India's Foreign Trade & Trade Policy

Assignment A

1. Within three years, SEZs in India has witnessed phenomenal success with an incremental investment of Rs.97, 871 crores and incremental direct employment provided to 231,629 persons with twice that number getting employed outside. Considering the statement, examine the role of Export Oriented Units / Export Processing Zones / Special Economic Zones in promoting export from India.    

2.What are the main provisions in the Foreign Trade Policy of India 2009-2014? How will these initiatives help the Government to promote export from the Country?

3. What are the steps taken by the Government of India to promote the export of Pharmaceutical products from India? Highlight the problems faced by the Indian Pharmaceutical companies in venturing the Foreign Market.

4. What is the role of WTO in promoting International Trade? What are the challenges faced by the organization in facilitating global trade of Agriculture products?    

Question 5: Write a short note of the trend in export from India for the last three years. Which are the major destinations of India’s export? What is the role of the USA in India’s total export in the current scenario?

6. What is the role of the World Bank in promoting International Trade? What are the functions of IDA and IRDB?

7. How the International Monetary Fund (IMF) helps its member countries in their economic development? What steps were taken by the IMF to help the member countries to come out of the recession?

8. What are the major functions of the EXIM Bank of India? Which are the major initiatives taken by the Bank to promote export from our country?    

    

SECTION B

Case Study

Organic Food Consumption in India
Some people believe that organic food is only a “concept” popular in developed countries. They think that when it comes to organic food, India only exports organic food and very little is consumed locally. However, this is not true. Though 50% of the organic food production in India is targeted towards exports, many look towards organic food for domestic consumption.
 
AC Nielsen, a leading market research firm, recently surveyed about 21,000 regular Internet users in 38 countries to find their preference for functional foods – foods that have additional health benefits. The survey revealed that India was among the top ten countries where health food, including organic food, was demanded by the consumers. 

The most important reason for buying organic food was the concern for the health of children, with over 66 percent of parents preferring organic food to non-organic food. Though organic food is priced over 25 percent more than conventional food in India, many parents are willing to pay this higher premium due to the perceived health benefits of organic food.

The increase in organic food consumption in India is evident from the fact that many organic food stores are coming up in India. Today (2009) every supermarket has an organic food store and every large city in India has numerous organic food stores and restaurants. This is a huge change considering that the first organic food store in Mumbai was started in 1997.

What do Indian organic food consumers prefer? The pattern of organic food consumption in India is much different than in developed countries. In India, consumers prefer organic marmalade, organic strawberry, organic tea, organic honey, organic cashew butter, and various organic flours.

However, the Indian organic food consumer needs education. Many consumers are unaware of the difference between natural and organic food. Many people purchase products labeled as Natural thinking that they are Organic. Further, consumers are not aware of the certification system. Since certification is not compulsory for domestic retail in India, many fake organic products are available in the market.

Organic Farming in India
Organic farming was practiced in India for thousands of years. The great Indian civilization thrived on organic farming and was one of the most prosperous countries in the world, until the British ruled it.
 
In traditional India, the entire agriculture was practiced using organic techniques, where the fertilizers, pesticides, etc., were obtained from plant and animal products. Organic farming was the backbone of the Indian economy and cow was worshipped (and is still done so) as a God. The cow, not only provided milk but also provided bullocks for farming and dung which was used as fertilizers.

Shift to Chemical Farming in the 1960s
During the 1950s and 1960s, the ever-increasing population of India and several natural calamities lead to severe food scarcity in India. As a result, the government was forced to import food grains from foreign countries. To increase food security, the government had to drastically increase the production of food in India. The Green Revolution (under the leadership of M. S. Swami Nathan) became the government’s most important program in the 1960s. A large amount of land was brought under cultivation. Hybrid seeds were introduced. Natural and organic fertilizers were replaced by chemical fertilizers and locally made pesticides were replaced by chemical pesticides. Large chemical factories such as the Rashtriya Chemical Fertilizers were established.

Before the Green Revolution, it was feared that millions of poor Indians would die of hunger in the mid-1970s. However, the Green Revolution, within a few years, showed its impact. The country, which was greatly relied on imports for its food supply, reduced its imports every passing year. In the 1990s, India had surplus food grains and once again became and exporter of food grains.

As time went by, extensive dependence on chemical farming has shown its darker side. The land is losing its fertility and is demanding larger quantities of fertilizers to be used. Pests are becoming immune requiring the farmers to use stronger and costlier pesticides. Due to the increased cost of farming, farmers are falling into the trap of money lenders, who are exploiting them no end and forcing many to commit suicide.

Both consumers and farmers are now gradually shifting back to organic farming in India. It is believed by many that organic farming is healthier. Though the health benefits of organic food are yet to be proved, consumers are willing to pay a higher premium for the same. Many farmers in India are shifting to organic farming due to the domestic and international demand for organic food. Further stringent standards for non-organic food in European and US markets have led to the rejection of many Indian food consignments in the past. Organic farming, therefore, provides a better alternative to chemical farming.

According to the International Fund for Agriculture and Development (IFAD), about 2.5 million hectares of land were under organic farming in India in 2004. Further, there are over 15,000 certified organic farms in India. India, therefore, is one of the most important suppliers of organic food to the developed nations. No doubt, the organic movement has again started in India.

Organic Food Exports from India
Organic food exports from India are increasing with more farmers shifting to organic farming. With the domestic consumption being low, the prime market for the Indian organic food industry lies in the US and Europe. India has now become a leading supplier of organic herbs, organic spices, organic basmati rice, etc.
 
RCNOS recently published a report titled ‘Food Processing Market in India' (2005)’. According to its research, exports amount to 53% of the organic food produced in India. This is considerably high when compared to the percentage of agricultural products exported. In 2003, only 6-7% of the total agricultural produce in India was exported.

Exports are driving organic food production in India
The increasing demand for organic food products in developed countries and the extensive support by the Indian government coupled with its focus on agro-exports are the drivers for the Indian organic food industry.

Organic food products in India are priced about 20-30% higher than non-organic food products. This is a very high premium for most of the Indian population where the per capita income is mere US$ 800. Though the salaries in India are increasing rapidly, the domestic market is not sufficient to consume the entire organic food produced in the country. As a result, exports of organic food is the prime aim of organic farmers as well as the government,

The Indian government is committed to encouraging organic food production. It allocated Rs. 100 crore or US$ 22.2 million during the Tenth Five Year Plan for promoting sustainable agriculture in India.

APEDA (Agricultural and Processed Food Export Development Authority) coordinates the export of organic food (and other food products) in India. The National Programme for Organic Production in India was initiated by the Ministry of Commerce. The program provides a standard for the organic food industry in the country. Since these standards have been developed taking into consideration international organic production standards such as CODEX and IFOAM, Indian organic food products are being accepted in the US and European markets. APEDA also provides a list of organic food exporters in India.

Organic food costs in India are expected to decrease driving further exports in future
Organic food production costs are higher in the developed countries as organic farming is labor-intensive and labor is costly in these countries. However, in a country like India, where labor is abundant and is relatively cheap, organic farming is seen as a good cost-effective solution to the increasing costs involved in chemical farming. Currently, most of the organic farmers in India are still in the transition phase and hence their costs are still high. As these farmers continue with organic farming, the production costs are expected to reduce, making India one of the most important producers of organic food.

Organic food products exported from India include the following:
Organic Cereals: Wheat, rice, maize or corn
Organic Pulses: Red gram, black gram
Organic Fruits: Banana, mango, orange, pineapple, passion fruit, cashew nut, walnut
Organic Oil Seeds and Oils: Soybean, sunflower, mustard, cottonseed, groundnut, castor 
Organic Vegetables: Brinjal, garlic, potato, tomato, onion
Organic Herbs and Spices: Chili, peppermint, cardamom, turmeric, black pepper, white pepper, amla, tamarind, ginger, vanilla, clove, cinnamon, nutmeg, mace, 
Others: Jaggery, sugar, tea, coffee, cotton textile.

1. What are the initiatives taken by the Government of India to boost export organic food products from India?

2. What are the reasons behind the increase in the demand for organic food products?

3. What are the prospects for the export of organic food products from India?

Assignment - C

Question No.  1    
The riskiness of an asset's return that results from interest rate changes is called    

Options    
Interest-rate risk.    
Coupon-rate risk.    
Rein vestment risk.    
Yield-to-maturity risk.    

Question No.  2    
The concept of _________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.    

Options    
present value    
future value    
interest    
deflation

Question No.  3    
A spot transaction in the foreign exchange market involves the    

Options    
Exchange of exports and imports at a specified future date.    
Exchange of bank deposits at a specified future date.    
Immediate (within two days) exchange of exports and imports.    
Immediate (within two days) exchange of bank deposits.

Question No.  4    
When the value of the British pound changes from $1.50 to $1.25, then the pound has _________ and the dollar has _________.    

Options    
appreciated; appreciated    
depreciated; appreciated    
appreciated; depreciated    
depreciated; depreciated

Question No.  5    
Typically, increasing interest rates    

Options    
Discourage individuals from saving.    
Discourage corporate investments.    
Encourage corporate expansion.    
Encourage corporate borrowing.

Question No.  6    
Adverse selection is a problem associated with equity and debt contracts arising from    
Options    
The lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.    
The lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.    
The borrower’s lack of incentive to seek a loan for highly risky investments.    
None of the above.

Question No.  7    
The starting point for understanding how exchange rates are determined is a simple idea called _________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.    

Options    
Gresham's law    
The law of one price    
purchasing power parity    
arbitrage

Question No.  8    
The _________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.    

Options    
Theory of purchasing power parity    
law of one price    
theory of money neutrality    
the quantity theory of money

Question No.  9    
If the dollar depreciates relative to the Swiss franc,    

Options    
Swiss chocolate will become more expensive in the United States.    
American computers will become less expensive in Switzerland.    
Swiss chocolate will become cheaper in the United States.    
Both (a) and (b) of the above.

Question No.  10    
Financial markets and institutions    

Options    
Involve the movement of huge quantities of money.    
Affect the profits of businesses.    
Affect the types of goods and services produced in an economy.    
Do all of the above.

Question No.  11    
A bond's future payments are called its    

Options    
Cash flows.    
Maturity values.    
Discounted present values.    
Yields to maturity.    

Question No.  12    
Higher tariffs and quotas cause a country's currency to _________ in the _________ run.    

Options    
depreciate; short    
appreciate; short    
depreciate; long    
Appreciate; long

Question No.  13    
The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the    

Options    
Central Bank.    
Commercial Bank.    
Bank of settlement.    
Treasury Department.    

Question No.  14    
Money market instruments    

Options    
Are usually sold in large denominations.    
Have a low default risk.    
Mature in one year or less.    
Are characterized by all of the above.

Question No.  15    
Long-term debt and equity instruments are traded in the _________ market.    

Options    
primary    
secondary    
Capital    
money

Question No.  16    
A loan that requires the borrower to make the same payment every period until the maturity date is called a    

Options    
Simple loan.    
Fixed-payment loan.    
Discount loan.    
Same-payment loan.

Question No.  17    
When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has    

Options    
Appreciated and German cars sold in the United States become more expensive.    
Appreciated and German cars sold in the United States become less expensive.    
Depreciated and American wheat sold in Germany becomes more expensive.    
Depreciated and American wheat sold in Germany becomes less expensive.    

Question No.  18    
The commonly accepted goal of the MNC is to:    

Options    
Maximize short-term earnings.    
Maximize shareholder wealth.    
Minimize risk.    
A and C.

Question No.  19    
Insurance purchased to cover the risk of expropriation __________, and will typically cover __________.    

Options    
It will be the same for all firms; only a portion of the firm's total exposure.    
It will be the same for all firms; all of the firm's total exposure.    
Will be dependent on the firm's risk; all of the firm's total exposure.    
Will be dependent on the firm's risk; only a portion of the firm's total exposure.

Question No.  20    
Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called    

Options    
Commodity markets.    
Funds markets.    
Derivative exchange markets.    
Financial markets.    

Question No.  21    
When the price of a bond is above the equilibrium price, there is excess _________ in the bond market and the price will _________.    

Options    
demand; rise    
demand; fall    
supply; fall    
supply; rise

Question No.  22    
If the demand for _________ goods decreases relative to _________ goods, the domestic currency will depreciate.    

Options    
foreign; domestic    
foreign; foreign    
domestic; domestic    
domestic; foreign

Question No.  23    
If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will    

Options    
Rise by 10 percent.    
Rise by 2 percent.    
Fall by 10 percent.    
Fall by 2 percent.    

Question No.  24    
______________ is(are) not a form of political risk.    

Options    
Exchange rate movements    
The attitude of consumers in the host country    
Actions of the host government    
Blockage of fund transfers    

Question No.  25    
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as    

Options    
Foreign bonds.    
Eurobonds.    
Eurocurrencies.    
Eurodollars.

Question No.  26    
The process of calculating what dollars received in the future are worth today is called    

Options    
Calculating the yield to maturity.    
Discounting the future.    
Compounding the future.    
Compounding the present.

Question No.  27    
The nominal interest rate minus the expected rate of inflation    

Options    
Defines the real interest rate.    
It is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.    
It is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.    
Defines the discount rate.

Question No.  28    
The theory of purchasing power parity is a theory of how the exchange rate is determined in    

Options    
The long run.    
The short-run.    
Both (a) and (b).    
None of the above.

Question No.  29    
LIBOR is:    

Options    
The interest rate commonly charged for loans between banks.    
The average inflation rate in European countries.    
The maximum loan rate ceiling on loans in the international money market.    
The maximum deposit rate ceiling on deposits in the international money market.

Question No.  30    
The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the    

Options    
Inflation rate.    
Exchange rate.    
Interest rate.    
Aggregate price level.

Question No.  31    
If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from _________ dollars to _________ dollars per euro.    

Options    
1.25; 0.83    
0.83; 1.25    
0.67; 1.50    
1.50; 0.67

Question No.  32    
The exchange rate is the:    

Options    
Opportunity cost at which goods are produced domestically.    
The balance-of-trade ratio of one country to another.    
The price of one country's currency expressed in terms of another country's currency.    
Amount of currency that can be purchased with 1 ounce of gold.

Question No.  33

The demand for dollars in the foreign exchange market:    

Options    
Is represented by a point in a diagram of foreign-exchange supply and demand.    
It depends in part on the foreign demand for U.S. goods.    
It depends on the U.S. demand for foreign goods and services.    
Is the ratio of the dollars demanded the amount of foreign currency supplied?

Question No.  34    
Changes in the value of the euro affect the economies of:    

Options    
Only those countries using the euro as currency.    
All European countries but there would be no significant impact on countries outside Europe.    
Potentially the entire world.    
There would be no significant impact on any economies as long as exchange rates are flexible.

Question No.  35    
The main sources of financing for businesses, in order of importance, are    

Options    
Financial intermediaries, issuing bonds, issuing stocks.    
Issuing bonds, issuing stocks, financial intermediaries.    
Issuing stocks, issuing bonds, financial intermediaries.    
Issuing stocks, financial intermediaries, issuing bonds.

Question No.  36    
When the exchange rate between the U.S. dollar and the Japanese yen is 1=100 yen, this is an indication that:    

Options    
It would take 100 yen to purchase $1.    
The dollar is depreciating compared to the yen.    
The yen is stronger than the U.S. dollar.    
All of the above.

Question No.  37    
If the exchange rate between the U.S. dollar and Japanese yen changes from 1=100 yen to 1=90 yen, then:    

Options    
All Japanese producers and consumers will lose.    
U.S. auto producers and auto workers will lose.    
U.S. consumers of Japanese TV sets will benefit.    
Japanese tourists to the U.S. will benefit.

Question No.  38    
The merchandise trade balance is equal to:    

Options    
The difference between merchandise exports and merchandise imports.    
The difference between service exports and service imports.    
The capital account balance.    
The current-account balance

Question No.  39    Marks - 10
A major problem with managed exchange rates is:    

Options    
A constant excess supply of U.S. dollars.    
The steady depletion of foreign-exchange reserves.    
The determination of the value of a particular currency and which country will maintain that value.    
The need for trade restrictions to maintain the desired level of currency value.

Question No.  40    
The bond markets are important because    

Options    
They are easily the most widely followed financial markets in the United States.    
They are the markets where interest rates are determined.    
They are the markets where foreign exchange rates are determined.    
All of the above.