, or if the unit intends to do so. Conduit- A conduit is an enterprise that obtains or borrows funds, often from unaffiliated enterprises, and remits those funds to its direct investor or another affiliated enterprise. Some conduits and holding companies may have a substantial physical presence as evidenced by office building, equipment, employees, etc. Others may have (little) or no physical presence and may exist only as shell companies. Debt securities- Debt securities include bonds, debentures, commercial paper, promissory notes and other tradable non-equity securities. Economic territory - Economic territory is defined as including all the areas under the effective economic control of a single government. Economic territory has the dimensions of physical location as well as legal jurisdiction. With regard to its composition, an economic territory (or economy) consists of all the institutional units that are resident in that territory. The concepts of economic territory and residence are designed to ensure that each institutional unit is a resident of a single economic territory. The economic territory includes the land area, airspace, territorial waters, 172 CU IDOL SELF LEARNING MATERIAL (SLM)
including jurisdiction over fishing rights and rights to fuels or minerals. In a maritime territory, the economic territory includes islands that belong to the territory. The economic territory also includes territorial enclaves in the rest of the world. These are clearly demarcated land areas (such as embassies, 6 consulates, military bases, scientific stations, information or immigration offices, aid agencies, central bank representative offices with diplomatic immunity, etc.) located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or other purposes with the formal agreement of governments of the territories where the land areas are physically located. 9.6 LEARNING ACTIVITY 1. Is FDI putting a threat on the host country's environment? What do you think? ___________________________________________________________________________ ___________________________________________________________________________ 2. Can you comment on number of new features of the international relations system and restrictive measures taken by both developed and developing/emerging countries in the field of foreign direct investment (FDI), before the Covid-19 pandemic and also under its influence? ___________________________________________________________________________ ___________________________________________________________________________ 9.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define FDI. 2. What are the characteristics of FDI? 3. Define trade protectionism. 4. Explain tax incentive which an investing company with reference to FDI. 5. How domestic investment is hindered because of FDI? Long Questions 1. What are the ways any country can increase export? 2. What is the impact of export and import on economy? 3. Give some examples of FDI. 4. What are the types of FDI? Discuss each in details? 173 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Discuss advantages and disadvantages of FDI. B. Multiple Choice Questions 1. What does foreign direct investment include? a. Intellectual properties b. Human resources c. Tangible goods d. Intangible goods 2. What is the reason for three disputes of FDI? a. Concern b. Interest c. Regard d. Hobby 3. Which year the Treaty of Rome was signed? a. 1959 b. 1957 c. 1956 d. 1955 4. When did Austria join the European Union? a. 1997 b. 1993 c. 1995 d. 1999 5. What should the foreign policy decision-makers rely on for spreading information? a. Bureaucrats b. Politicians c. Media d. Public Answers 1-c, 2-b, 3-b, 4- c, 5-c 174 CU IDOL SELF LEARNING MATERIAL (SLM)
9.8 REFERENCES References Bode, M. and Budzinski, O. (2005). Competing Ways towards International Antitrust: the WTO versus the ICN. Marburg: Philipps-University Marburg. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics. Bown, C. P. (2002). The Economics of Trade Disputes.Washington D.C.: WTO. Textbooks Blackhurst, R. and Hartridge, D. (2004). Improving the capacity of WTO institutions to fulfill their mandate. Journal of International Economic. Blackhurst, R., Enders, A. and Francois, J. F. (1995). The Uruguay Round and Market Access: Opportunities and Challenges for Developing Countries. Washington, D.C.: World Bank. Blanchard, O. (2005). European Unemployment: the Evolution of Facts and Ideas. Cambridge, MA: National Bureau of Economic Research. Websites https://www.investopedia.com/terms/f/fdi.asp#:~:text=A%20foreign%20direct%20inv estment%20(FDI)%20is%20an%20investment%20made%20by,assets%20in%20a%20 foreign%20company https://www.fdi.finance/blog/why-is-fdi-so-important/ https://boycewire.com/foreign-direct-investment-definition/ 175 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 10 – MAKE IN INDIA STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Meaning of Make in India 10.2.1 Economic Rationale 10.2.2 Operationalizing Inclusive Growth 10.2.3 Recent Export Pessimism 10.2.4 Policy Challenges on Make in India 10.3 Impact of Make in India on Economy 10.4 Summary 10.5 Keywords 10.6 Learning Activity 10.7 Unit End Questions 10.8 References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Explain the concept of make in India Identify the policy challenges on make in India. Describe the impact of make in India on Economy. 10.1 INTRODUCTION Make in India is a major national programme of the Government of India designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best in class manufacturing infrastructure in the country. The primary objective of this initiative is to attract investments from across the globe and strengthen India’s manufacturing sector. It is being led by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India. The Make in India programme is very important for the economic growth of India as it aims at utilising the existing Indian talent base, creating additional employment opportunities 176 CU IDOL SELF LEARNING MATERIAL (SLM)
and empowering secondary and tertiary sector. The programme also aims at improving India’s rank on the ease of doing business index by eliminating the unnecessary laws and regulations, making bureaucratic processes easier, making the government more transparent, responsive and accountable. The initiative was formally introduced on September 25, 2014 by Indian Prime Minister Mr.Narendra Modi at Vigyan Bhawan, New Delhi, in the presence of business giants from India.The focus of Make in India programme is on 25 sectors. These include- automobiles, automobile components, aviation, biotechnology, chemicals, construction, defence manufacturing electrical machinery, electronic systems, food processing, IT & BPM, leather, media and entertainment, mining, oil and gas, pharmaceuticals, ports and shipping, railways, renewable energy, roads and highways, space, textile and garments, thermal power, tourism and hospitality and wellness. The campaign Make in India is under the progress in many sectors but along with facing failures in others. Where one side has achieved successes in many areas, in another way, it has become a debatable issue as the failed campaign too. The main objective of manufacturing has not met Modi’s expectations. There is a loss in gross domestic products, inconsistency in policy focus, and no direct investment. The possible reason for failures is the lofty dreams taken without noticing the capability of India’s infrastructure and skill of workers. Make in India\" had three stated objectives- To increase the manufacturing sector's growth rate to 12-14% per annum; To create 100 million additional manufacturing jobs in the economy by 2022; To ensure that the manufacturing sector's contribution to GDP is increased to 25% by 2022 (later revised to 2025). After the launch, India gave investment commitments worth ₹16.40 lakh crore (US$230 billion) and investment inquiries worth of ₹1.5 lakh crore (US$21 billion) between September 2014 to February 2016.As a result, India emerged as the top destination globally in 2015 for foreign direct investment (FDI), surpassing the United States and China, with US$60.1 billion FDI.As per the current policy, 100% Foreign Direct Investment (FDI) is permitted in all 100 sectors, except for Space industry (74%), defence industry (49%) and Media of India (26%).Japan and India had also announced a US$12 billion 'Japan-India Make-in-India Special Finance Facility\" fund to push investment. In line with the Make in India, individual states too launched their own local initiatives, such as 'Make in Odisha,' 'Tamil Nadu Global Investors Meet,' 'Vibrant Gujarat,' 'Happening Haryana' and 'Magnetic Maharashtra. India received US$60 billion FDI in FY 2016–17. The World Bank's 2019 Ease of Doing Business report acknowledges India's jump of 23 positions against its rank of 100 in 2017 to be placed now at 63rd rank among 190 177 CU IDOL SELF LEARNING MATERIAL (SLM)
