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GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 3
rd
Semester
INTERNATIONAL BUSINESS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal marks
SECTION-A
1. Explain the Modes of Entry into International Business.
2. Discuss the Components of Foreign Environment with examples.
SECTION-B
3. What are the Recent Trends in India's Foreign Trade ?
4. Explain Commercial Policy Instruments.
SECTION-C
5. What do you mean by Balance of Payments Account and its Component?
6. Explain the Objectives and Principles of WTO.
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SECTION-D
7. What do you mean by EOUs? Explain briefly.
8. Discuss in detail Types and Flows of Foreign Investment in Indian Perspective.
Easy2Siksha.com
GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 3
rd
Semester
INTERNATIONAL BUSINESS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal marks
SECTION-A
1. Explain the Modes of Entry into International Business.
Ans: Modes of Entry into International Business
Imagine you own a small sweet shop in your town. Your laddoos and gulab jamuns are so
famous that people from nearby cities travel just to get a taste. One day, a relative from
Dubai visits, tastes your sweets, and says:
“Why don’t you sell these in Dubai? People would love them!”
Now, you’re excited. Expanding into another country sounds amazing—but here comes the
big question: How do you enter that new market?
This exact situation is faced by companies around the world—whether it’s Amul from India,
Samsung from Korea, or Nike from the US. They all dream of selling in other countries, but
the “doorway” they choose to enter matters a lot. These doorways are what we call Modes
of Entry into International Business.
So, let’s walk through these modes in a simple story-like way. Think of it as different ways
you can send your sweets to Dubai and beyond.
1. Exporting – Sending from Home
This is the simplest way. You stay in your own country, make the sweets in your kitchen, and
then ship them abroad.
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In business, exporting means you produce goods in your country and sell them in another.
For example, Indian textile companies export sarees and fabrics worldwide.
• Advantages:
o Easy and less risky.
o You don’t have to invest in factories abroad.
o You learn about foreign customers without spending too much.
• Disadvantages:
o High shipping costs.
o Risk of government restrictions and import duties in the other country.
o Less control over marketing and distribution abroad.
For your sweet shop: You could pack your laddoos and ship them to Dubai shops. That’s
exporting!
2. Licensing – Giving Permission
Let’s say you’re too busy to manage exports. Instead, you give a sweet shop in Dubai the
recipe and the right to use your brand name. In return, they pay you a fee (royalty).
This is licensing in international business—when one company allows a foreign company to
use its technology, patents, or brand.
Example: McDonald’s allows different franchise owners in each country to use its brand and
recipes.
• Advantages:
o Low investment required.
o Good way to enter countries with strict trade barriers.
o Quick expansion possible.
• Disadvantages:
o You lose some control—what if they spoil the taste of your sweets?
o Risk of creating a competitor (they learn your secrets and then stop paying
you).
In your story: You send your secret laddoo recipe to a Dubai shop and let them sell
under your name.
3. Franchising – Spreading Your Brand
Now, imagine you don’t just share your recipe—you give the entire business model: the
way your shop looks, the menu, the uniforms, and even the customer service style.
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This is franchising. It’s like a bigger and stricter version of licensing.
Example: Domino’s and KFC operate worldwide using this method. The taste remains almost
the same whether you eat in Delhi, Dubai, or New York.
• Advantages:
o Fast global growth.
o Franchisee invests money, so less financial burden on you.
o Strong brand consistency.
• Disadvantages:
o Maintaining quality everywhere is hard.
o Franchisees may not always follow rules strictly.
In your sweets story: You open “Rishabh’s Laddoos” outlets in Dubai with the same look,
same logo, same sweets—just like your shop back home.
4. Joint Ventures – Making Friends Abroad
Suppose you find a sweet shop in Dubai that is already popular. You decide: “Let’s partner!
I’ll bring my recipes, you bring your local market knowledge, and together we’ll run the
shop.”
That’s a joint venture—two companies (one domestic, one foreign) start a new business
together.
Example: Maruti Suzuki in India is a joint venture between an Indian company (Maruti) and
a Japanese company (Suzuki).
• Advantages:
o You get local knowledge and networks.
o You share costs and risks.
o It helps in countries where foreign ownership is restricted.
