Module 4: IB

INTRODUCTION TO LPG ECONOMIC LIBERALISATION OF INDIA

In 1991 the Indian economy faced a severe balance of payments crisis which is otherwise
called as Economic crisis in 1991. To counter this economic crisis a wide-ranging economic
program was launched, not just to restore the balance of payments but to reform, restructure
and modernize the economy.
Deregulation of the Industrial Sector – In the industrial sector, deregulation involves the
removal of barriers to entry, reduction of monopolistic practices, and creation of a more
competitive and market-driven environment. This process refers to the systematic reduction
or elimination of government regulations and controls on businesses and industries.
Financial Sector Reforms – The aim of financial sector reforms is to establish a streamlined
financial system that enhances the effective allocation of resources, fosters financial
inclusion, safeguards trust in the financial system, and ensures its stability.
Tax Reforms – Tax reform involves modifying the methods of tax collection or
administration by the government. This is typically done to enhance tax management or to
offer economic and social advantages.
Trade and Investment Policy Reforms – Under this reform, the mandate for acquiring
licenses was eliminated for all industries except those related to alcohol, cigarettes, hazardous
chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals. The
necessity for licenses for establishing new units or expanding existing ones has been
removed.
Foreign Exchange Reforms – Foreign exchange reforms were set in motion in 1991 through
the devaluation of the Indian rupee in relation to foreign currencies. As a result, a US dollar
or British pound could now fetch a greater number of rupees compared to earlier, signifying
that these foreign currencies can procure a greater quantity of goods within the Indian market.

Foreign Trade Policy (2015-2020) – Short Note

India’s Foreign Trade Policy (FTP) 2015-2020 aimed to boost exports, enhance global
trade competitiveness, and promote ease of doing business. The policy focused on
sustainable growth, integration with global supply chains, and leveraging trade for
economic development.
Key Highlights:
1. Merchandise Exports from India Scheme (MEIS)
o Replaced multiple export incentive schemes with a single, simplified
framework.
o Provided duty credit scrips to exporters, helping them reduce export costs.
2. Service Exports from India Scheme (SEIS)
o Encouraged the export of Indian services (IT, healthcare, education) with
financial incentives.
 o Aimed to enhance India’s position as a global service hub.
3. Ease of Doing Business & Digital Initiatives
o Simplified export-import documentation and digitized licensing processes.
o Introduction of online payment, single-window clearance, and e-
certifications.
4. Boosting MSMEs & Make in India
o Special incentives for Micro, Small, and Medium Enterprises (MSMEs) to
improve global market access.
o Alignment with Make in India to enhance domestic manufacturing and
exports.
5. Trade Facilitation & Infrastructure Development
o Strengthened trade-related infrastructure through logistics, port
modernization, and Special Economic Zones (SEZs).
o Launched initiatives like Trade Infrastructure for Export Scheme (TIES).
6. SCOMET and Export Control
o Strengthened export control on sensitive goods and dual-use technologies.
o Compliance with international security frameworks like Wassenaar
Arrangement.
Impact:
• Helped India increase exports, particularly in services and MSME sectors.
• Enhanced ease of doing business through digital transformation.
• Set the foundation for the Foreign Trade Policy 2023, shifting from incentives to
remission-based strategies.

FOREIGN TRADE DEVELOPMENT AND REGULATION ACT, 1992

The Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act) was enacted to
regulate, develop, and promote foreign trade in India. It provides the legal framework for
the formulation and implementation of export and import policies, ensuring smooth
international trade while safeguarding national interests.

Key Provisions:

1. Power to Make Export-Import (EXIM) Policy:

o The Act empowers the Central Government to formulate and modify
Foreign Trade Policy (FTP).
o Policies are framed to enhance India’s global trade competitiveness.
 2. DGFT (Directorate General of Foreign Trade) Authority:
o The DGFT is responsible for regulating and promoting foreign trade
activities.
o It issues import-export licenses, grants incentives, and monitors compliance
with trade laws.
3. Export and Import Restrictions:
o The Act allows the government to prohibit, restrict, or regulate trade in
certain goods for reasons like national security, public interest, or
environmental concerns.
o Includes regulations for dual-use goods under SCOMET (Special
Chemicals, Organisms, Materials, Equipment, and Technologies).
4. Licensing and Registration:
o Businesses engaged in international trade must obtain an Importer Exporter
Code (IEC) from the DGFT.
o Licensing procedures are established for restricted and controlled goods.
5. Penalties for Violations:
o The Act enforces strict penalties for non-compliance, including suspension
or cancellation of trade licenses.
o Offenders may face fines, bans, or legal action for violating trade regulations.
6. Trade Facilitation and Development:
o Encourages export promotion by facilitating ease of doing business.
o Introduces policies to boost FDI (Foreign Direct Investment) and
international collaborations.