countries.By the end of 2017, India had risen 42 places on Ease of doing business index, 32 places World Economic Forum's Global Competitiveness Index, and 19 notches in the Logistics Performance Index,thanks to recent governmental initiatives, which include converges, synergies and enables other important Government of India schemes, such as Bharatmala, Sagarmala, Dedicated Freight Corridors, Industrial corridors, UDAN- RCS, Bharat Broadband Network, Digital India. Ease of Doing Business India jumped to 63rd place out of 190 countries in the world Banks' 2019 Ease of Doing Business Index from 130th in 2016. In February 2017, the government appointed the United Nations Development Programme (UNDP) and the National Productivity Council \"to sensitize actual users and get their feedback on various reform measures.\"As a result, now there is competition among the states of India to improve their current ranking on the ease of doing business index based on the completion percentage scores on 98-point action plan for business reform under Make in India initiative. Currently Andhra Pradesh, Telangana, Haryana, Odisha, Chhattisgarh and West Bengal are top six states. 10.2 MEANING OF MAKE IN INDIA Make in India is an initiative by the Government of India to make and encourage companies to manufacture in India and incentivize dedicated investments into manufacturing. The policy approach was to create a conducive environment for investments, develop a modern and efficient infrastructure, and open up new sectors for foreign capital. The initiative targeted 25 economic sectors for job creation and skill enhancement, and aimed \"to transform India into a global design and manufacturing hub. India jumped to 63rd place out of 190 countries in the World Bank’s 2019 Ease of Doing Business Index from 130th in 2016. Currently Andhra Pradesh, Telangana, Haryana, Odisha, Chhattisgarh and West Bengal (44.35%) are top six states. The campaign was designed by Wieden+Kennedy with the launch of a web portal and release of brochures on the 25 sectors, after foreign equity caps, norms and procedures in various sectors were relaxed, including application of manufacturing application made available online and the validity of licenses was increased to three years. \"Zero Defect Zero Effect\" slogan was coined by Prime Minister of India, Narendra Modi, as essence of the Make in India initiative that manages advanced processes, materials and technologies, to guide the production mechanism that produces products with no defects and with no adverse environmental and ecological effects. On June 15, 2017, Ministry of Commerce and Industry (India), the nodal ministry revised the Indian public procurement order and general financial rule to incorporate preference to make 178 CU IDOL SELF LEARNING MATERIAL (SLM)
in India. Subsequently, all the nodal agencies published their own orders to extended the scope of Make in India in procurement related to their line of products 10.2.1 Economic Rationale We have collated a list of factors which might well auger well for economy and in turn impact the markets in a positive way. Boost to manufacturing sector The government will select domestic companies having leadership in innovation and new technology. The idea is to turn these into global champions and promote green and advanced manufacturing and help these companies to integrate into global value chain. The once booming services sector has slowed, but it is the manufacturing sector that has performed especially poorly by recording an expansion of barely 1.1 per cent growth in 2012-13, followed by a contraction of 0.7 percent. India will need a dramatic improvement in transport connectivity together with addressing the skewed transport mode mix, currently biased towards roads. Road construction will need to rise 5-fold to 30Kms/day from the current 6 kms/day. The Indian Railways will also need to build the capacity to evacuate more than 3x the current traffic of both passengers as well as freight by building high speed dedicated freight corridors and faster trains. Need to increase FDI India's next step should be to achieve higher growth and to do that foreign direct investment (FDI) is a top priority, say analysts. It seeks investment in several industries, including manufacturing, construction, telecommunications and financial services. 'Make in India' or 'Invest India' campaign will be the first reference point to guide foreign investors. It will provide help on regulatory and policy issues, and assist in obtaining regulatory clearances. The government has identified 25 sectors where India can become world leader. These include automobiles, chemicals, IT, pharma, textiles, ports, aviation, leather Tourism and hospitality, wellness, and railways, among others. In other words, at the current level of GDP of almost $2 trillion in India, about $100 billion of FDI is required to boost the GDP growth by 2%. Help in reviving economic growth One of the immediate problems faced by the new government is the significant slowdown in economic activity in recent years. After a sustaining growth rates of over 9 per cent between 2005-06 and 2007-08, growth slowed in 2008-09 in the wake of the global financial crisis. The growth has continued to slow down and has been running below 5 per cent for the last two years. For a massive increase in the growth rate by 4% to GDP, $200 billion of FDI would be needed. This is about eight times the level of GDP India currently attracts in FDI. 179 CU IDOL SELF LEARNING MATERIAL (SLM)
In order to boost growth at least in the near term, the first and most obvious thing would be to finish the various stalled infrastructure projects. The capital invested in these projects can be made generate output. 