External Sector of Economy

In India, the term ‘hot money’ is used to refer to

[amp_mcq option1=”Currency + Reserves with the RBI” option2=”Net GDR” option3=”Net Foreign Direct Investment” option4=”Foreign Portfolio Investment” correct=”option4″]

In India, the term ‘hot money’ is used to refer to D) Foreign Portfolio Investment.

‘Hot money’ refers to speculative capital flows that move quickly in and out of countries, seeking the highest short-term returns or reacting to expected exchange rate movements. Foreign Portfolio Investment (FPI), which involves investing in stocks, bonds, and other financial assets, is typically considered more liquid and volatile than Foreign Direct Investment (FDI), and thus is often referred to as ‘hot money’ because of its potential for rapid withdrawal during times of economic uncertainty.

Foreign Direct Investment (FDI) involves establishing or acquiring businesses in a foreign country and is generally considered a long-term investment. Currency plus reserves with the RBI relate to the country’s monetary base and foreign exchange reserves. Net GDRs are a mechanism for Indian companies to raise foreign currency, but FPI encompasses a broader category of short-term financial investments which fit the description of ‘hot money’.

Recently the Government of India entered into an agreement for a lithium exploration and mining project with which one among the following countries?

[amp_mcq option1=”Brazil” option2=”Australia” option3=”Argentina” option4=”Chile” correct=”option3″]

The Government of India, through Khanij Bidesh India Limited (KABIL), signed an agreement for lithium exploration and mining with Argentina.

India’s state-owned KABIL signed an exploration and mining agreement with Catamarca Minera y Energética Sociedad del Estado (CAMYEN), a state-owned mining company of Catamarca province in Argentina. This marked India’s first lithium exploration and mining project abroad.

Lithium is a critical mineral for India’s clean energy transition goals, particularly for the production of batteries used in electric vehicles and energy storage systems. Argentina is part of the ‘Lithium Triangle’ (along with Chile and Bolivia), which holds a significant portion of the world’s lithium reserves.

Consider the following statements about the Regional Comprehensive Economic Partnership (RCEP):

• 1. It is a comprehensive free trade agreement between the ASEAN member States and ASEAN’s free trade agreement partners.
• 2. India opted out of RCEP.

Which of the statements given above is/are correct?

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

Both statements 1 and 2 are correct regarding the Regional Comprehensive Economic Partnership (RCEP).

– Statement 1 is correct: RCEP is indeed a free trade agreement signed between the ten member states of ASEAN and their five FTA partners: Australia, China, Japan, South Korea, and New Zealand.
– Statement 2 is correct: India was part of the negotiations for RCEP but decided to opt out in November 2019, citing concerns about potential adverse impacts on domestic industries, agriculture, and trade deficits, particularly with China.

– RCEP is the world’s largest trade bloc by GDP. It was signed on 15 November 2020 and came into effect on 1 January 2022 for most signatories. India’s decision to withdraw was influenced by anxieties regarding increased market access demands from member countries, especially China, and the potential for a surge in imports.

Which of the following statements is/are correct?

• Most of India’s reserves is held in the form of foreign currency.
• There is no cost of holding foreign currency as reserves by a nation.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option1″]

A) 1 only

– Statement 1 is correct. India’s foreign exchange reserves are composed of Foreign Currency Assets (FCA), Gold, Special Drawing Rights (SDRs), and Reserve Tranche Position (RTP) in the IMF. Foreign Currency Assets, held in major currencies, consistently form the largest component, typically accounting for over 90% of the total reserves.
– Statement 2 is incorrect. Holding foreign currency reserves incurs costs. These include the opportunity cost (the return that could have been earned if the funds were invested domestically or in higher-yield assets instead of low-yield reserves), potential losses due to exchange rate fluctuations (if the reserve currency depreciates), and administrative costs of managing the reserves.

– Foreign exchange reserves are crucial for managing exchange rate volatility, providing confidence to markets, and meeting balance of payments needs. However, maintaining excessively high levels can be costly due to the reasons mentioned in statement 2.

If India enters into Free Trade Agreements (FTAs) with other nations, then the growth of exports of India would depend upon which of the following?

• 1. Extent of tariff reduction vis-à-vis MFN tariffs
• 2. Extent of relaxation in terms of rules of origin
• 3. Extent of relaxation in sanitary and phytosanitary measures
• 4. Level of infrastructure in India
• 5. Income in nations with which India enters into FTAs

Select the correct answer using the code given below.

[amp_mcq option1=”1, 3 and 4 only” option2=”1, 2 and 4 only” option3=”2, 3 and 5 only” option4=”1, 2, 3, 4 and 5″ correct=”option4″]

All five factors listed are crucial determinants of India’s export growth under Free Trade Agreements (FTAs).
1. **Extent of tariff reduction:** Lower tariffs make Indian goods more competitive in partner markets.
2. **Rules of origin:** Lenient RoO ensure that a higher proportion of goods manufactured in India qualify for preferential FTA tariffs.
3. **Sanitary and phytosanitary measures:** Relaxations or clear standards for SPS measures facilitate exports of agricultural and food products.
4. **Infrastructure in India:** Efficient logistics, transportation, and port infrastructure reduce costs and improve reliability for exporters.
5. **Income in partner nations:** Higher economic growth and income levels in FTA partner countries lead to increased demand for imports, including those from India.

The success of export growth under FTAs depends not only on tariff reductions but also on non-tariff barriers, domestic capabilities, and market demand in partner countries.

Beyond these factors, other elements like trade facilitation measures, dispute resolution mechanisms within the FTA, currency exchange rates, and global economic conditions also play a role in influencing export performance.

Which one of the following would be considered as Foreign Direct Investment ?