Determinants of Exports and Imports

1. Exchange Rates
o A weaker domestic currency makes exports cheaper and imports expensive,
boosting exports.
o A strong currency makes imports more affordable but reduces export
competitiveness.
2. Global and Domestic Demand
o High foreign demand for domestic goods increases exports, while strong
domestic demand raises imports.
o Economic conditions in major trading partners influence trade flows
significantly.
3. Trade Policies and Tariffs
o Lower import duties and free trade agreements (FTAs) encourage imports,
while higher tariffs restrict them.
o Export incentives, subsidies, and trade restrictions impact export volumes.
4. Production Costs and Competitiveness
 o Countries with low labor costs, advanced technology, and efficient
infrastructure have a competitive edge in exports.
o High production costs increase reliance on imports for cheaper alternatives.
5. Availability of Natural Resources
o Countries with abundant natural resources (oil, minerals, agricultural
products) become major exporters.
o Resource-poor nations depend on imports to meet their needs.
6. Inflation and Price Levels
o High domestic inflation makes exports expensive and less competitive
internationally.
o Low inflation helps maintain stable export prices and reduces costly imports.
7. Political and Economic Stability
o Stable economies attract foreign investments and trade partnerships,
boosting exports and imports.
o Political uncertainty, wars, or economic crises reduce trade activities.
8. Logistics and Infrastructure
o Efficient transportation, ports, and digital trade platforms lower export
costs and improve trade efficiency.
o Poor infrastructure increases import dependence due to local production
inefficiencies.

What is balance of payments (BoP)?

Balance of Payments (BOP)

• The BoP record the transactions in goods, services and

assets between residents of a country with the rest of the world for a
specified time period typically a year.
• BoP follows the Double Entry System to record transactions with the
rest of the world and has two sides – Credit side and Debit side

BoP Surplus Balanced BoP BoP Deficit

Credit Side > Debit Side Credit Side = Debit Side Credit Side < Debit Side

• Accounts in the BoP includes

1. Current account
2. Capital account

Current Account

• It is the record of trade in goods and services and transfer payments.

 • It records all the transactions that relate to the actual receipts and
payments of the visible items, invisible items, and unilateral transfers
during a specific period of time.
• Components of Current Account includes
1. Trade in goods (Visible Trade or Merchandise Transactions) –
It includes exports and imports of goods.
2. Trade in services (Invisible Trade) – It includes factor income
and non-factor income transactions.
▪ Factor income - Includes net international earnings on
factors of production (like labour, land and capital).
▪ Non-factor income - It is net sale of service products like
shipping, banking, tourism, software services, etc.
3. Transfer payments – They are the receipts which the residents
get for free without having to provide any goods or services in
return. They consist of gifts, remittances and grants.
4. Income receipts and payments to and from abroad - It
involves investment income in the form of rent, profits, and
interest.

urrent Account Surplus Balanced Current Account Current Account Deficit

eceipts > Payments Receipts = Payments Receipts < Payments

• Components of Current Account includes

1. Balance of Trade
2. Balance on Invisibles
• Balance of Trade (BOT) – It is the difference between the value of exports and value
of imports of goods of a country in a given period of time.
• It is also known as Trade Balance.

Trade Surplus Balanced BOT Trade Deficit

Exports > Imports Exports = Imports Exports < Imports

• Net Invisibles – It is the difference between the value of exports and value of imports
of invisibles of a country in a given period of time.
 • Invisibles include services, transfers and flows of income that take place between
different countries.
• Services trade includes both factor and non-factor income.
Capital Account
• It includes those transactions, which cause a change in the assets or liabilities of a
country’s residents or its government.
• Components of Capital Account includes
1. Borrowings and Lendings to and from abroad – Includes all the
transactions related to borrowings from abroad by the government, private
sector, etc.
2. Investments to and from abroad – Includes all the investments by the rest of
the world in shares of Indian companies, real estate, etc. The investments to
and from abroad are:
▪ Foreign Direct Investment - FDI consists of the purchase of an asset,
which gives direct control to the buyer over the asset. For example,
purchase of land, building, etc.
▪ Portfolio Investment – It is the cross-border transactions and
positions involving equity or debt securities, other than direct
investment or reserve assets. Ex - FII (Foreign Institutional
Investment).
3. Change in Foreign Exchange Reserves - The financial assets of the
government held in the central bank are Foreign Exchange Reserves.

Capital Account Surplus Capital Current Account Capital Account Deficit

Capital inflows > Capital outflows Capital inflows = Capital outflows Capital inflows < Capital outflows

Problems Faced by Indian Exporters

1. Knowledge Gap
Many Indian exporters lack awareness of international trade regulations, market
trends, and export procedures. Limited access to export training and trade
intelligence makes it difficult to compete globally. Addressing this gap through
government support, training programs, and digital trade platforms is essential.
2. Global Competition
Indian exporters face stiff competition from China, the USA, the EU, and other
emerging economies offering similar or cheaper products. Countries with better
infrastructure, advanced technology, and lower production costs have a
 competitive edge. To sustain exports, India must focus on quality enhancement,
innovation, and cost-effective production.
3. Complicated Export Documentation
The export process in India involves lengthy paperwork, multiple approvals, and
complex customs procedures. Small and medium enterprises (SMEs) often struggle
with obtaining licenses, tax compliance, and regulatory approvals. Simplifying
documentation through digital platforms and single-window clearance can ease this
burden.
4. Government Restrictions
Exporters often face policy changes, tariffs, and trade restrictions that affect
business planning. Export bans, duties, and compliance with Foreign Trade Policy
(FTP) regulations can create uncertainty. A stable policy framework and
government support for exporters can mitigate these challenges.
5. Subsidies from Developed Countries
Developed nations provide heavy subsidies to their domestic industries, making
Indian products less competitive. Subsidized agricultural and industrial products from
countries like the US, EU, and China undercut Indian exporters in global markets.
India must push for fair trade policies and WTO negotiations to counter such
advantages.
6. Meeting Product Standards
Indian exporters must comply with stringent quality and safety regulations in
global markets, such as ISO, FDA, CE, and RoHS certifications. Failure to meet
these standards results in rejections, penalties, or bans. Improving product quality,
investing in R&D, and ensuring compliance with global standards are necessary for
export success.
7. Cross-Border Payment Issues
Exporters often struggle with delayed payments, high transaction costs, currency
fluctuations, and banking regulations. International trade involves risks like default
by buyers, banking restrictions, and complex forex rules. Using secure payment
mechanisms, trade insurance, and digital financial solutions can help mitigate
these risks.

Common Ethical Dilemmas in International Business

1. Employment Practices
Many companies face ethical issues related to low wages, unsafe working
conditions, and long working hours in different countries. Some businesses exploit
cheap labor in developing nations to cut costs. Ensuring fair wages and safe
workplaces is essential for ethical business operations.
2. Human Rights
Businesses operating globally may encounter child labor, forced labor, or
 discrimination in some regions. Ethical companies must ensure they respect human
rights and do not support unfair labor practices. Following international labor laws
helps create a fair working environment.
3. Environmental Concerns
Some businesses harm the environment by causing pollution, deforestation, or
excessive resource exploitation. Ignoring environmental responsibility can lead to
climate change and legal penalties. Companies should adopt sustainable practices
like recycling and reducing emissions.
4. Corruption
In many countries, businesses face bribery, fraud, and unethical dealings to secure
contracts. Corruption damages trust, fairness, and economic growth in the long run.
Ethical businesses should follow transparent policies and anti-corruption laws to
maintain integrity.
5. Moral Obligations
Companies have a responsibility to give back to society and contribute to social
welfare. Some firms focus only on profits without considering their impact on local
communities. Ethical businesses invest in CSR (Corporate Social Responsibility)
programs to support education, healthcare, and the environment.