10.2.2 Operationalizing Inclusive Growth Despite high overall economic growth rates in many Asian countries in the past 2 decades, many policy makers in Asia and in international organizations have become increasingly concerned that this growth has been too uneven and often accompanied by rising income inequality. In addition, it appeared that disadvantaged groups, including members of ethnic minorities, people in remote rural locations, and women, have not benefited proportionately from this rapid economic growth. The possibility that growth might leave poor and disadvantaged people behind was highly relevant in political debates in India during the 2004 national election. The new government targeted inclusive growth as a strategy to overcome these inequalities and disadvantages. Indeed, India’s Eleventh Five-Year Plan, 2007–2012 was entitled “Inclusive Growth” and included concrete strategies to promote the well-being and participation of disadvantaged groups. Inclusive growth is more than broad-based growth. While economic growth is a well-defined but narrow concept, inclusive growth, by implication, focuses on a subset of such growth episodes. Since not all growth episodes are inclusive, it is necessary to separate those that are from those that are not. Growth is a necessary condition for inclusive growth; there is, by implication, no such thing as an “inclusive contraction.”2 Therefore, it is necessary to determine what characterizes growth episodes that qualify as inclusive. Two options are possible. One focuses on process, in the sense that the actual growth included many people who participated in that growth (i.e., inclusive growth is based on inputs from a large number of people). In this context, inclusive growth is somewhat related to broad-based or labour- intensive growth. However, “inclusive” carries with it the notion of non-discrimination, a feature that is less clear with the other terms. Thus inclusive growth can be characterized as broad-based growth that includes non-discriminatory participation. The second option focuses on outcomes of the growth process (i.e., inclusive growth benefits many people). This option is closely related to the much-discussed concept of pro-poor growth. According to its weak but absolute definition, pro-poor growth refers to increased income for the poor, while its relative definition refers to growth that leads to disproportionate increases in incomes among the poor (i.e., it is accompanied by declining inequality). The goal of inclusive growth is to strike a balance between economic and sustainable development. In other words, instead of only focusing on the economic outcomes as in traditional models, inclusive growth focuses more on equity. Make in India was launched keeping in mind the inclusive growth of the country. 10.2.3 Recent Export Pessimism 180 CU IDOL SELF LEARNING MATERIAL (SLM)
During 1950’s many economists like Prebisch, Myrdal, Singer and Nurkse recognized that the exports of least developed countries or LDC’s during the 20th century were quite weak in contrast to buoyancy of exports during the 19th century. Many LDC’s started realising that trade was disadvantageous to them rather than being an ‘engine of growth’. The pessimism about demand for the exports of the LDC’s in the markets of the developed countries is termed as export pessimism. Jagdish Bhagwati identified two distinct forms of export pessimism. One form of export pessimism prevailed during the period from the World War II to the mid 1960’s and the second variant prevailed in 1980’s. The first form of export pessimism was sought to be explained by Prebisch, Singer and Nurkse. Prebisch and Singer related the phenomenon of export pessimism on the part of LDC’s to the secular deterioration in the terms of trade of primary products (manufacturing product). In the opinion of Bhagwati, the phenomenon of secular deterioration of the TOT (Term of Trade) of LDC’s exogenous to the policies of LDC’s themselves. So far as Nurkse’s version of export pessimism is concerned, low growth of exports of LDC’s is due to low income elasticity of demand for several agricultural products in the economies of developed countries. With the acceleration of development process in the LDC’s there would be much difficulty for the developed countries to absorb large quantities of primary products that would be turned out by the former. As a consequence, the relative price of those exports would decline. It is clear that the causes of the decline in the TOT of LDC’s, in either case, lie outside the control of these countries. The second form of export pessimism became manifest during 1980’s. Jagdish Bhagwati termed it as ‘new export pessimism’. The inability of less developed countries to enlarge their exports was explained in terms of Nurksian hypothesis that developed countries could not absorb expanding exports of primary products from the developing countries. Bhagwati did not accept this hypothesis for three reasons. First, the exports could be rapidly increased during 1980’s by the newly industrialized countries such as South Korea, Hong Kong, Taiwan and Singapore. It is unlikely that all LDC’s would be able to increase exports at the similar higher rates. Second, the exports of LDC’s in the markets of developed countries constitute about 2 percent of the world trade. Even if this proportion gets doubled, the developed country would be able to absorb the exports of LDC’s. Third, there has been growth in intra-industry trade both between the LDC’s and developed countries and between the LDC’s themselves. Another line of argument concerning the new export pessimism is that any accelerated growth of exports of LDC’s to developed countries would provoke protectionist reactions from the latter. In view of the protectionist threat from the developed countries, it is likely that the LDC’s would switch over to the import-substitution policies. 181 CU IDOL SELF LEARNING MATERIAL (SLM)
It raises the question whether or not the fear of protectionist threat from developed countries is justified. It is sometimes pointed out that the protectionist threat is over-stated. Baldwin, in this connection, has put forward the argument that protection, in fact, is not as effective as it seems at the first sight. The exporting countries can circumvent protection through different means and increase their export earnings. Jagdish Bhagwati has advanced another argument that the foreign direct investment has much role to play in this regard. The investors can create political pressure upon the developed countries to desist from protectionism and continue to follow free trade. A most potent force for resisting increased protectionism from developed countries may also be the WTO. Nurkse’s Version of Export Pessimism Apart from Prebisch-Singer line of argument based on secular deterioration of TOT hypothesis, the export pessimism in LDC’s was discussed by R. Nurkse in terms of the inability of developed countries to absorb the expanding exports of primary products from the developing countries. According to him, the shrinkage of demand for the exports of the LDC’s during the post-war period was on account of the following factors: i. Change in Industrial Structure: The post-war industrial restructuring in the developed countries resulted in the growth of such heavy industries that had a low content of raw materials imported from the other countries. That partly restricted the exports of materials from the LDC’s to developed countries. ii. Increase in Share of Services: In advanced countries, there has been a tremendous increase in the share of services in the total output. It led to the diminution of the demand for imported inputs from the less developed countries. iii. Low Income Elasticity of Demand: The income elasticity of demand for a large number of agricultural products is very low. Therefore, the prospect of raising the exports of agricultural products has remained low in the past. Even in future, there is very little possibility of raising the exports of farm products. iv. Economy in the Use of Raw Materials: During the post-war period, there has been a trend towards the economisation of raw materials. Many industries in the developed countries undertake the reprocessing of scrap and waste materials. There is also the introduction of synthetic products. These 182 CU IDOL SELF LEARNING MATERIAL (SLM)
