EXTERNAL SECTOR-B K REDDY SIR RAU’S IAS

MAINS POSSIBLE QS?????

• CAPITAL ACCOUNT CONVERTIBILITY- PROS, CONS AND WAY

FORWARD---?????

• EXPORT-LED MODEL OF DEVELOPMENT- NEED, CONSTRAINTS

AND WAY FORWARD ……..?????

• CRITICAL ANALYSIS OF VOCAL FOR LOCAL CAMPAIGN

• GLOBAL VALUE CHAINS: A TOOL FOR STRUCTURAL

TRANSFORMATION OF ECONOMY

• CRITICAL ANALYSIS OF 1991 LPG REFORMS

• DATA LOCALISATION- PROS AND CONS

 BALANCE OF PAYMENT
Record of economic transactions between residents and non-residents for a period of 1
year. The BoP comprises of Current Account and Capital Account.
 B K REDDY SIR

EXTERNAL COMMERCIAL BORROWINGS

Commercial loans raised by residents from non-resident entities. Can be raised either in
Foreign Currency or Indian Rupees. Interest rates for ECB are linked to LIBOR. RBI sets
the limit for ECB (automatic route) under FEMA.

FOREIGN DIRECT INVESTMENT (FDI)

Investment through capital instruments by a person resident outside India (a) in an unlisted
Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital in a
listed Company.
ROUTES
 Government Route: Application in Foreign Investment Facilitation Portal
Concerned Administrative Ministry/Department. Proposals of more than Rs 5000 crores
to be approved by CCEA.
 Automatic Route: No Prior Approval of the Government or RBI
Prohibited Sectors: Lottery Business; Gambling and betting including casinos; Chit
funds and Nidhi company; Trading in Transferable Development Rights (TDRs); Real
Estate Business or Construction of Farm-Houses; Manufacturing of Cigars; Activities/
sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway
operations
Types of FDI: Greenfield FDI (Net Investment); Brownfield FDI (Take-over of Existing
Company)

IMPORTANT POINTERS FOR PRELIMS

 Countries attracting highest FDI: USA ($ 250 bn); China; Singapore ( India- placed
at 10th Position)
 Top FDI Sources for FDI (2019-20): Singapore, Mauritius, Netherlands, USA, Japan
 Top FDI Source between 2000-2019 (Cumulative) : Mauritius, Singapore
 Sectors attracting highest FDI (Both in terms of Cumulative value and in FY 2019-
20): Services, Computer Software & Hardware, Telecommunications.
 B K REDDY SIR

RECENT CHANGES IN FDI

 100% FDI in Coal Mining and Coal processing plants such as Coal Washery. Earlier,
allowed FDI in Coal Mining only for Captive Consumption. Now, allowed to sell coal
in Open Market.
 100% FDI in Contract Manufacturing under Automatic Route. Earlier, no specific
Provision for Contract Manufacturing.
 Now, it has been explicitly provided.
 Presently, 49% FDI in Broadcasting Content Services (FM Radio, News TV Channels).
But lack of clarity on whether FDI was allowed in Digital Media. Govt Announcement-
26% FDI in Digital Media for uploading/ streaming of News through Digital Media.
 FDI Cap in DTH has been increased to 100% (from existing FDI cap of 49%).
 FDI limit in Defence Production has been raised to 74% from existing 49% under
Automatic Route. (100%- Govt. Route)
 FDI limit in Insurance increased from 49% to 74% (Proposed Union Budget 2021-22)

FOREIGN PORTFOLIO INVESTMENT

Equity investment not exceeding 10% of the total paid up capital of the company is FPI.
Also called ‘hot money’. Represent short-term inflows such as investment in shares,
bonds, debentures, etc.
Categories of Investments: Shares, Corporate Bonds, Debentures, Commercial
Papers, Mutual Fund Units; Treasury Bills; Dated Securities; State Development
Loans (SDLs)
CATEGORIES OF FPIS
 Category –I (Low Risk): Foreign Government and their entities; Multilateral
Organizations
 Category – II (Moderate Risk): Regulated entities such as Banks, Pension Funds, Mutual
Funds etc.
 Category- III (High Risk): All other FPIs excluding the above.
LIMITS ON FPI
 Individual FPI limit in a single Indian Company: Less than 10%
 Aggregate FPI Limit in a single Indian Company: Either 49% or up to sectoral Cap,
whichever is lower. (Earlier, the aggregate FPI Limit was 24%)
 B K REDDY SIR

DIFFERENCE BETWEEN FDI AND FPI

CRITERIA FDI FPI
Percentage of 10% or more Less than 10%
Ownership
What it includes? Transfer of Capital + Technology + Only Transfer of Capital
Management
Skills
What it leads to? Ownership + Management Only Ownership
Where does it flow? Physical Assets Financial assets
Which Segment of Primary Market Mainly Secondary Market. Can
Market targeted? Participate even in Primary
Market as well.
Nature of Investment Stable and Long term Unstable and short-term ( Hot
Money)
Flexibility? Less Flexible ( Entry and Exit More Flexible ( Entry and Exit
difficult) easier)
Role of Investors Active Passive
 B K REDDY SIR

TYPES OF EXCHANGE RATE SYSTEMS

Floating Exchange Rate System: Currency is allowed to freely appreciate or depreciate

depending upon the market forces. The Central Bank does not intervene in forex market.
(No Devaluation/ Revaluation).