• Disadvantages:
o Disagreements may arise between partners.
o Profits are shared.
o Different working styles can cause conflict.
In your sweets story: You and a Dubai partner open a new sweet shop together. Both
share the profits and responsibilities.
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5. Wholly Owned Subsidiaries – Going All Alone
Now, let’s say you are super confident and have enough money. You decide: “I’ll buy land in
Dubai, open my own factory, and sell sweets directly through my own shops.”
This is called a wholly owned subsidiary—where a company sets up or buys a business in a
foreign country fully owned by itself.
Example: Hyundai has fully owned manufacturing plants in India.
• Advantages:
o Full control over operations.
o All profits belong to you.
o You build a strong brand image abroad.
• Disadvantages:
o Very costly and risky.
o If the foreign government changes rules, you may face losses.
o Managing from far away is difficult.
In your sweets story: You set up “Rishabh International Sweets LLC” in Dubai with your
own staff, machines, and shops.
6. Mergers & Acquisitions – Buying Existing Shops
Another option is: instead of starting fresh, buy an existing sweet shop in Dubai. Since it
already has customers, workers, and reputation, you just rebrand it under your name.
In business, this is called mergers and acquisitions (M&A). Many big companies use this
method to grow quickly.
Example: Tata Motors acquired Jaguar Land Rover in the UK.
• Advantages:
o Instant market entry.
o Access to existing customers and suppliers.
o Saves time building everything from scratch.
• Disadvantages:
o Very expensive.
o Cultural clashes between companies.
o High risk if the acquired company has hidden problems.
In your sweets story: You buy a famous sweet shop in Dubai and make it yours
overnight.
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7. Contract Manufacturing – Outsourcing Work
Here, instead of producing sweets yourself, you hire a Dubai factory to make them on your
behalf, but you sell them under your brand.
Example: Many clothing brands don’t own factories—they outsource production to
countries like Bangladesh or Vietnam.
• Advantages:
o Low investment.
o You can focus on marketing and branding.
o Quick supply in the foreign market.
• Disadvantages:
o Quality control issues.
o Dependency on the manufacturer.
o Risk of brand damage if workers are exploited.
In your sweets story: A Dubai factory makes your laddoos, and you just sell them under
your brand name.
Wrapping Up the Story
So, whether it’s exporting, licensing, franchising, joint ventures, wholly owned subsidiaries,
mergers, or contract manufacturing—every mode of entry has its own flavor, risks, and
rewards.
Think of it this way:
• If you want less risk → Exporting or Licensing.
• If you want fast growth with local help → Franchising or Joint Venture.
• If you want full control and have money → Wholly Owned Subsidiary or Acquisition.
In the end, companies choose their path depending on money, risk capacity, and long-term
goals.
Just like your laddoo shop, the dream of going global is exciting, but the choice of door
(mode of entry) decides whether you’ll succeed sweetly or end up in a sticky mess.
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2. Discuss the Components of Foreign Environment with examples.
Ans: A Journey into the Foreign Environment: Understanding the Puzzle
Imagine you are the captain of a ship. Your ship is not just carrying goods—it represents
your business. You are about to sail across the oceans, not just to nearby ports, but to
completely new countries where the language is different, the rules are different, the
culture is unique, and even the way people live and buy things is not the same as back
home.
Now, before you start your journey, what would you do? Of course, you’ll study the
environment of those foreign lands. Why? Because if you don’t understand the winds,
waters, and conditions there, your ship (business) may sink.
This is exactly what companies face when they operate in the foreign environment. It’s like
entering a new world with its own set of conditions. Let’s break this down into its
components, one by one, using relatable examples so it sticks in your memory like a good
story.
1. Economic Environment
Think of this as the “treasure chest” of the country. How much wealth does the nation
have? How strong is its economy? Are people rich enough to buy your products, or are they
struggling to meet basic needs?
• If you are a company like Apple, you’ll think twice before selling iPhones in a poor
country where most people can’t afford them. But in countries like the USA or Japan,
you can sell them easily because people have high purchasing power.
• Similarly, if you’re selling budget smartphones like Xiaomi, you’ll target countries like
India or Africa where people look for affordable technology.
So, the economic environment decides whether your product will become a “must-have” or
just a “luxury no one buys.”
2. Political and Legal Environment
This is like the “rulebook” of the land. Every country has its own government, policies, and
laws. If you don’t follow them, you’re out of the game.
• For example, when Uber entered many countries, it faced legal issues because local
taxi unions and governments felt threatened. In some countries, Uber had to adjust
its policies to fit local laws.
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• Another case is Coca-Cola in India during the 1970s. The Indian government asked
foreign companies to share their secret formulas if they wanted to operate. Coca-
Cola refused, and it had to leave India for years until liberalization brought it back.
The lesson? If you don’t play by the local rules, no matter how big you are, you may be
shown the exit door.
3. Social and Cultural Environment
Imagine walking into a festival in a foreign land where everyone is dancing, eating, and
dressing differently. You would never want to behave in a way that offends them, right?
That’s exactly why businesses must respect the social and cultural environment.
• For instance, McDonald’s doesn’t sell beef burgers in India because cows are sacred
to Hindus. Instead, they sell “McAloo Tikki” and “Paneer Burgers.”
• Similarly, in Middle Eastern countries, KFC and other fast-food chains ensure their
food is halal to meet religious standards.
If a company ignores culture, it will not just fail but also hurt local sentiments. Respecting
traditions is the key to winning hearts abroad.
4. Technological Environment
This is like the “tools and weapons” available in that country. Some nations are highly
advanced, while others are still catching up.
• In South Korea, with one of the fastest internet speeds in the world, companies can
introduce advanced online services and gaming platforms.
• But in some rural parts of Africa, internet access is still limited, so companies like
Facebook launched projects like “Free Basics” to provide basic internet to more
people.
The technological environment tells you whether your product will fly like a rocket or crawl
like a snail.
5. Competitive Environment
Imagine stepping into a market like a battlefield where many players are already fighting for
attention. You need to know who your rivals are and how strong they are before making
your move.
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• For example, when Pepsi tries to grow in a new country, it has to face its eternal rival
Coca-Cola, which is often already established.
• Similarly, Amazon faced tough competition from local players like Flipkart in India,
who already understood Indian customers better.
Understanding the competitive environment is like studying your opponent before a chess
match—you can’t win if you don’t know their moves.
6. Demographic Environment
This is about the “people” of the country—who they are, how many they are, how old they
are, and what they like.
• For example, India has a very young population, which is why companies like
Instagram, Netflix, and Spotify are so popular here. Youngsters love entertainment,
technology, and social media.
• On the other hand, countries like Japan have an aging population, so businesses
there focus more on healthcare, old-age products, and robots that can assist the
elderly.
The demographic environment helps companies know who their real customers will be.
7. Natural Environment
Last but not least, think of this as the “geography and resources” of the land. Nature can
either help your business grow or put obstacles in your way.
• For example, if you want to open a ski resort, you wouldn’t choose Dubai—you’d
choose Switzerland or Canada where snow is abundant.
• Similarly, oil companies rush to Middle Eastern countries because they are rich in
petroleum resources.
Also, natural calamities like earthquakes, floods, or even climate change can affect how a
company operates in a foreign country.
Tying It All Together: The Puzzle of Foreign Environment
So, when a company plans to go global, it must study all these components like pieces of a
puzzle:
• Economic – Do people have money to buy my product?
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• Political/Legal – Am I allowed to operate under their rules?
• Social/Cultural – Will my product fit into their lifestyle?
• Technological – Do they have the technology to use my product?
• Competitive – Who are my rivals?
• Demographic – What type of people live there?
• Natural – What resources and challenges exist?
If even one piece of the puzzle is missing, the picture remains incomplete, and the business
risks failure.
Conclusion: Why It Matters
Understanding the components of foreign environment is not just a theory—it’s survival.
It’s like learning the language, customs, and rules of a new land before moving there.
Businesses that respect and adapt to these components thrive, while those that ignore them
vanish like ships lost at sea.
So, the next time you hear about a company going “global,” remember, it’s not just about
selling products abroad—it’s about understanding and respecting the environment of
another country. That’s what makes the difference between success and failure in
international business.
SECTION-B
3. What are the Recent Trends in India's Foreign Trade ?
Ans: Recent Trends in India’s Foreign Trade
Imagine for a moment that India is like a big, busy household in a global neighbourhood.
Every family in this neighbourhood trades things with each other—some give away extra
vegetables, some provide clothes, some offer gadgets, while others buy services like
carpentry or tuition. In the same way, India too exchanges goods and services with different
countries around the world. This whole give-and-take process is what we call foreign trade.
Now, just like households change their shopping habits over time—maybe they start buying
more online or prefer healthier food—India’s trade patterns also keep changing. These
changing patterns are what we call recent trends in foreign trade. Let me take you on a
simple yet insightful journey through these changes, almost like flipping through the pages
of India’s trading diary.
1. Rising Share of Services in Exports
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Earlier, India was known mainly for exporting raw materials like cotton, tea, and spices. But
today, services have become India’s shining star. Think of it like a family that once sold
vegetables but now earns more money by giving computer classes and English coaching in
the neighbourhood.
India is now one of the world’s largest exporters of IT services, software solutions, and
business process outsourcing (BPO). Companies in the US, Europe, and other parts of the
world rely on Indian engineers, coders, and call center executives. Exports of services like IT,
healthcare, online education, and consultancy have grown faster than many traditional
goods.
This shows that India is slowly moving from being a “supplier of goods” to a “hub of
knowledge and digital skills.”
2. Diversification of Export Basket
Earlier, India’s export basket was narrow—just like a family selling only rice in the local
market. But now, India sells not only rice but also wheat, spices, cars, medicines, software,
mobile phones, and even satellites!
• India is now a big exporter of pharmaceuticals (generic medicines), which became
even more important during COVID-19 when Indian medicines and vaccines reached
many countries.
• Exports of engineering goods, chemicals, petroleum products, and automobiles
have gone up.
• Even electronics exports are rising, thanks to government schemes like “Make in
India” and “Production Linked Incentives (PLI).”
This wider variety makes India less dependent on just one or two products and reduces risks
when global markets fluctuate.
3. Shift in Trading Partners
Imagine earlier the family mostly exchanged things with one or two neighbours. But now
they have started trading with many households across the neighbourhood. Similarly, India
has expanded its trade relations.
• Earlier, India’s major trade partners were mainly the US, UK, and a few European
countries.
• Today, the list includes China, UAE, Saudi Arabia, ASEAN nations (like Singapore,
Indonesia, Malaysia), Japan, and South Korea.
• At the same time, India’s trade with Africa and Latin America is also growing.
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This shows India’s willingness to be a “global neighbour” and not just depend on a few
countries.
4. Trade Deficit Challenges
Here comes a twist in the story. Imagine our household earns ₹10,000 by selling vegetables
and services but spends ₹15,000 on buying gadgets and clothes from neighbours. That
means the family is spending more than what it earns. In trade terms, this is called a trade
deficit.
India often imports more than it exports, especially because:
• We import a lot of crude oil to meet our energy needs.
• We import gold (for jewellery and investment).
• We also import electronic goods, machinery, and fertilizers.
This trade deficit sometimes puts pressure on India’s economy, as more dollars are going
out than coming in.
5. Growth of E-Commerce and Digital Trade
Another fascinating trend is the rise of digital trade. Just as households now order things
from Amazon instead of going to the market, India too is increasingly exporting and
importing through online platforms.
Small businesses and artisans are now selling products like handicrafts, jewelry, and clothes
to customers abroad using e-commerce websites. This has given rural and semi-urban India
a chance to participate directly in global trade.
6. Impact of Global Events
Foreign trade doesn’t happen in isolation—it is affected by what’s happening in the world.
Let’s look at a few recent examples:
• COVID-19 pandemic: Trade was badly hit in 2020, but later India’s pharmaceutical
and medical exports gained attention worldwide.
• Russia-Ukraine war: This affected supply of crude oil, sunflower oil, fertilizers, and
wheat, making India adjust its trade strategies.
• Global inflation and slowdown: Demand for certain products went down, but India
kept pushing IT and digital services, which are less affected.
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This shows that India’s trade journey is like a car moving on a bumpy road—it faces
obstacles but keeps finding new routes.
7. Government Initiatives to Boost Trade
The government plays the role of a guardian of this trading household, setting rules and
providing support. Some recent steps include:
• Make in India & Atmanirbhar Bharat: Encouraging domestic production so that
imports reduce.
• Production Linked Incentives (PLI): Giving companies incentives to manufacture in
India, especially in electronics, textiles, and automobiles.
• Free Trade Agreements (FTAs): India has signed or is negotiating trade deals with
countries like UAE, Australia, UK, and the EU to reduce tariffs and expand markets.
• Digital India: Promoting online services, which indirectly helps IT exports.
These efforts are like giving extra tools and fertilizers to the family so they can produce
more and sell better.
8. Sustainability and Green Trade
A very modern trend is the focus on eco-friendly and sustainable trade. The world now
demands products that are environmentally safe. India too is trying to increase exports of
renewable energy technologies like solar panels, wind turbines, and electric vehicles.
This shift is important because in the future, countries that don’t go green may face
restrictions in global trade.
9. Regional Imbalances in Trade
It is also important to notice that not all parts of India contribute equally to foreign trade.
States like Gujarat, Maharashtra, Tamil Nadu, and Karnataka are the leaders in exports,
while some other states are still lagging. The government is now working to encourage
exports from smaller states by promoting local industries like handicrafts, textiles, and
agriculture.
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Conclusion
So, if we summarize India’s foreign trade journey, it feels like the story of a household that
has grown smarter and more diverse in its earnings but still struggles with overspending. On
the one hand, India is shining globally with IT services, medicines, and a wider variety of
products. On the other hand, heavy dependence on oil and gold imports creates challenges.
The good news is that India is learning, adapting, and expanding its trade network across the
world. With policies like Make in India, digital push, and free trade agreements, India’s trade
diary is likely to get even more colourful in the coming years.
In simple words, India’s foreign trade is no longer about just spices and textiles—it is now a
fascinating blend of software, smartphones, medicines, engineering goods, and services that
connect it to every corner of the globe.
4. Explain Commercial Policy Instruments.
Ans: Commercial Policy Instruments – A Simple Yet Engaging Explanation
Imagine for a moment that the world is like a big marketplace. Every country has its own
shop, selling goods like textiles, spices, machinery, or software, while also buying what it
cannot produce efficiently. Now, just like a shopkeeper decides whether to keep discounts,
set prices, or put limits on how much one person can buy, countries too make rules about
how trade should happen across their borders.
These rules, strategies, and methods are collectively called Commercial Policy Instruments.
They are basically the “tools” a government uses to regulate trade with other countries –
deciding what to allow, what to restrict, and how to shape the nation’s economic growth.
But why would a government want to interfere with trade? After all, shouldn’t trade just be
free and simple? Well, the answer is similar to why a shopkeeper sets some policies in his
shop:
• To protect his business from losses,
• To promote certain products more than others,
• To compete strongly with rivals,
• To maintain balance in profits and costs.
In the same way, governments use commercial policy instruments to protect their
industries, promote exports, manage imports, and strengthen the overall economy.
Let’s now go step by step and explore these instruments in a fun, story-like manner.
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1. Tariffs – The Entry Ticket to the Marketplace
Think of tariffs like the entry fee at an amusement park. If you want to enter and enjoy the
rides, you must pay some money.
In trade, a tariff is a tax imposed on imported goods. Suppose India imports cars from Japan.
If the Indian government places a tariff of 20% on each imported car, the price of that
Japanese car will automatically rise in the Indian market. This makes Indian-made cars look
cheaper and more attractive to local buyers.
Purpose of tariffs:
• To protect domestic industries from foreign competition,
• To raise revenue for the government,
• To sometimes reduce dependence on foreign goods.
So, tariffs act as a shield for local producers but can also make goods costlier for consumers.
2. Quotas – The “Limited Stock Available” Sign
Have you ever seen a shop sign that says, “Only 2 pieces per customer”? This is done so that
one person doesn’t grab everything and others also get a chance.
Similarly, in trade, a quota is a limit on how much of a product can be imported into the
country. For example, the government may allow only 1,00,000 tons of sugar to be imported
in a year. Once that quota is filled, no more sugar imports are allowed.
Purpose of quotas:
• To control the quantity of foreign goods entering the country,
• To give space to local industries to grow without being flooded by imports,
• To manage balance of payments when the country has less foreign currency to
spend.