developments in the fields of processing and manufacturing industries have led to a decline in the demand for exportable products of the LDC’s. v. Agricultural Protectionism: The countries of European Union and the United States have continued to follow the policy of protection to agriculture through price-supports and subsidies. The developed countries stubbornly opposed the removal of agricultural subsidies so much so that Uruguay Round of negotiations came to the brink of breakdown on this issue. The agricultural protectionism resulted in a major impediment in the growth of exports of agricultural products from the LDC’s. In view of disappointing growth of exports of the LDC’s, Nurkse and several other writers prescribed that the LDC’s should follow the inward- looking strategy, i.e., import substitution. In the words of Nurkse, “When developing countries face difficulties in exporting both traditional and new exports, import-substitution strategy may be adopted by them as an escape route from economic stagnation.” 10.2.4 Policy Challenges on Make in India The concept of Make in India is undoubtedly an inspiring initiative of the Indian government which has reduced the risk factors for investing in India for many big foreign industries, but the pace of the progress is slower as decided and predicted. In this section, the main hurdles and barriers which are responsible for this slow pace are discussed. Political Stalemate Political stalemate or gridlock is of major concern among the policymakers, analysts and investors. Session by session the working of the parliamentary affairs is interrupted and delaying the approval of important bills in the parliament houses owing to political gridlock. As a result, the economy and the mindsets of the investors are confused. Important bills and reforms such as land acquisition and labour and Goods and Services Tax (GST) are some examples. GST is the most important and critical reform, required for smooth and efficient business for ensuring low cost and improve tax revenues. Critical economic reforms required for the implementation of Make in India programme still need approvals from both houses of the Indian parliament. Foreign investors, who are attracted by ambitious promises, may opt other options after getting frustrated by this political stalemate. Global rating agencies are also worried about the slow pace of reforms in India. The political logjam may lead to uncertainties and low interest of the overseas investors. Role of Indian States The role of the Indian states is very crucial in the implementations and success of the Make in India initiative. India with a federal political system like the United States has a large and versatile geographical and demographical distribution. The involvement and 183 CU IDOL SELF LEARNING MATERIAL (SLM)
cooperation of state-level decision-makers, political leaders and authorities in a positive way is the basic requirement for the grand success of the new initiative. But it seems to be a dream as many of the now-NDA governed states are hesitating in its implementations. In contrast, many of the NDA led states have implemented this concept and even developed some copycat state-led investment schemes such as “Make in Madhya Pradesh” by BJP led Madhya Pradesh state government. Thus to make this concept of Make in India a success, a common consensus among the states is to be made to achieve national progress. Basic And Better Infrastructure No business can succeed without the availability of high quality and modern infrastructure. Industrial zone equipped with basic needs of modern and high-speed communication technologies, integrated logistic arrangements, regular power supplies, connectivity to transporting areas, ease of availability of raw materials etc. No infrastructure is possible without the availability of land. This requires a new, transparent, effective and equitable land acquisition law. However, the approval of such laws is interrupted due to political gridlock. Power Supply There are many villages in many of the Indian states where still there is either the limited power supply or no power supply. Thus providing the basic need of the industry i.e. power supply is the major issues to be dealt with. Throughout the country, power failures and brownouts are very common endemic particularly in summers, making Make in India a challenge. India is running short of power with a deficit of ~ 5.1%. The Comptroller and Auditor General (CAG) recently claimed a loss of $37 billion due to lack of transparency in the allocation of the coal blocks. Under these conditions, the government first should plan to reduce the nationwide deficit in power generation. Skilled Manpower Another hurdle in the path of Make in India is the shortage of skilled manpower. A nation requires skilled human resources in order to prosper and move atop in the global scenario. Indian comes second after China as far as its population statistics are concerned. In spite of this, India is still in the list of developing countries. No doubt the power of the India is its youth, but this power is not utilized in a fruitful manner. The youth is not skilled in a right way and the major reason for this is our education system. In spite of mushrooming of educational institutions in the last two decades, skilled manpower is limited. The curriculum is not updated according to the needs and demands. Even no skilled trainers, teachers and instructors are employed in these educational institutions. The students are educated theoretically rather than practically. The majority of the talented students passing out from the different universities and colleges move to foreign countries as the incentives are three to four time in foreign countries as compared 184 CU IDOL SELF LEARNING MATERIAL (SLM)
to this issue of brain drain and migration is still another cause of the shortage of skilled manpower in India. The inadequacy of the skilled manpower has a direct effect on the country’s GDP and economic progress. However, in order to tackle this problem Indian government has started SKILL INDIA program, the main aim of which is to develop multi-skill development programme with a mission for better and highly payable employment and entrepreneurship for all socio-economic classes. Taxation India is ranked 142nd in the list of 189 countries when it is assessed for ease of doing business. The complex taxation system, a huge amount of paperwork and corruption may be the main cause of worries among the investors. Although, various steps have been taken to provide a conducive environment and platform for doing business,Make in India initiative is still beyond realities. 10.3 IMPACT OF MAKE IN INDIA ON ECONOMY Make in India is an initiative launched by the Government of India to encourage multinational, as well as national companies to manufacture their products in India. This programme was launched in 2014 on 25th of September by the PM at the Vigyan Bhawan in New Delhi. India emerged, after initiation of the programme in 2015 as the top destination globally for foreign direct investment, surpassing the United States of America as well as the People's Republic of China. Make in India is a campaign launched by the PM, Narendra Modi, which facilitates all the big business investors worldwide who want to do business in India. It is a big step taken by the government of India to reduce the level of unemployment faced by the youths of the country. The aim of launching this campaign in India is to make India a world level manufacturing powerhouse which will definitely help in solving the biggest issue of Indian economy. This initiative was launched with new deals for foreign investors successfully in New Delhi with the top industrialists of India including Mukesh Ambani (Reliance Industries chairman), Azim Premji (Wipro chairman), etc. The objective of this campaign is to grow this to a 25% contribution as seen with other developing nations of Asia. In this course of action, the government expects to create more jobs, attract much foreign direct investment, and transform India into a manufacturing hub preferred around the globe. After the initiation of the program, India would emerge as the top destination globally for foreign direct investment and a global manufacturing hub. Make in India program not only includes attracting foreign companies or investors to set up their business in India, but also encouraging domestic companies to increase the production within the country. Impact on Indian Economy The main focus of Make in India Campaign is mainly on 25 sectors. These sectors are 185 CU IDOL SELF LEARNING MATERIAL (SLM)