Dirty Float/ Managed Exchange Rate: Currency is allowed to freely appreciate or

depreciate depending upon the market forces during the normal circumstances. In case of
large-scale volatility, the Central Banks may intervene in Forex Market
(Devaluation/ Revaluation takes place).

Fixed/ Pegged Exchange Rate: Value of the currency is pegged to the other currency
(Mainly Dollars). Example: Saudi Arabia: $ 1= 3.75 Riyal (1986).
 B K REDDY SIR

RUPEE DEPRECIATION/ APPRECIATION

Value of When does How does it impact the
Example How does it happen?
Currency it happen? economy?
Earlier $ Demand for  Increase in Imports Short term
1= Rs 60 Dollar  Decrease in Exports Exports from India
increases
 Decrease in FDI, increase. Imports become
Now FPI Costly.
$ 1 = Rs Supply of  Decrease in
70 Dollar Remittances etc. Long term (In case of
Rupee reduces. India where lmports >
Depreciation
Exports)
Dollar Outflows >
(Shortage of Dollar Inflows  Outflow of dollars due to
Dollars) Shortage of Dollars  costly imports >> Dollar
Dollar value Increases inflows due to increase in
 Rupee value Exports  Rupee
Reduces Depreciation

Earlier $ Demand for  Decrease in Imports Short Term

1= Rs 60 Dollar  Increase in Exports Exports become
Now reduces
 Increase in FDI, FPI uncompetitive Imports
$ 1 = Rs become cheaper.
 Increase in
50 Supply of Remittances etc.
Rupee Dollar
Appreciation Dollar Outflows < Long Term
Increases
Dollar Inflows  Cheaper Imports  Hurt
Surplus Dollars  Domestic Manufacturing
(Surplus Dollar value reduces  Dutch Disease
Dollars)  Rupee value
Increases

RUPEE DEVALUATION/ REVALUATION

 Under Devaluation, the Central Bank intervenes in the forex market and buys the dollars.
This leads to artificial shortage of dollars leading to increase in the value of Dollar and
decrease in the value of Rupee. It is mainly done to boost exports.
 Under Revaluation, the Central Bank intervenes in the forex market and sells the dollars.
This leads to increase in supply of dollars leading to decrease in the value of Dollar and
 B K REDDY SIR

increase in the value of Rupee. It is mainly done to check large scale depreciation in
value of Rupee.

CURRENCY WAR
Takes place when countries seek to devalue their currency to gain a competitive advantage.
If a particular country devalues its currency to boost exports, then it would prompt even
other countries to do the same. Thus, it may lead to a situation of competitive devaluation
where each country seeks to reduce the value of a currency so as to remain competitive.

CURRENCY MANIPULATOR
It is basically a label given by the US government to countries which it believes are
deliberately devaluing their currencies against the dollars to boost exports, reduce imports
and thus achieve higher trade surplus with US.
3 CRITERIA
 A bilateral trade surplus with the US of more than $20 billion
 A current account surplus of at least 3 per cent of GDP
 Net purchases of foreign currency of 2 per cent of GDP over 12 months
Note: An Economy which meets all the above 3 criteria is labelled as "Currency
Manipulator". An economy meeting two of the three criteria is placed on the Monitoring
List. Recently, India has been placed on the Monitoring List.

CURRENCY SWAP AGREEMENT

India has entered into currency swap agreements with number of countries such as Japan,
UAE, SAARC countries etc. It has also proposed for a swap agreement with USA.
1. First Leg: The RBI would provide $100 worth Indian Rupees to US Fed Bank at
prevailing exchange rate. In return, the Fed Bank would provide equivalent value of
dollars ($ 100) to the RBI.
2. Second Leg (After 3 months): US Fed Bank would return Rs 7000 and take back $ 100
from the RBI. Now, this transaction takes place at the exchange rate which was fixed in
the first leg. Hence, there is no exchange rate risk involved in the Currency Swap
agreement.
HOW WOULD IT BENEFIT INDIA?
 The dollars availed under this route would act as second line of defence after the Forex
Reserves to deal with the volatility.
 Reduce the speculation in the forex market and provide stability to the exchange rate.
 B K REDDY SIR

FOREX RESERVES
The FOREX Reserves rose to an all-time high of US$ 586.1 billion as of January, 2021.
The Forex reserves in India comprise of Foreign Currency assets (FCAs), Special Drawing
Rights (SDRs), Reserve Position in the IMF and Gold.
Highest Component: Foreign Currency Assets (FCA) > Gold > Reserve Position in IMF
> SDRs.

IMPORT COVER
Number of months of imports that could be paid for by Forex reserves.

GREENSPAN-GUIDOTTI RULE
Forex Reserves should be sufficient to pay the short-term External Debt.

REMITTANCES INTO INDIA

According to World Bank’s “Migration and Development Brief” report, India receives the
world’s highest remittances ($ 80bn) followed by China and Mexico. The remittances into
India contribute around 3% of its GDP. However, for some countries such as Nepal and
Philippines, the share of remittances as proportion of their GDP is much higher. India
receives its highest remittances from UAE, USA, Saudi Arabia

RUPEE CONVERTIBILITY
Refers to the freedom to convert the domestic currency into other internationally accepted
currencies and vice versa.
 B K REDDY SIR

Full Rupee Convertibility on Current Account transactions such as Imports, Exports,

Remittances, Gifts, Donations. On these transactions, India has adopted full Rupee
Convertibility in 1993.
Partial Rupee Convertibility on Capital Account: Capital Account Convertibility
(CAC) is not just the currency convertibility, but it also involves the freedom to invest in
financial assets of other countries. So, it basically refers to easing of restrictions on
movement of capital (such as FDI, FPI etc) from one country to another. India has adopted
partial Rupee convertibility on Capital Account.
1. Restrictions on FDI: Prohibited sectors; Sectoral Cap; Government’s Approval in
certain sectors.
2. Restrictions on FPI: Individual and Aggregate FPI Limit, FPI Limit in G-Secs and
Corporate Bonds etc.
3. External Commercial Borrowings: RBI sets annual limits.

CAPITAL ACCOUNT CONVERTIBILITY- PROS, CONS AND WAY

FORWARD---????? MAINS POSSIBLE QS
RUPEE CONVERTIBILITY IN INDIA
Full Rupee Convertibility on Current Account: The Current Account under the Balance
of Payment (BoP) includes various transactions such as Imports, Exports, Remittances,
Gifts, Donations. On these transactions, India has adopted full Rupee Convertibility in
1993.
Partial Rupee Convertibility on Capital Account: Capital Account Convertibility
(CAC) is not just the currency convertibility, but it also involves the freedom to invest in
financial assets of other countries. The Committee on Capital Account Convertibility
(1997) headed by Tarapore has given a working definition for the CAC - “CAC refers to
the freedom to convert local financial assets into foreign financial assets and vice versa at
market determined rates of exchange. It is associated with changes of ownership in
foreign/domestic financial assets." So, it basically refers to easing of restrictions on
movement of capital (such as FDI, FPI etc) from one country to another.
PROS AND CONS OF FULL RUPEE CONVERTIBILITY ON CAPITAL
ACCOUNT TRANSACTIONS
Pros Cons
 Easier access to Foreign Capital and  Higher Volatility in the Exchange rate due
technology due to greater ease for the to sudden inflow and outflow of Foreign
foreign Investors. currencies. (1997 Asian Financial Crisis)
 B K REDDY SIR

 Promote competition between domestic  Higher Inflows of foreign Capital could

companies and MNCs lead to sudden appreciation in the value of
 Internationalisation of Rupee- Rupee can Rupee and thus hurt Exports.
easily be accepted in other countries.  Greater chances of global risks affecting
 Enable domestic Investors to invest in Indian Economy! Example: 2007-08
overseas market Global Financial Crisis)
 Promote Financial Discipline since the  Higher Foreign Debt
Government must keep in check Fiscal  Outflow of Domestic Savings to other
Deficit and Public Debt to attract foreign Countries.
Capital  No empirical link between Capital
 Promote Employment opportunities and Account Convertibility and Economic
GDP growth. Growth.
IS INDIA READY FOR CAPITAL ACCOUNT CONVERTIBILITY?
The Tarapore Committee has recommended that India should Capital Account
Convertibility in a phased and gradual manner. At the same time, it has laid down some
pre-conditions to be met for the introduction of Capital Account convertibility:
1. Eliminate Revenue Deficit and ensure Revenue surplus
2. Substantial part of Revenue surplus should be earmarked for meeting repayment
obligations.
3. Strengthen the Regulation of Financial sector, including that of Banks. Reduce the NPAs
of Banking sector and focus on reforms in Public Sector Banks (PSBs).
4. To meet import and debt service payments, forex reserves should be adequate enough.
5. The RBI should evolve policies to allow industrial houses to have stakes in Indian banks
or promote new banks.
WHAT APPROACH SHOULD INDIA FOLLOW?
 Capital account liberalization should be regarded as a process and not an event i.e., it

should be introduced in a phased and gradual manner.

 The degree and timing of capital account liberalization need to be sequenced with other

reforms, such as strengthening of banking systems, fiscal consolidation, trade

liberalization and the changing domestic and external economic environments.
 India must focus more on liberalising inflows as compared to outflows. Among the kinds

of inflows, FDI should be preferred for stability, while excessive short-term external
debt needs to be avoided.
 For outflows, the hierarchy for liberalization must be - Corporates first, followed by

financial intermediaries, and finally individuals.