Quotas are like rationing in trade – allowing some imports, but in limited amounts.
3. Subsidies – The Special Discount for Local Products
Now imagine a government behaving like a supportive parent who gives money to their
child to help set up a lemonade stall. With that extra help, the child can sell lemonade
cheaper and still make profit.
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This is exactly what subsidies do in trade. A subsidy is financial assistance given by the
government to local industries, so they can produce goods at lower costs and compete
better with foreign products.
Example: If the Indian government gives subsidies to farmers for fertilizers, irrigation, or
electricity, Indian agricultural products become cheaper and more competitive in both local
and global markets.
Purpose of subsidies:
• To encourage production of certain goods,
• To make exports more competitive,
• To support struggling sectors like agriculture or small industries.
Subsidies are like a hidden helping hand that boosts domestic producers.
4. Import Licensing – The Permission Slip
When we were in school, sometimes to leave the classroom early, we needed a permission
slip from the teacher. Without that slip, we simply couldn’t go.
Import licensing works in the same way. Before importing certain goods, traders need to get
a license from the government. Only those with permission are allowed to import.
Purpose of import licensing:
• To control the flow of goods into the country,
• To prevent unnecessary imports,
• To encourage essential imports only.
It ensures that imports don’t happen randomly but only with government approval.
5. Exchange Control – The Pocket Money Rule
Think of a parent giving a child pocket money and saying, “You can only spend this much on
snacks.” Similarly, governments sometimes restrict how much foreign currency people or
companies can use to buy goods from abroad.
This is called exchange control. If a country is running low on foreign reserves (like dollars),
it may decide to allow only limited imports, prioritizing essentials such as medicines, oil, or
machinery.
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Purpose of exchange control:
• To protect foreign currency reserves,
• To prioritize important imports,
• To maintain economic stability.
It’s like keeping an eye on the national wallet.
6. Export Promotion Measures – Showing Off in the Global Bazaar
If imports are like controlling what comes in, exports are about proudly selling what goes
out. Every country wants to sell more abroad because it brings in valuable foreign exchange.
So, governments adopt export promotion measures such as:
• Tax exemptions on export income,
• Subsidies for exporters,
• Special economic zones (SEZs) where businesses get facilities to produce only for
export,
• Organizing trade fairs abroad to showcase products.
The idea is simple: The more a country exports, the richer it becomes.
7. Anti-Dumping Measures – Protecting Against Unfair Tricks
Imagine if a big bakery from another city starts selling cakes in your neighborhood at very
cheap prices, even cheaper than the cost of making them, just to destroy your local baker.
This strategy is called dumping.
To protect local industries, governments impose anti-dumping duties (extra charges) on
such imported goods. This ensures that foreign companies cannot kill domestic industries by
selling below cost.
8. Voluntary Export Restraints – A Gentle Agreement
Sometimes, instead of fighting, two countries sit together and agree: “You will sell only this
much to us, and we won’t complain.”
This is called Voluntary Export Restraint (VER). It’s a diplomatic tool where the exporting
country itself limits the amount it sells to avoid trade conflicts.
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Why Are Commercial Policy Instruments Important?
All these tools may sound like restrictions, but they are not always bad. Just like a parent
sets rules for children not to harm them but to guide them, governments use these policies
to balance growth, protect jobs, and develop industries.
• They protect new industries (infant industry argument),
• They generate government revenue,
• They help maintain economic stability,
• They support employment and development.
At the same time, if used excessively, these tools can also make goods expensive for
consumers and reduce choices. That’s why governments need to balance wisely between
protection and openness.
Conclusion – The Art of Balancing Trade
So, in our big “world marketplace,” commercial policy instruments are like the rules of the
game. Tariffs act like entry tickets, quotas are limits on stock, subsidies are discounts for
local players, and exchange controls are pocket money rules. Together, they shape how
countries buy, sell, and compete with each other.
In the end, the goal is always the same: to protect domestic interests while also benefiting
from global trade. Like a wise shopkeeper who knows when to give discounts, when to
stock limits, and when to expand his market, a country too must use these instruments
smartly to grow and prosper.
SECTION-C
5. What do you mean by Balance of Payments Account and its Component?
Ans: Balance of Payments and Its Components
Imagine you live in a town where every family keeps a diary of all the money that comes
into the house and all the money that goes out. If your uncle in another town sends you
money, you write it down as “money received.” If you buy something from the nearby shop,
you write it as “money spent.” At the end of the year, when you look at your diary, you can
clearly see how much money entered your house and how much left.
Now, imagine the country itself is like a giant family. This family too has to keep a diary of
all the transactions it makes with the rest of the world. Every time India trades goods,
services, or money with another country, it is noted in a special account. That special diary
of a country is called the Balance of Payments (BoP).
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So, what exactly is Balance of Payments?
The Balance of Payments is a record of all the economic transactions between a country
and the rest of the world during a specific period, usually a year.
In simple words:
• Whenever India earns money from other countries (like selling tea, software, or even
when Indians working abroad send money home), it is recorded as an inflow.
• Whenever India spends money in other countries (like buying crude oil, paying for
foreign education, or investing abroad), it is recorded as an outflow.
The BoP is like a mirror. It shows whether money is flowing more into the country or more
out of the country.
Why is Balance of Payments Important?
Let’s continue with our family diary example. If your family spends more money than it
earns, you may have to borrow or dip into your savings. Similarly, if a country spends more
than it earns from abroad, it may have to take loans or use its foreign currency reserves.
That’s why governments, economists, and even international organizations look at the
Balance of Payments very carefully. It tells them about the financial health of a nation,
whether it is stable or under stress.
Main Components of Balance of Payments
Just like a diary has different sections (like food expenses, school fees, medical costs, etc.),
the Balance of Payments also has two big sections:
1. Current Account
2. Capital Account
(and sometimes we also discuss a third – the Financial Account – but broadly, it is
included in Capital Account in many books.)
Let’s understand them one by one, with simple stories.
1. Current Account: The Day-to-Day Wallet
Think of the Current Account as your family’s daily wallet. It shows all the income and
expenditure that happen regularly.
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It has four main parts:
(i) Balance of Trade (Goods):
This is the record of exports (goods sold to other countries) and imports (goods bought from
other countries).
• If India exports more than it imports, we have a “trade surplus.”
• If imports are more (like our huge oil imports), then it is a “trade deficit.”
Example: When India exports spices to Europe, that’s money coming in. When India imports
crude oil from Saudi Arabia, that’s money going out.
(ii) Trade in Services:
India is famous for its services, like IT software, call centers, tourism, and education.
Whenever foreigners pay India for these services, it’s recorded as inflow. Similarly, if Indians
use services abroad (like hiring foreign consultants or studying in the US), it’s outflow.
(iii) Income:
This includes earnings from investments. For example, if an Indian company has invested in
shares abroad and earns dividends, that’s inflow. But if foreign companies operating in India
send their profits back to their home country, that’s outflow.
(iv) Transfers:
These are one-way flows where no direct exchange takes place. A good example is
remittances (when Indians working abroad send money home). It also includes foreign aid,
donations, or gifts.
All these together make up the Current Account.
2. Capital Account: The Big Investments and Loans
If the Current Account was like your wallet, the Capital Account is like your family’s long-
term assets and loans.
It shows how money moves in and out of a country for the purpose of investment, loans,
and asset ownership.
Some major parts are:
(i) Foreign Direct Investment (FDI):
When a foreign company sets up a factory or business in India, that’s money coming in. For
example, when Samsung builds a plant in India, that’s FDI inflow. Similarly, if Indian
companies invest abroad, that’s an outflow.
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(ii) Foreign Portfolio Investment (FPI):
This refers to foreigners investing in Indian stock markets or bonds. They don’t build
factories but just buy shares and sell them when they like. It’s like short-term investment
money.
(iii) External Borrowings and Loans:
If India takes a loan from the World Bank or IMF, that’s inflow. When India repays loans, it’s
outflow.
(iv) Movement of Foreign Exchange Reserves:
Sometimes the Reserve Bank of India (RBI) itself buys or sells foreign currency to maintain
stability. That also appears here.
How Do Current and Capital Accounts Work Together?
Here comes the interesting part. Just like in a family diary, if expenses are more than
income, you borrow or use savings to balance it out.
Similarly, in Balance of Payments:
• If India has a Current Account Deficit (spending more than earning), it has to be
financed by inflows in the Capital Account (like FDI or foreign loans).