Automobiles Food processing Renewable energy Automobile components IT and BPM Roads and highways Aviation Leather Space Biotechnology Media and Entertainment Textiles and garments Chemicals Mining Thermal power Construction Oil and gas Tourism, Hospitality Defence manufacturing Pharmaceuticals Wellness Electrical machinery Ports Electronic system Railways Almost every sector is capital-intensive and demands a lot of skill. So, with the more and more investment in these sectors, the main focus will be on increasing employment and the use of advanced technology. It creates a policy framework to ease foreign investment, ease of business and management of intellectual property. This helps industries to establish their manufacturing bases in India. Exports from such industries help in contributing to our foreign 186 CU IDOL SELF LEARNING MATERIAL (SLM)
exchange reserve. Most importantly, such an initiative helps bring critical knowledge about manufacturing and production into the Indian population. This initiative, by Mr. Modi is literally inviting the rich and semi-rich countries to step in India and invest their money for the future of India. It’s like inviting the countries to set up their companies in India and manufacture in the territory of our country. Now, this initiative has a great impact on the economy of our country. Obviously, if the big companies will setup their branches here, it will directly affect the GDP of India. The main thing is that the focus is on the manufacturing sector, and the population of India is majorly middle-class or lower middle-class. So, the products manufactured by the foreign companies will be entirely for the upper section of the society. Hence, it is possible that the goals and aspirations of Make in India may not find much success. Make in India initiative is an honest attempt to revive the fortunes of Industry / Manufacturing sector. Revival of Industry sector is key role to revival of Indian economy. Digital India will help to maintain contribution of Service sector but manufacturing / industry sector has to grow at much faster pace to out-pace service sector. It is not an easy task. Government should target to increase contribution of Industry / manufacturing from existing 16% to 35% in next 5 years. Make in India will help to achieve this goal but it comes with its own set of challenges. Manufacturing is capital and resources intensive sector which will require conductive environment for business. Labour issues will be major hurdle which the govt. is trying to handle through labour reforms. Besides this, a major push is required to upgrade infrastructure of country. Govt. has also set up 10,000 Cr start up fund to encourage entrepreneurship. Basically objective is to create ecosystem of small industries in periphery of manufacturing hub similar to Maruti model. Government will provide all the approvals under Make in India initiate in a time bound manner through single online portal. Examples of Make in India Automotives Not only has India established itself as a prime destination for automotive manufacture, it has fast emerged as an auto export hub for both small as well as heavy vehicles. Major auto behemoths have set up shop in the country, tying Make in India into the global supply chain. Prominent ‘Made-in- India, for the world’ examples include: Renault’s export of its Kwid to Mauritius, Suzuki’s Baleno to Japan, Honda’s Jazz to South Africa and Volkswagen’s Vento to Mexico. Electronics system design & manufacturing Driven by the Government’s visions of Digital India and ‘Zero Net Imports by 2020’, major efforts are underway to establish India as a global electronics manufacturing hub. From 60 million mobile handsets in 2014-15, India’s mobile manufacturing capacity has increased to 110 million mobile handsets in 2015- 16. With 72 new mobile handset and component manufacturing units set up in last two years, India has emerged as a mobile 187 CU IDOL SELF LEARNING MATERIAL (SLM)
manufacturing hub. From global giants like Xiaomi, Gionee and Samsung to home- grown Makers like Lava and Micromax, the world is choosing to make its electronics in India. Renewable energy One of the largest solar power plants is open in Kumuthi in Tamil Nadu. Cochin Airport became the world’s first to operate only on solar power. Under ease of doing business, renewable is now a ‘white industry’, exempting it from environmental clearances. India has embarked on the world’s largest renewable energy expansion programme, with a 175 GW target by 2022, and the world has taken notice. “I’m very optimistic about what could happen with renewable energy in India,” said World Bank Prez Jim Yong Kim. Roads & highways In 2016-17, 8,231 km of national highways were constructed across the country, compared to 2013-14’s total of 4,260 km. Similarly, on an average, 130 km of roads were constructed daily in 2016-17 compared to an average of 73 km daily between 2011 and 2014. Roads & Highways is central to the Government’s agenda of building a ‘New India’. Testament to this is Bharatmala, India’s biggest ever highway project, which aims to develop and expand 83,000 km of roads by 2022. Pharmaceuticals The widespread availability of raw materials and the presence of a highly-skilled workforce have catapulted India to the top, establishing it as a research and manufacturing hub. India makes its presence felt in the global pharmaceuticals supply chain, as the world’s largest provider of generic medicines accounting for 20% of global export volume. In a big boost for affordable, accessible healthcare, India’s first indigenously-developed, life-saving Rotavirus vaccine Rotavac was launched in 2014. Food processing Food Processing is one of India’s sunrise sectors and is vital to the country’s development, bringing together agriculture and industry. Under Make in India, Ministry of Food Processing is assisting 135 integrated cold chain projects while 7 Mega Food Parks were operationalized. Each creating 5,000 jobs and benefitting 25,000 farmers. The industry is also at the forefront of ease of doing business reforms, from a single dedicated investor facilitation cell to custom clearance reforms. 10.4 SUMMARY Make in India is a major national programme of the Government of India designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best in class manufacturing infrastructure in the country. 188 CU IDOL SELF LEARNING MATERIAL (SLM)
The primary objective of this initiative is to attract investments from across the globe and strengthen India’s manufacturing sector. During 1950’s many economists like Prebisch, Myrdal, Singer and Nurkse recognized that the exports of least developed countries or LDC’s during the 20th century were quite weak in contrast to buoyancy of exports during the 19th century. Many LDC’s started realising that trade was disadvantageous to them rather than being an ‘engine of growth’. The pessimism about demand for the exports of the LDC’s in the markets of the developed countries is termed as export pessimism. It can be safely stated that make in India is an opportunity for everyone. It is a prospect, which if given time will flourish like a spring flower and would provide with the expected fruit. This India globalization method will bring a need for B2B marketing for each business to create global leads. Make in India will help us to stand globally with strong economy along with our Indian brand. It will create job opportunities and looks for overall development of India. But like every coin has two sides Make in India is not in the favour of agriculture development. The government of India has taken number of steps to further encourage investment and further improve business climate. “Make in India” mission is one such long term initiative which will realize the dream of transforming India into manufacturing Hub. Start-ups in the core manufacturing sectors are poised to play a crucial role in the success of “Make in India”. “Start-ups in the fields of telecom, defence manufacturing, automobile, Internet of Things, financial technology modules and mobile internet have immense potential to succeed in the scheme of “Make in India”. Make in India scheme also focuses on producing products with zero defects and zero effects on environment. India jumped to 63rd place out of 190 countries in the world Banks' 2019 Ease of Doing Business Index from 130th in 2016. \"Zero defect zero effect\" slogan was coined by Prime Minister of India, Narendra Modi, as essence of the Make in India initiative that manages advanced processes, materials and technologies, to guide the production mechanism that produces products with no defects with any adverse environmental and ecological effects. 10.5 KEYWORDS Make in India campaign -Make in India is an initiative by the Government of India to make and encourage companies to manufacture in India and incentivize dedicated investments into manufacturing. 189 CU IDOL SELF LEARNING MATERIAL (SLM)
Investment - To invest is to allocate money with the expectation of a positive benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time? Ease of doing business Index - The ease of doing business index is an index created jointly by Simeon Djankov, Michael Klein and CaraleeMcLiesh, three leading economists at the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights. Gross Domestic Product (GDP) - A value measure of the flow of domestic goods and services produced by an economy over a period of time, such as a year. Only output values of goods for final consumption and intermediate production are assumed to be included in the final prices. GDP is sometimes aggregated and shown at market prices, meaning that indirect taxes and subsidies are included; when these indirect taxes and subsidies have been eliminated, the result is GDP at factor cost. The word gross indicates that deductions for depreciation of physical assets have not been made. See also gross national product. Swadeshi - Literally, of one's own country. A pre-independence movement to further the use of Indian-made items, particularly cottage-industry products, such as hand- loomed cloth, and to oppose British-made goods. 10.6 LEARNING ACTIVITY 1. What do you think why Make in India has failed? What improvements can you suggest to make it a success? ___________________________________________________________________________ ___________________________________________________________________________ 2. Patanjali is an excellent example of domestic organization success in business within shot span of time using all indigenous material and technology. Study Patanjali in view of Make in India campaign? ___________________________________________________________________________ ___________________________________________________________________________ 10.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define ease of doing business index. 190 CU IDOL SELF LEARNING MATERIAL (SLM)
2. What is GDP? 191 3. What is the primary objective of Make in India? 4. Define inclusive growth. 5. How is political stalemate a concern for Make in India campaign? Long Questions: 1. Describe make in India campaign. 2. What is the impact of Make in India on Indian economy? 3. What are the challenges of Make in India policy? 4. What is Nurkse’s Version of Export Pessimism? 5. What is the economic rationale behind Make in India? B. Multiple Choice Questions 1. When was the Make in India initiative formally launched by PM Modi? a. August 15, 2014 b. September 25, 2014 c. October 2, 2014 d. November 14, 2014 2. What is the aim of Make in India policy? a. Elimination of red-tapism b. Reduction in the cost of manufacturing c. Making good product. d. None of these 3. Why are Indian workers less skilled than western workers? a. Low wages b. Inferior quality of capital provided to the workers c. High illiteracy d. Strong trade unions 4. How many sectors does Make in India focuses? a. 15 b. 21 c. 25 d. 30 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Which programme / programmes is / are envisaged to make India a manufacturing hub of the world? a. Skill India b. Make in India c. Made in India d. Skill India and Make in India Answers 1-b, 2-d, 3-c, 4- c, 5-d 10.8 REFERENCES References Gokul, B. (2019). How mobile manufacturing made the most of Make in India. LiveMint. Singha, Minati (2015). Mudhi to be a part of global 'Make in India' campaign. The Times of India. Barrow, Keith (2018). ICF rolls out prototype 160km/h EMU for Indian Railways. International Railway Journal. Textbooks Maurice, D.L (2005), International finance (4th ed.), New York: Routledge. Gupta, S (2020), Make in India or Trade in India, New Delhi:Paperback. Kaur, P (2020), Make in India: An initiative in Information & Technology Sector in India, Lambert Academic Publishing: Germany Websites https://www.ibef.org/economy/make-in-india https://en.wikipedia.org/wiki/Make_in_India https://enterslice.com/learning/make-in-india-scheme-advantages-challenges-and- sectors/ 192 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 11 – TRADE CYCLES STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Meaning 11.3 Definition 11.4 Phases of a Trade Cycle 11.5 Summary 11.6 Keywords 11.7 Learning Activity 11.8 Unit End Questions 11.9 References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Define trade cycle. Describe different phases of trade cycle. Examine the importance of trade cycle. 11.1 INTRODUCTION The performance of a firm is never the same over an extended period of time. There are always ups and downs in the economic activity and output of a firm. These cyclical fluctuations are known as trade cycle or business cycle. Generally, the cyclical fluctuations have a tendency towards simultaneous appearance in all the branches of the national economy. But sometimes they may be confined only to individual industries or individual sectors of the economy. Every company must go through their share of ups and downs. And each trading cycle is characterized by its own unique features. There are four basic phases – expansion, peak, trough/depression, and recovery. A firm must always identify which phase it is currently in. It must also always be prepared for a sudden change in the cycles since these cycles are impossible to predict. Let us see the importance of business cycles and their relevance for firms. 193 CU IDOL SELF LEARNING MATERIAL (SLM)