 B K REDDY SIR

VOLUNTARY RETENTION ROUTE (VRR)

Separate channel introduced by RBI (2019) to enable FPIs to invest in debt markets in
India. Broadly, investments through this Route is free from the macro-prudential and other
regulatory norms applicable to FPI investments in debt markets. However, for availing
such a benefit, the FPIs should voluntarily commit to retain a required minimum
percentage of their investments in India for a certain period.
RBI'S REGULATIONS ON VRR
 Any FPI registered with SEBI is eligible to participate through this Route. Participation
through this Route shall be voluntary.
 FPIs are eligible to invest in any Government Securities i.e., Central Government dated
Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans
(SDLs). They can also investment in corporate bonds.
 RBI imposes limit on investment under this Route. Presently, it is Rs 1.5 lakh crores.
 Minimum retention period for the Investment is 3 years.
 Minimum percentage of Investment which has to retained is 75%.
 FPIs that wish to liquidate their investments under the Route prior to the end of the
retention period may do so by selling their investments to another FPIs. However, the
FPI buying such investment shall abide by all the terms and conditions applicable under
the Route.
 B K REDDY SIR

NIRVIK SCHEME --PRELIMS

New export credit insurance scheme. Implemented by Export Credit Guarantee
Corporation. Extends insurance cover to the banks which give loans to the exporter.
Provides insurance cover of up to 90% of the principal and interest. Thus, it enhances
bank’s ability to extend more loans to the exporters to meet their capital requirements

EXPORT PREPAREDNESS INDEX ---PRELIMS

 This index has been released by NITI Aayog.
 It examines export preparedness and performance of Indian states.
 The ranking is done on the basis of 4 pillars:
a. Policy: A comprehensive trade policy provides a strategic direction for exports and
imports.
[Link] Ecosystem: An efficient business ecosystem can help states attract
investments and create an enabling infrastructure for individuals to initiate start-ups.
c. Export Ecosystem: This pillar aims to assess the business environment, which is
specific to exports.
[Link] Performance: This is the only output-based pillar and examines the reach of
export footprints of States and Union Territories.
 Most of the Coastal States are the best performers. Gujarat, Maharashtra and Tamil Nadu
occupy the top three ranks.
 In the landlocked states, Rajasthan has performed the best, followed by Telangana and
Haryana. Among the Himalayan states, Uttarakhand is the highest, followed by Tripura
and Himachal Pradesh. Across the Union Territories, Delhi has performed the best,
followed by Goa and Chandigarh.
 B K REDDY SIR

EXPORT-LED MODEL OF DEVELOPMENT- NEED, CONSTRAINTS AND

WAY FORWARD
India’s vision of becoming a $ 5 trillion economy by 2024 is intricately linked with an
export-oriented approach. Greater integration with global value chains (GVCs) will enable
India to attract investment, create Jobs, Boost Exports and hence sustain virtuous
economic cycle. In line such a strategy, NITI Aayog has taken a significant step by
developing the first-ever Export Preparedness Index for Indian states.
IMPORTANT ASPECTS OF INDIA'S TRADE
 India's share in the world's exports has remained stagnant at 1.6% in the last decade.

 India is still critically dependent on import of critical goods such as Pulses, Oilseeds,

Electronic Goods, Active Pharmaceutical Ingredients (APIs) etc. which shows lack of
self-sufficiency of Indian Economy.
 Imports into India is much higher than exports. This usually leads to Current Account

deficit.
 India's export basket is dominated by Capital intensive goods such as Petroleum

products, Gems, Jewelry etc. (rather than Labor intensive goods such as Textiles,
Leather etc.)
 Undoubtedly, the forex reserves have increased to all time high. However, it is mainly

on account of increase in volatile FPI inflows rather than on account of export surplus.
 Unlike China, India has failed to get integrated into Global value chains (GVCs).

NEED FOR EXPORT-LED MODEL

Empirical Evidence: Countries such as Japan, South Korea, Singapore etc. have been
able to sustain higher economic growth by following export-led strategy. In the recent
times, such an export-led strategy has benefitted both bigger economies such as China as
well as smaller economies such as Vietnam.
 B K REDDY SIR

Shift from Consumption-led to Investment and Export driven Model: India’s growth
drivers highlight that its economic growth has been primarily propelled by domestic
demand which accounts for 60% of India's GDP. However, exports account for only 12%
GDP. It should also be recognised that an economy with only $2,000 per capita income
will not be able to expand simply based on domestic demand. Moreover, too much focus
on domestic demand might strengthen imports faster than exports, which could potentially
lead to a widening deficit.
Conducive environment in terms of decline in exports from china on account of US-
China Trade war, rising Labour costs, growing anti-china sentiment etc.
Boost Make in India and Assemble in India: By integrating “Assemble in India for the
world” into Make in India, India can raise its export market share to about 3.5 percent by
2025 and 6 per cent by 2030. India would create about 4 crore well-paid jobs by 2025 and
about 8 crore by 2030.
Innovation and Efficiency: Exporters would be required to innovate and adopt new
technologies to boost exports.
CHALLENGES IN BOOSTING EXPORTS
Supply-side:
 Dominance of Dwarf Firms in MSME Sector: MSMEs account for around 40% of

the exports and 45% of manufacturing output. However, these MSMEs face problems
with respect to factors of production such as Land, labour and capital. Plus, most of the
MSMEs use obsolete technology which leads to poor efficiency and competitiveness.
 Higher Logistics Cost: India’s logistics cost as a share of GDP is 14 percent, which is

high when compared to developed nations, where it ranges between eight and ten
percent. Higher logistics cost in turn reduces the overall competitiveness of Indian
economy.
 Trade Facilitation: Involves reducing the number of documents needed for trade. Trade

facilitation reduces the time to export and cost of exports. In India, Trade facilitation, as
measured by "Trading Across Borders" is quite poor. "Trading Across Borders" is one
of the parameters for measuring World Bank's Ease of Doing Business.
 Poor Innovation: India spends hardly around 0.7% of its GDP on R&D, which is quite

lower in comparison to USA (2.1%), China (2.8%), Israel (4.3%) etc. Improvement in
innovation ecosystem would help us improve manufacturing competitiveness and help
us manufacture high quality goods for the global market.
 Lack of Market Intelligence related to consumer preference in export markets. For

example, higher sweetness in Indian mangoes is not necessarily in demand in many

countries.
 B K REDDY SIR
 Identification Challenges: Each district of a country has a potential equivalent to that
of a small country in boosting exports. However, there is lack of focus on identifying
potential export clusters within a state.
 Lack of coordination among multiple government ministries and departments involved

in boosting exports.
 Adverse Impact of FTAs: Some of the FTAs with countries such as Japan, South Korea

etc. has led to inverted duty structure which has in turn encouraged import of finished
goods and discouraged domestic manufacturing.
Policy Instability
 Delay in announcement of incentives under RoDTEP scheme. Even though, this scheme

was announced on 1st Jan 2021. The Government has notified the guidelines in Aug
2021.
 Whenever there is increase in prices of agricultural commodities such as Onions, Potato

etc., the Government imposes ad-hoc ban on export of such commodities. This affects
India’s image as a reliable supplier of agricultural commodities.
Demand-side:
 Rising Protectionist Policies in importing countries: High import duties and Quota

limits in export markets

 Easier market access to India's competitors: Goods from countries such as

Bangladesh, Vietnam etc. enter into export markets such as EU, USA etc. at almost zero
customs duty. However, Indian goods enter such markets with comparatively higher
customs duty and thus our goods become uncompetitive. India's exports of Textiles and
Leather to USA and EU has been declining on account of this.
 WTO Norms: Indiscriminate application of sanitary and phytosanitary measures by

other countries against Indian products. For example, basmati and non-basmati rice
exports to the US have been rejected multiple times on the grounds of low hygiene
standards. Similarly, the issue of pesticides residues is frequently raised by the EU and
Japan
WAY FORWARD
 Improve Trade Competitiveness by improving access to factors of production (Land,

Labour, Capital), Reduce Logistics costs (14% of GDP) to global benchmarks (8% of
GDP), improving Ease of Doing Business etc.
 Protect the domestic Market from the import cheap foreign goods through (a) strong

and effective technical regulations (b) trade safeguards such as Anti-dumping duties and
safeguard duties.
 Better Inter-Ministerial Coordination: The ministry of Commerce and Industry must

hold regular Inter-ministerial meetings. Further, regular Interactions with the State
 B K REDDY SIR

Governments is also crucial so that trade facilitation takes place under cooperative
federalism.
 Handholding support to MSMEs The MSMEs need to be provided handholding
support to have access to factors of factors and use appropriate technology to boost
exports.
 Increase access to formal finance: Less than 4 per cent of small firms in India have
access to formal finance. The figure for the the US, China, Vietnam and Sri Lanka is 21
per cent.
 Reorient SEZs (Baba Kalyani Committee): The SEZs should be renamed as 3 E's-
Employment and Economic Enclaves. Focus should not only be on boosting exports,
but also on employment creation and GDP growth rate. Incentives given to companies
in SEZs should depend upon factors such as Value addition, Technology adoption etc.
This would encourage the companies to innovate and compete at the global level.
 Integration into Global value chains (GVCs): Invite large anchor firms in critical
products to set up operations in India. Government initiatives like simplified labour
laws, PLI incentives, low corporate tax on new manufacturing operations and scrapping
of retrospective tax would encourage many firms searching for China plus-one location
to shift base to India.

CRITICAL ANALYSIS OF VOCAL FOR LOCAL CAMPAIGN ---MAINS

POSSIBLE QS
PRESENT STRATEGIES ADOPTED BY GOVERNMENT TO PROMOTE
LOCAL GOODS
 Nationalistic Sentiments: Appeal to the Nationalistic sentiments of the Indians to buy
and Promote Indian Goods.
 Withdrawing from FTAs such as RCEP
 Increasing Customs duty/ Safeguard Duty on some of the goods such as Solar Panel
Cells to promote domestic Manufacturing.
 Higher Preference to Domestic Companies in Government Procurement
 Negative list to avoid import of certain defence Goods
Benefits Challenges/ Concerns

Incentivises the Make in India has been launched in 2014. But not quite
Foreign successful so far due to poor regulatory environment such as
Companies to shift
 B K REDDY SIR

their production hurdles in Land acquisition, delays in environmental

base to India  clearances, complexity in labour laws.
Boost Make in Mere slogans will not lead to increase in FDI. It has to be
India and Create accompanied by deep structural reforms.
Employment
Opportunities.

Brands that are Consumers are Utility Maximisers  Buy Goods which are of
Global today, were Superior Quality and at lower Prices Indian Goods may not
initially local and be able to compete with Foreign Goods in terms of Quality and
grew because of Price. (Case in Point is Mobile Phones).
customer support. Consumers also buy Foreign Goods in order to improve their
Hence, buying and Social Status and Prestige.
Promotion of
Indian Brands will
enable them to
become Global
brands in future
and boost our
Exports.

Boosting the Local Development of local supply Chain requires skilled work force
supply Chain  as seen in China. India need to focus more on “Skill India”
Make India Self- campaign.
Dependent 
Decrease in
Imports into India

Higher Production Almost 22% of India’s population live below poverty line.
of Goods of Food, Clothing and Shelter is of utmost importance for them.
different Brands Increase in choice of Goods has no meaning for the people
Increase in Choice living at lower strata.
of Goods to Indian
Consumers

Increased demand Increased demand for Foreign Goods such as Chinese Goods is
for Indian Goods mainly on account of Price competitiveness. Unless, the India
 Reduce Goods are able to match the imported Goods in terms of quality
dumping of Goods and prices, Trade Deficit would not improve.
by Countries such
as China 
 B K REDDY SIR

Improve the trade

Deficit

Increase in Government’s strategies such as Increase in Customs duty,

Domestic Preference to domestic companies in procurement etc. shields
Investment and the domestic companies from foreign competition. This fosters
FDI  Increase in complacency in domestic manufacturing leading to decline in
Employment quality of Goods.
Opportunities  India has to realise that it was its integration with Global
Increase in Per- Economy in 1991 that led to rapid increase in its GDP size from
Capita Income  $ 270 billion in 1991 to $ 2.9 trillion in 2019.
Higher Demand for The Government’s strategies to boost local manufacturing
Goods Increase takes India back to pre 1991 and hint towards protectionist and
in Investment and Anti-Globalisation policies. Hence, such strategies can be
FDI considered to be retrograde.
(Virtuous
Economic Cycle)

GLOBAL VALUE CHAINS: A TOOL FOR STRUCTURAL TRANSFORMATION

OF ECONOMY MAINS POSSIBLE QS
In the Budget 2020-21, the Finance Minister had highlighted the need for "Assemble
in India" on the lines of "Make in India". In a way, this was a call for greater
Integration of Indian Economy with the Global Value Chains (GVCs) to reap multiple
benefits. Integration into GVCs has the potential to bring about structural shift in our
economy- From Agriculture to Manufacturing, From Low-end Manufacturing to high-
end Manufacturing, From Self-Employed and Casual Workers to Salaried Workers,
from lower Productivity to higher productivity and overall a change in our orientation
from being inward to outward
B K REDDY SIR
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WHAT ARE GLOBAL VALUE CHAINS?

GVCs refer to the full range of activities (design, production, marketing,
distribution and support to the final consumer, etc) that are divided among
multiple firms and workers in multiple countries to bring a product from its
conception to its end use and beyond. The Global value Chains (GVCs) have been
developed for number of products such as Automobiles, Pharmaceuticals,
Textiles, Electronics, Chemicals, Gold and Jewellery etc.

WHY SHOULD INDIA GET INTEGRATED INTO GVCs?

Economic Growth and Development: According to World Bank, 1 percent
increase in the level of GVC participation increases average productivity by 1.6
percent and per-capita Income by more than 1% in long-run. This is on account
of following reasons:
 Provides fast track route to Industrialisation since there is no need to build

entire supply chain right from scratch.

 Better access to a greater variety of higher-quality or less costly intermediate

inputs
 No need for firms to focus on entire supply chain and instead focus on

specialised tasks leading to Hyper-specialisation.

 Transfer of technology and know-how from the foreign partners.

 Promotes collaboration rather than competition between Domestic and Foreign

Firms wherein each of them focusses on specialised task in the production

cycle. Both Domestic and Foreign firms collaborate with each other in order to
minimise the costs and maximise the profits.
 Knowledge Intensive firms in other countries would share product innovations

with Indian Firms and thus provide scope for the Indian firms to move higher
up the value chain
 Increase in Employment creation and Exports
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Increased Job Creation and Labour Welfare:

 Potential to provide fillip to Manufacturing sector leading to structural change

in Indian Economy.
 Shift in the Workers from agriculture to Manufacturing.