[amp_mcq option1=”A foreign company buying shares in stock exchanges in India” option2=”A foreign country pension fund investing in Indian stock markets” option3=”A foreign merchant banker buying shares from Indian stock markets” option4=”A foreign entity setting up an educational institution in India” correct=”option4″]

A foreign entity setting up an educational institution in India would be considered as Foreign Direct Investment.

Foreign Direct Investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. FDI typically involves establishing a lasting interest or controlling ownership in a foreign enterprise. This can be done by establishing a new business (greenfield investment) or acquiring a significant stake in an existing one.
– Options A, B, and C describe portfolio investment, which involves buying shares purely for financial return without seeking management control. Investing in stock markets (unless it’s a significant stake aiming for control) is typically portfolio investment.
– Option D, setting up a new educational institution, involves creating physical infrastructure, employing staff, and operating a business in India, representing a clear instance of greenfield FDI.

FDI is distinct from Foreign Portfolio Investment (FPI). FDI is seen as bringing not just capital but also technology, management expertise, and market access. FPI is more liquid and focuses on short-term financial gains.

Which one of the following sectors is not affected by the changes made in the Foreign Direct Investment Policy in June 2016?

[amp_mcq option1=”Multi-brand retailing” option2=”Defence” option3=”Private security agencies” option4=”Manufacturing of small arms and ammunitions covered under the Arms Act, 1959″ correct=”option1″]

The changes made in the Foreign Direct Investment (FDI) Policy in June 2016 significantly liberalized norms across various sectors. While sectors like defence, civil aviation, pharmaceuticals, private security agencies, and manufacturing of small arms and ammunitions saw substantial policy changes (increased FDI limits, shift to automatic route), the policy regarding Multi-brand retailing remained largely unchanged at 51% FDI subject to various conditions. Therefore, multi-brand retailing was the sector least affected by the specific *changes* announced in the June 2016 package compared to the other listed options which saw significant liberalization.

The June 2016 FDI policy changes focused on liberalizing norms in many sectors. Multi-brand retail FDI policy (51% with conditions) was not part of the major liberalization drive in this specific announcement.

The June 2016 FDI reform package included increasing FDI limits or bringing more activities under the automatic route in sectors such as Defence (up to 100%), Civil Aviation (up to 100% in airlines with certain conditions), Pharmaceuticals (up to 100%), Private Security Agencies (up to 74%), Manufacturing of small arms under Arms Act, 1959 (up to 100%), Food Products manufacturing and trading (100%), Broadcasting, etc. Multi-brand retail FDI continued to be governed by the existing policy.

The Most Favoured Nation (MFN) Clause under WTO regime is based on the principle of

[amp_mcq option1=”non-discrimination between nations” option2=”discrimination between nations” option3=”differential treatment between locals and foreigners” option4=”uniform tariff across commodities” correct=”option1″]

The Most Favoured Nation (MFN) clause under the WTO regime is based on the principle of non-discrimination between nations.

The MFN principle means that if a country grants a trade concession or advantage to one trading partner (WTO member), it must grant the same treatment to all other WTO members. For example, if a country reduces its tariff on imports of cars from one member country, it must reduce the tariff on car imports from all other WTO members to the same level. This ensures that trade barriers are lowered uniformly for all members, fostering a level playing field.

This principle is enshrined in Article I of the General Agreement on Tariffs and Trade (GATT), which is a key part of the WTO agreements. While there are certain exceptions allowed (e.g., Regional Trade Agreements like Free Trade Areas or Customs Unions, and provisions for developing countries), the core principle of MFN is non-discrimination among members.

Which of the following statements about the Trans-Pacific Partnership (TPP) is/are correct?

• 1. The TPP was signed by 12 Pacific Rim nations in the year 2015.
• 2. The TPP is likely to be a game-changer in global trade as member countries account for about 40 percent of global GDP.
• 3. India is a founder member of TPP.

Select the correct answer using the code given below.

[amp_mcq option1=”1, 2 and 3″ option2=”1 and 2 only” option3=”2 and 3 only” option4=”1 only” correct=”option2″]

Statement 1 is incorrect. While negotiations for the Trans-Pacific Partnership (TPP) concluded in October 2015, the agreement was officially signed by the 12 member nations in Auckland, New Zealand, on February 4, 2016. Statement 2 is correct; the TPP member countries together accounted for approximately 40% of global GDP and a significant share of global trade, making it a potentially significant trade bloc. Statement 3 is incorrect; India was not a member or founder member of the TPP. The 12 founding members were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States.

The Trans-Pacific Partnership (TPP) was a major trade agreement involving countries around the Pacific Rim, but excluded major economies like China and India.

The TPP agreement faced political challenges, particularly in the United States, and the US withdrew from the agreement in January 2017. The remaining 11 countries proceeded to negotiate a revised agreement, known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect in December 2018.

TRIPS Agreement pertains to

[amp_mcq option1=”international tariff regime” option2=”intellectual property protection” option3=”international practices on trade facilitation” option4=”international taxation of property” correct=”option2″]

TRIPS stands for the Agreement on Trade-Related Aspects of Intellectual Property Rights. It is an international agreement administered by the World Trade Organization (WTO) that sets minimum standards for the regulation by national governments of different forms of intellectual property (IP) as applied to nationals of other WTO member nations.

The TRIPS Agreement is a key agreement within the WTO framework that harmonises global standards for intellectual property rights like patents, copyrights, trademarks, geographical indications, industrial designs, etc.

Prior to TRIPS, intellectual property rules varied significantly between countries, leading to potential trade disputes. The TRIPS Agreement aims to ensure adequate and effective protection of intellectual property rights and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade.