Foreign Investments Policy in India

Questions and Answers

What does the Balance of Payments (BoP) primarily record?

The country's monetary policy changes over a financial year

The total economic output of a country for a financial year

All external financial transactions between residents and non-residents (correct)

All internal financial transactions within a country

What is a key function of custom duties within the External Sector Policy?

To eliminate export incentives

To promote foreign investments only

To manage currency exchange rates

To regulate imports and protect domestic industries (correct)

Which of the following best describes the impact of the Atmanirbhar Bharat policy on foreign investment?

Increased restrictions on foreign ownership to enhance local businesses

Enhanced limits of foreign ownership to up to 100% in some sectors (correct)

Complete reduction of foreign investment opportunities

Discouragement of all forms of external investment

What is one target variable of the External Sector Policy?

Real GDP Signup and view all the answers

Which statement is true regarding inward versus outward looking policies?

Inward looking policies prefer self-sufficiency and limit foreign exchanges Signup and view all the answers

Which statement accurately describes an outward looking policy?

It promotes globalization and reduces trade barriers. Signup and view all the answers

What were the primary features of India's pre-reform external sector policy?

High tariffs, quotas, and licenses restricted foreign participation. Signup and view all the answers

How does the external sector policy impact aggregate demand?

It attempts to influence net exports (NX) and net income received from abroad (NR). Signup and view all the answers

What is one of the goals of external sector policy?

Protecting the domestic economy. Signup and view all the answers

What is the role of custom duties in trade policy?

To protect domestic industries from foreign competition. Signup and view all the answers

What change characterized India’s external sector policy post-1991?

Encouragement of foreign participation by lowering tariffs. Signup and view all the answers

Which option best describes the balance of payments structure affected by external sector policies?

Both the current account and capital account are impacted. Signup and view all the answers

What does an inward looking policy primarily aim to achieve?

Restricting foreign competition to support local industries. Signup and view all the answers

Which of the following components is included in the Current Account?

Merchandise trade Signup and view all the answers

What happens when total inflow is less than total outflow in the current account?

The country has a current account deficit Signup and view all the answers

Which of the following describes a potential risk associated with high current account deficits?

Increased dependence on capital inflows Signup and view all the answers

In the Balance of Payments structure, which account includes net foreign direct investment?

Capital Account Signup and view all the answers

Which of the following is NOT a type of capital account funding?

Foreign exchange reserves Signup and view all the answers

Which component of foreign investment specifically involves capital flows in the portfolio investment category?

ADRs/GDRs Signup and view all the answers

What impact can high custom duties have on foreign investments?

Deter potential foreign investors Signup and view all the answers

Which aspect of the monetary movements is affected by the Balance of Payments?

Changes in reserves Signup and view all the answers

Study Notes

Restrictions on Foreign Investments

Economy opened to various forms of foreign investments with enhanced limits.
Foreign ownership limits increased to 100% in certain sectors.
Policy of Atmanirbhar Bharat introduced in 2020 to promote self-reliance.

External Sector Policy

Governs transactions between domestic residents and the global economy.
Target variables include real GDP, exports, imports, and currency value.
Policy variables: custom duties, import restrictions, quotas, and visa regulations for foreign labor.

Balance of Payments (BoP)

A systematic record of all external financial transactions within a defined period, often a year.
Components include:
- Net Foreign Direct Investment: includes equity and reinvested earnings.
- Net Portfolio Investment: includes Foreign Institutional Investors (FIIs), American Depositary Receipts (ADRs), and Global Depositary Receipts (GDRs).

Basic Accounting Practices in BoP

Consists of current and capital accounts, errors & omissions, and overall balance.
Current Account includes merchandise trade and invisibles (services).
Capital Account consists of foreign investment, loans, banking capital, and other capital.

Current Account Deficit

Occurs when total inflow is less than total outflow.
Must be financed by capital inflows to maintain currency stability.
Increases economic vulnerability due to the volatility of capital inflows.

Goals of External Sector Policy

Aims for economic growth, protection of the domestic economy, and currency management.
Influences net exports (NX) and net receipts (NR) in the aggregate demand equation.

Policy Approach

Inward looking policy: protectionist stance limiting foreign involvement.
Outward looking policy: promotes globalization and integration in the economy.

Historical Context of External Sector Policy in India

Pre-Reform Era (1951-1991): Inward looking policy with high tariffs and quotas, limiting foreign participation.
Post-Reform Era (1991-2024): Outward looking policy, encouraging foreign investments by lowering tariffs and eliminating quotas and licenses.

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Description

This quiz explores the framework and restrictions surrounding foreign investments in India, especially after the implementation of the Atmanirbhar Bharat policy in 2020. It covers ownership limits and the evolution of investment policies, providing insights into how these changes have shaped the investment landscape.