 Higher Paying Jobs accompanied by Social Security benefits

 Induce shift in type of employments from Self-employed and Casual workers

towards Salaried Workers

Socio-Economic Transformation: GVCs support employment of not just men,
but also women. Notably in the apparel and electronics sectors, where assembly
of many small parts must be done manually, firms report preferences for female
employees because of the high levels of dexterity required. Thus, as seen in
Bangladesh, higher employment creation for Women would have following
benefits:
 Higher Expenditure on Girls' Education

 Decline in IMR and MMR

 Political, Economic and Social Empowerment of Women

Doubling of Farmers' Income: Even though, India is one of the largest

producers of Agri-commodities, its share in global exports stands at merely 2.2%
(9th Rank). This clearly highlights India's poor Integration into Global
agricultural supply chains. Hence, greater integration would translate into
expanded market access and higher prices for the farmers leading to doubling of
their income levels.
Higher Resilience: According to OECD, Integration of economies into GVCs
lead to resilience, stability and flexibility in their production network and hence
capable of responding to domestic shocks. On the other hand, economies which
are less integrated into GVCs are more vulnerable to shocks and hence may see
decline in economic activity and fall in National incomes in response to domestic
shocks
INDIA'S POOR INTEGRATION INTO GVCs
According to OECD-WTO’s TiVA (Trade in Value Added) database, India’s
GVC participation index stands at 43, as compared to 52 for Vietnam and 60 for
Malaysia. The GVC participation index displays a country’s integration into the
GVC and is the sum of forward and backward linkages divided by total exports.
The foreign value added of India's Gross Exports (Forward Linkages) has reduced
from 25% (2012) to 16% (2016).
Some of the reasons for India's poor Integration into GVCs are as given below:
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 Historical Reasons: Inward-looking Industrial policies with focus on State-led

Industrialisation, Import-substitution, Licence-raj System etc.
 Lack of Lead Firms in India: The lead firms are the firms that establish supply

chains across the world and hence major drivers of GVCs. For example, in
India, Tata Motors (Automobile) and Ranbaxy (Pharmaceuticals) have
emerged as lead firms by attracting foreign Investment, transferring
technology, establishing supply chains etc. However, there is a need to have
such lead firms in almost all sectors.
 Higher Focus on Domestic Market: Indian Firms have traditionally focussed

on Indian Domestic Market since it is quite large. However, they have failed to
realise that integration into GVCs would give them much wider market.
 Inward Oriented FDI Policy: Countries such as China and Vietnam have been

inviting MNCs with GVC linkages to their countries leading to their

Integration. However, India has so far not given due emphasis on this aspect of
FDI policy.
 Lack of Focus on R&D leading to limited knowledge transfer

 Lack of access to Finance- Higher Dependence of Banks, Under-developed

Bond Market etc.

 Inability of the Government to bring about long-pending Labour Reforms

 Lack of availability of skilled manpower in crucial sectors Electronics.

 Higher Logistics Cost (14%) as compared to USA (9%) and Japan (11%) -

leading to Uncompetitive Indian exports.

 Poor Focus on Quality due to higher share of small-scale enterprises

 Inverted Duty structure making import of Finished Goods cheaper

WAY FORWARD
The Government should address the various constraints highlighted above in
order to successfully integrate Indian Economy into GVCs. India should target
the entire production cycle in the Smile Curve of the Global Value Chains
(GVCs). In some of the selected products such as Automobile, Pharmaceuticals
etc, India needs to focus on high-end activities such as Conceptualisation and
Design in order to reap its expertise in R&D, technology. India must also focus
on lower end of the curve (Production and Assembly) to give fillip to "Make in
India" and "Assemble in India".
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CRITICAL ANALYSIS OF 1991 LPG REFORMS MAINS POSSIBLE QS

July 2021 marks the 30th anniversary of the LPG Reforms. So, far, the LPG
reforms has been a mixed bag for India. On one hand, the GDP size of India has
increased from $275 bn to $ 2.9 trillion. However, on the other hand, the increase
in GDP size has not been accompanied by transformative changes in the Indian
Economy.
Agricultural Development: The average growth rate of Indian agriculture is
below the targeted growth rate of 4% and is way below the double-digit growth
rate of the service sector. Despite being the one of the largest producers of food
grains, India's share in global export of agricultural commodities has remained
stagnant at 2% (9th Rank). Similarly, the import of cheaper agricultural
commodities has adversely affected the income levels of the farmers. This clearly
shows that the farmers in India have not able to get benefitted from LPG reforms.
Stagnation in Manufacturing sector: The share of manufacturing sector to
India's GDP has remained stagnant at 16-17% since 1991 reforms. Instead of
focussing on labour intensive industries, the manufacturing sector has come to be
dominated by capital intensive Industries. The failure of the LPG reforms to
promote manufacturing sector is the biggest loss for the Indian Economy.
Jobless Growth: The employment elasticity is hardly around 0.1 which means
every 1% increase in GDP growth rate leads to 0.1% increase in employment
creation. Apart from low quantity of jobs, concerns have also been raised with
respect to poor quality of jobs. 90% of India's workforce is employed in informal
sector which is characterised by low wages, poor productivity and lack of access
to social security benefits. Hence, there is a need to create high-paying, high-
productivity formal sector jobs.
Lack of Inclusive Growth: India has failed to prevent concentration of wealth
and provide for equitable distribution of income. For instance, as per
Credit Suisse, 1% of the wealthiest in India have increased their share in wealth
from 40% in 2010 to 60% in the last five years. The richest 10% in India own
more than 4 times the wealth than the remaining 90%. Going forward, richest
10% in India would take away the majority share of $ 5 trillion economy.
Provision of basic services: The Government has failed to allocate sufficient
financial resources for provision of basic goods and services. For instance, India's
expenditure of 3% on education is much below the target of 6%. Similarly,
expenditure on health has remained quite lower at 1.5% as against the mandated
3%.
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DATA LOCALISATION- PROS AND CONS MAINS POSSIBLE QS