Help Frame Appropriate Policies A business cycle will affect all the sectors of an economy. Similarly, it will also affect all sectors of a firm as well. Right from demand to supply to the cost of production every aspect will depend on the phase of the business cycle. So the firm must be able to correctly identify its current phase. This will help them frame appropriate business and trade policies. For example, if the firm is going through expansion it will be the correct time for aggressive investment policies or an expansion in the workforce. Strategic Business Decisions The business cycle of a firm will also have a huge impact on their business decisions. Managers and entrepreneurs take strategic business decisions based on the phases of the trade cycle. A business cannot be stagnant it must constantly keep updating to stay with the times. Different phases of the cycle demand different actions from the firm. If the economy is going through an expansion the management can make the strategic decision to expand the business or increase their output levels. But if the firm is in a trough then spending must be reined in and policies should be formed accordingly. Management may even decide to shut down some product lines temporarily or even permanently. Such important business decisions will depend on the trade cycle. Greatly Affect Cyclic Businesses Changes in the economy affect all firms but not uniformly. There are certain businesses that are more vulnerable to a change in the phase of a trade cycle. Such firms have to keep a very close look at the changes in the economy at all times. Some examples are the fashion industry, electronics industry, food and beverage industry, real estate industry etc. For such firms when the economy is in a boom, they must capitalize. Because a depression in the economy will affect them the most. So this is one of the important things of business cycles. Entry and Exit from Market For the success of a product launch, the phase of the trade cycle for its introduction is a very important factor. It is much harder for a new product to survive a sluggish economy that is moving towards a depression. Even the prices, sales policy, promotions of the new product will depend on the phases of the business cycle. And on the other hand, if a product has to exit the market, again the conditions must be studied. If the economy is coming out of a depression and seeing a revival then perhaps the exit can be delayed. This is another importance of business cycles. 194 CU IDOL SELF LEARNING MATERIAL (SLM)
11.2 MEANING A trade cycle refers to fluctuations in economic activities especially in employment, output and income, prices, profits etc. It has been defined differently by different economists. According to Mitchell, “Business cycles are of fluctuations in the economic activities of organized communities. The adjective ‘business’ restricts the concept of fluctuations in activities which are systematically conducted on commercial basis. The noun ‘cycle’ bars out fluctuations which do not occur with a measure of regularity”. According to Keynes, “A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages altering with periods of bad trade characterised by falling prices and high unemployment percentages”. 11.3 DEFINITION The term business cycle has been defined in various ways by different economists.The important definitions are as follows- Prof. Haberler has said – “The business cycle in the general sense may be defined as an alternation of period of prosperity and depression of good and bad trade.” In the words of W. C. Mitchell – “Business cycles are a species of fluctuations in the economic activities of organised communities. The adjective ‘business’ restricts the concept of fluctuations in activities which are systematically conducted on a commercial basis. The noun “cycles” bars out fluctuations which do not recur with a measure of regularity. Prof. Mitchell thus insists upon a measure of regularity in cyclical fluctuations.” According to Keynes – “A trade cycle is composed of period of good trade characterised by rising prices and low unemployment percentages, altering with periods of bad trade characterised by falling prices and high unemployment percentages.” Keynes has thus specified two indices, namely prices and unemployment, for measuring the upswing and down swing of the business cycles. In the words of Frederic Benham “A trade cycle may be defined, rather badly as a period of prosperity followed by a period of depression. It is not surprising that economic process should be irregular trade being good at sometime and bad at others.” In short the business cycle is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in measures of aggregate economic activity such as gross product, the index of industrial production and employment and income. Generally, the cyclical fluctuations have a tendency towards simultaneous appearance in all the branches of the national economy. But sometimes they may be confined only to individual industries or individual sectors of the economy. 195 CU IDOL SELF LEARNING MATERIAL (SLM)
11.4 PHASES OF A TRADE CYCLE The phases of trade cycle are explained with a diagram- Figure 11.1: Phases of trade cycle Recovery In the early period of recovery, entrepreneurs increase the level of investment which in turn increases employment and income. Employment increases purchasing power and this leads to an increase in demand for consumer goods. As a result, demand for goods will press upon their supply and it shall, thereby, lead to a rise in prices. The demand for consumer’s goods shall encourage the demand for producer’s goods. The rise in prices shall depend upon the gestation period of investment. The longer the period of investment, the higher shall be the price rise. The rise of prices shall bring about a change in the distribution of income. Rent, wages, interest do not rise in the same proportion as prices. Consequently, the margin of profit improves. The wholesale prices rise more than retail prices. The prices of raw materials rise more than the prices of semi-finished goods and the prices of semi-finished goods use more than the prices of finished goods. Boom The rate of investment increases still further. Owing to the spread of a wave of optimism in business, the level of production increases and the boom gathers momentum. More investment is possible only through credit creation. During a period of boom, the economy surpasses the level of full employment and enters a stage of over full employment. Recession 196 CU IDOL SELF LEARNING MATERIAL (SLM)
The orders for raw materials are reduced on the onset of a recession. The rate of investment in producers’ goods industries and housing construction declines. Liquidity preference rises in society and owing to a contraction of money supply, the prices falls. A wave of pessimism spreads in business and those markets which were sometime before sellers markets become buyer’s markets now. Depression The main feature of a depression is a general fall in economic activity. Production, employment and income decline. The prices fall and the main factor responsible for it is, a fall in the purchasing power. The distribution of national income changes as the costs are rigid in nature, the margin of profit declines. Machines are not used to their full capacity in factories, because effective demand is much less. The prices of finished goods fall less than the prices of raw materials. Examples of Trade Cycles The 2008 recession was so nasty because the economy immediately contracted 2.3% in the first quarter of 2008. When it rebounded 2.1% in the second quarter, everyone thought the downturn was over. But it contracted another 2.1% in the third quarter, before plummeting 8.4% in the fourth quarter. The economy received another wallop in the first quarter of 2009 when it contracted a brutal 4.4%. In 2008, the unemployment rate rose from 4.9% in January to 7.2% by December. The trough occurred at the end of second quarter of 2009, according to the National Bureau of Economic Research. GDP only contracted by 0.6%. Unemployment, though, did rise to 9.5% because of its lagging nature. The expansion phase started in the third quarter of 2009 when GDP rose by 1.5%. That was thanks to the stimulus spending from the American Recovery and Reinvestment Act. The unemployment rate continued to worsen, reaching 10.2% in October. Four years into the expansion phase, the unemployment rate was still above 7%. That's because the contraction phase was so harsh. The peak that preceded the 2008 recession occurred in the third quarter of 2007. GDP growth was 2.2%. 11.5 SUMMARY Every nation’s economy fluctuates between periods of expansion and contraction. These changes are caused by levels of employment, productivity, and the total demand for and supply of the nation’s goods and services. In the short-run, these changes lead to periods of expansion and recession. But in the long-run, economic growth can occur, allowing a nation to increase its potential level of output over time. 197 CU IDOL SELF LEARNING MATERIAL (SLM)