Challenges Faced by MNCs in CSR Implementation

1. Lack of Transparency
Many MNCs struggle with clear reporting and accountability in CSR initiatives,
leading to concerns about fund utilization. Stakeholders demand transparency, but
inconsistencies in disclosure weaken trust. Proper auditing and independent
evaluations are essential to ensure credibility.
2. Lack of Community Participation
CSR programs often fail due to low engagement from local communities, resulting
in ineffective implementation. Communities may feel disconnected if their needs and
cultural aspects are not considered. Building trust and collaboration is crucial for
sustainable CSR success.
3. Lack of Non-Governmental Organizations (NGOs)
NGOs play a key role in bridging the gap between MNCs and local communities,
but their shortage limits effective CSR execution. Without experienced NGOs, CSR
initiatives may lack proper direction, monitoring, and impact assessment. Partnering
with reliable NGOs can improve project efficiency.
4. Lack of CSR Guidelines
Many countries have unclear or inconsistent CSR regulations, making it difficult
for MNCs to develop a standardized approach. Without clear guidelines, companies
may focus on superficial CSR activities rather than long-term sustainable programs.
Establishing uniform policies ensures measurable and impactful CSR efforts.
 5. Narrow View towards CSR Initiatives
Some MNCs treat CSR as a mere compliance requirement rather than a strategic
tool for social change. This limited perspective results in one-time projects instead of
sustainable, long-term commitments. A broader outlook aligning CSR with core
business values can create meaningful impact.
6. Lack of Budget
Many MNCs allocate insufficient funds for CSR, limiting their ability to create
large-scale social impact. Budget constraints often lead to short-term, low-impact
projects rather than sustainable development efforts. A dedicated CSR budget with
long-term planning can enhance the effectiveness of corporate social responsibility
initiatives.

Environmental Issues

1. Pollution
Pollution, including air, water, and soil contamination, is one of the most critical
environmental concerns. Industrial emissions, vehicle exhaust, and plastic waste
contribute to health hazards and ecosystem damage. Reducing pollution requires
strict regulations, sustainable practices, and public awareness.
2. Climate Change
Rising global temperatures due to greenhouse gas emissions lead to extreme weather,
rising sea levels, and biodiversity loss. Human activities such as deforestation and
fossil fuel consumption accelerate climate change. Urgent actions like renewable
energy adoption and carbon footprint reduction are needed.
3. Depleting Natural Resources
Overexploitation of forests, water, minerals, and fossil fuels threatens long-term
sustainability. Unchecked consumption and deforestation lead to resource scarcity,
affecting future generations. Promoting conservation, recycling, and alternative
resources is key to reversing this trend.
4. Habitat Destruction
Urbanization, deforestation, and industrial expansion result in the loss of wildlife
habitats, leading to species extinction. Clearing forests for agriculture and
infrastructure disrupts ecosystems and biodiversity. Sustainable land-use planning
and conservation efforts are essential to protect natural habitats.
5. Overpopulation
Rapid population growth puts excessive strain on food, water, energy, and
healthcare resources. Overpopulation increases waste generation, deforestation,
and pollution, worsening environmental issues. Sustainable population control
policies and resource management are necessary for balance.
6. Improper Waste Disposal
Inadequate waste management leads to land, air, and water pollution, impacting
human health and marine life. Plastic waste, industrial toxins, and electronic waste
worsen the problem. Effective recycling, waste segregation, and eco-friendly
disposal methods are crucial to minimizing waste-related hazards.
Labour issues in international business
Labour issues" in international business refer to challenges companies face when managing
employees across different countries, including discrepancies in wages, working conditions,
labor laws, unionization, child labor, and human rights concerns, often arising due to varying
regulations and cultural norms between nations.
Key aspects of labor issues in international business:
• Wage disparities:
Significant differences in minimum wage and average salaries between countries,
potentially leading to exploitation of workers in lower-wage regions.
• Working conditions:
Variations in safety standards, hours worked, and workplace benefits depending on
the country, raising concerns about worker well-being
• Child labor:
Employing children in violation of local laws, particularly prevalent in developing
countries.
• Forced labor:
Coercing individuals to work against their will, a serious human rights violation.
• Unionization and collective bargaining:
Differences in union power and collective bargaining rights across countries, impacting
worker representation and negotiation.
• Compliance with local labor laws:
Navigating complex and varying employment regulations in different jurisdictions, which
can be challenging for multinational companies.
• Gender discrimination:
Unequal treatment of women in the workplace, including pay gaps and limited
opportunities for advancement.