IMPORTANCE OF DATA IN NEW GLOBAL ORDER
Data is considered to be the new oil. The technological giants such as Apple,
Amazon, Facebook, Google, Microsoft etc have been harnessing the data
generated by the users to make huge profits. The advent of Industrial revolution
in Britain enabled it to become superpower and eventually it went on to colonize
other countries across the world. Similarly, the data is considered to be the
necessary ingredient of the Industrial Revolution 4.0.
Presently, USA and China have already taken lead in terms of Industrial
revolution 4.0 by focusing on Big data and Artificial Intelligence (AI). Because
of this, India would be required to be dependent on these two global digital
superpowers in future. This would considerably compromise our economic and
political independence leading to Digital Colonization of India.
DATA LOCALIZATION- PROS AND CONS
Data localization refers to storage of data on any device that is physically present
within the borders of a specific country where the data gets generated. In case of
India, the Draft E-Commerce policy has mandated for the data localization norms
for the e-commerce companies such as Flipkart, Amazon etc. On Similar lines,
the RBI has mandated that all the payment system operators such as Mastercard,
Visa etc. should compulsorily store the payments related data in the servers which
are physically based in India.
BENEFITS OF DATA LOCALIZATION:
Data as Public Good: The Economic Survey 2018-19 has highlighted that the
data generated by the Indian users has to be accessible by the people and
ultimately used for the benefit of people and that is why the chapter has been aptly
titled as "Data of the People, by the People, for the People"; Promotes evidence
based policy making in order to improve the education, health and various
dimensions of human development.
Enforcement: Enable law enforcement officers to access information required
for the detection of crime as well as in gathering evidence for prosecution.
Reducing Vulnerabilities: A large amount of data is transmitted from one
country to the other via undersea cables which increases the risk of vulnerability
of the internet and cross-border transfer of data.
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Thrust to Industrial Revolution 4.0: Data localization norms would force the
companies to store their data in India giving a much needed push to Industrial
Revolution 4.0.
Preventing Foreign Surveillance: A significant portion of the data collected
and stored by global MNCs in other countries increases the scope of foreign
surveillance.
CONCERNS RELATED TO DATA LOCALIZATION
Increase in Compliance Cost: Presently, some of the Indian companies store
their data in servers located in the other countries at much cheaper prices. The
data localization norms may make it costlier for the Indian companies to create
necessary digital infrastructure to store the data within India.
Monopolization of Data: Data Localization would require huge investment in
creation of digital infrastructure which can be done only for large MNCs.
However, the small and medium sized businesses would have to be dependent
upon the infrastructure set up these global MNCs in India.
Cyber Threat: Forcing the companies to store data locally deprives them of the
option of distributing information across servers in multiple locations, making it
more vulnerable to cyber threats.
Issues related to Privacy: It is to be noted that data localization may not be able
to completely eliminate cyber-attacks. Even when, data is stored locally, it is
prone to cyber-attacks leading to data breach and loss of privacy.
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CONCERNS WITH INDIA'S EXTERNAL SECTOR

 India's share in the world's exports has remained stagnant at 1.6% in the last

decade.
 India's export basket is dominated by Capital intensive goods such as Petroleum

products, Gems, Jewelry etc. ( rather than Labor intensive goods such as
Textiles, Leather etc.)
 Undoubtedly, the forex reserves have increased to all time high. However, it is

mainly on account of increase in volatile FPI inflows rather than on account of

export surplus.
 Unlike China, India has failed to get integrated into Global value chains

(GVCs).

Poor Innovation Ecosystem: The R&D Expenditure as % of GDP at 0.7% has

remained stagnant in the last 2 decades. Unlike developed economies, the R&D
expenditure in India is mainly driven by public sector. The private sector
investment in R&D needs to be substantially enhanced.
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Special drawing rights

Fixed Number of Units of

Weights determined in the
Currency Currency for a 5-year period
2015 Review
Starting Oct 1, 2016

U.S. Dollar 41.73 0.58252

Euro 30.93 0.38671

Chinese Yuan 10.92 1.0174

Japanese Yen 8.33 11.900

Pound Sterling 8.09 0.085946

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Index Logistics Performance Trading Across Trade Facilitation Enabling Trade

Index (LPI) Borders – Doing Index Index
Business
Publishing World Bank World Bank OECD World Economic
Agency Forum
What it Logistics Friendliness of Time and cost of the Assessment of trade Factors, policies and
measures countries logistical process of facilitation policies, services that
countries areas for action and facilitate trade
impact of reforms across borders and
to destination.
India's Rank 44/160 (2018) 68/190 (2019) 1.52/2 (2018) 102/136 (As per
2016)
Best Top 5: Germany. Austria, Belgium, 1.86/2- Netherlands Top 5: Singapore,
performing Sweden, Belgium, Denmark, France, Netherlands, Hong
Austria, Japan Hungary, Italy, Kong, Luxembourg,
states/
Netherlands, Spain all Sweden
countries tied for Rank 1