The business cycle model shows how a nation’s real GDP fluctuates over time, going through phases as aggregate output increases and decreases. Over the long-run, the business cycle shows a steady increase in potential output in a growing economy. The output gap is the difference between actual output and potential output in the business cycle. Potential output is what a nation could be producing if all of its resources were being used efficiently. In the business cycle model, a nation’s potential output at any given time is represented as the long-run growth trend. Output gaps exist whenever the current amount that a nation is producing is more or less than potential output. In the business cycle model, whenever the business cycle curve is above the growth trend that means an economy is experiencing a positive output gap. Whenever the business cycle curve is below the growth trend that means the economy is experiencing a negative output gap. When actual output is above the potential output, aggregate demand has grown faster than aggregate supply, causing the economy to overheat. Overheating in this instance means output is occurring at an unsustainably high level, at which the unemployment rate is lower than the natural rate of unemployment. Eventually, the business cycle will reach a peak and enter a recession. When actual output is below the potential output, aggregate demand or aggregate supply has fallen, causing a fall in employment and output. When a negative output gap exists, the unemployment rate will be higher than the natural rate of unemployment. Eventually, the business cycle will reach a trough and enter a recovery and expansion. Potential output is also called full-employment output. Potential output is the level of real GDP that would be produced if all resources are used efficiently. For example, if labour is used efficiently, the actual rate of unemployment will be equal to the natural rate of unemployment. When there is a positive output gap, an economy is producing beyond its long-run potential and the unemployment rate will be lower than the NRU. During a recession, real GDP falls below its potential and the unemployment rate is higher than the NRU. The actual unemployment rate is different than the natural rate of unemployment, at different points along the business cycle, because cyclical unemployment changes along the business cycle. Cyclical unemployment increases due to reduced output during recessions, and cyclical unemployment decreases due to increased output during expansions. The business cycle goes through four major phases: expansion, peak, contraction, and trough. All businesses and economies go through this cycle, though the length varies. 198 CU IDOL SELF LEARNING MATERIAL (SLM)
The Federal Reserve helps manage the cycle with monetary policy, while heads of state and governing bodies use fiscal policy. Consumer confidence plays a role in managing the economy and the current phase in the cycle. The government manages the business cycle. Legislators use fiscal policy to influence the economy. They use expansionary fiscal policy when they want to end a recession and should employ contractionary fiscal policy to keep the economy from overheating. But that rarely happens because they get voted out of office when they raise taxes or cut popular programs. Three factors cause each phase of the business cycle: the forces of supply and demand, the availability of capital, and consumer confidence. The most critical is confidence in the future. The economy grows when there is faith in the future and in policymakers. It does the opposite when confidence drops. The history of U.S. business cycles since 1929 can give an overview of how this measure of confidence has affected the U.S. economy through the decades. The duration of a business cycle is the period of time containing a single boom and contraction in sequence? The time it takes to complete this sequence is referred to as the length of the business cycle. Each business cycle has four phases: expansion, peak, contraction, and trough. They don’t occur at regular intervals, but they do have recognizable indicators. An expansion is between the trough and the peak. That's when the economy is growing. The gross domestic product, which measures economic output, is increasing. The GDP growth rate is in the healthy 2% to 3% range. Unemployment reaches its natural rate of 3.5% to 4.5%. Inflation is near its 2% target. And the stock market is in a bull market. A well-managed economy can remain in the expansion phase for years, which is called a Goldilocks economy. The peak is the second phase. It is the month when the expansion transitions into the contraction phase. The third phase is a contraction. It starts at the peak and ends at the trough. Economic growth weakens. GDP growth falls below 2%. When it turns negative, that is what economists call a recession. Mass layoffs make headline news. The unemployment rate begins to rise. It doesn’t happen until toward the end of the contraction phase because it's a lagging indicator. Businesses wait to hire new workers until they are sure the recession is over. Stocks enter a bear market as investors sell. The trough is the fourth phase. That's the month when the economy transitions from the contraction phase to the expansion phase. It's when the economy hits bottom. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
Economic recovery is the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after a recession. An economic recovery follows after the recession and leads into a new expansionary business cycle phase. An economic recovery can be thought of as a healing process analogous to the body heals by breaking down and reusing dead and damaged tissue. Inappropriate government policies can interfere with this process in a similar way that certain drugs interfere with the body’s healing process. 11.6 KEYWORDS Business cycle model- A model showing the increases and decreases in a nation’s real GDP over time; this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output. Trough - The turning point in the business cycle between a recession and an expansion; during a trough in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again. Growth trend - The straight line in the business cycle model, which is usually upward sloping and shows the long-run pattern of change in real GDP over time. Peak - The turning point in the business cycle between an expansion and a contraction; during a peak in the business cycle, output has stopped increasing and begins to decrease. Aggregate demand - The total demand for a nation’s output, including household consumption, government spending, business investment, and net exports. Recession - A recession is actually a specific sort of vicious cycle, with cascading declines in output, employment, income, and sales that feed back into a further drop in output, spreading rapidly from industry to industry and region to region. This domino effect is key to the diffusion of recessionary weakness across the economy, driving the co movement among these coincident economic indicators and the persistence of the recession. On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feed back into a further rise in output. The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy. Recovery - Economic recovery is the business cycle stage following a recession that is characterized by a sustained period of improving business activity. Normally, 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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