• If both accounts together balance out, then the BoP is said to be “balanced.”
In reality, BoP never balances perfectly on its own. The RBI often has to adjust using its
reserves.
A Quick Example Story
Let’s imagine India as a student studying abroad.
• He earns money by tutoring classmates (this is like export of services).
• He buys food and pays rent (like imports).
• His parents send him money (like remittances).
• He also invests in a laptop (like capital investment).
• Sometimes he takes loans from friends (like external borrowing).
At the end of the year, when he looks at all his income and expenses, that record is like
India’s Balance of Payments.
Conclusion
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So, in simple words, the Balance of Payments is a comprehensive record of a country’s
economic dealings with the world. The Current Account records day-to-day trade, services,
income, and transfers, while the Capital Account records investments, loans, and asset
movements.
It is important because it shows whether the country is a net earner or a net spender in the
global economy. Just like a family must check its diary to avoid overspending, a country
must carefully track its Balance of Payments to remain financially healthy.
In the end, the Balance of Payments is not just numbers—it’s the story of how a nation
interacts with the world, how it earns, how it spends, and how it grows.
6. Explain the Objectives and Principles of WTO.
Ans: Objectives and Principles of WTO
Imagine for a moment that the world is like one big marketplace. In this marketplace, each
country is like a shopkeeper. Some shops are huge—like the United States or China—with
lots of products to sell. Some shops are medium-sized, like India or Brazil. And some are
very small shops, like Bhutan or Nepal, which don’t have as many goods to sell. Now, if there
are no rules in this marketplace, the bigger shops might push the smaller ones into a corner,
block their paths, or impose unfair prices. Chaos would follow: fights, mistrust, and losses
for everyone.
This is exactly why the World Trade Organization (WTO) was created in 1995. It is like the
manager of this global marketplace. Its job is not to sell products, but to make sure all
countries—big or small—can trade fairly, smoothly, and peacefully with each other. WTO
provides a rulebook that everyone must follow, ensuring no one takes undue advantage and
that trade disputes are resolved without conflict.
Now, to understand WTO better, let us break it into two big parts:
1. Objectives – What does WTO want to achieve?
2. Principles – What rules or values guide its work?
Let’s go step by step like a story.
Objectives of WTO
The objectives of WTO can be compared to the goals of a good school. A school wants its
students to learn, grow, compete fairly, and live peacefully. Similarly, WTO has a set of goals
for world trade:
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1. Promoting Free Trade
Think of trade barriers like walls. High customs duties, import restrictions, or heavy quotas
are like tall walls that prevent countries from buying or selling goods freely. WTO’s first
objective is to reduce these walls so that trade flows smoothly across borders.
For example, if India wants to export mangoes to Europe, it should not face unfairly high
taxes there. WTO encourages countries to gradually lower tariffs and make markets more
open.
2. Ensuring Fair Competition
Imagine playing a cricket match where one team has bats, gloves, and pads, while the other
team has only bare hands. That’s unfair! Similarly, in trade, some countries might use tricks
like giving heavy subsidies to their industries or dumping goods at very low prices in foreign
markets. WTO’s objective is to make sure every country competes on equal terms.
3. Raising Standards of Living
At the heart of WTO’s mission is people. The organization wants global trade to ultimately
benefit ordinary citizens by creating jobs, improving access to goods, and raising living
standards. When trade grows, businesses expand, workers earn more, and economies
prosper.
4. Ensuring Full Employment
Unemployment is like a disease for any economy. WTO believes that smoother trade will
open new industries, markets, and opportunities—thereby creating jobs. For instance, IT
outsourcing in India or automobile exports from Japan have generated millions of jobs
because of global trade.
5. Optimal Use of World Resources
WTO also aims at efficient use of global resources. Instead of every country producing
everything, each should focus on what it does best. For example, Brazil can specialize in
coffee, India in software, and Saudi Arabia in oil. This specialization reduces wastage and
increases global efficiency.
6. Promoting Peaceful Relations
History shows us that trade conflicts can often lead to wars. WTO’s objective is to settle
disputes peacefully through discussions, mediation, and legal mechanisms rather than
battles. In this way, it acts like a court for trade disagreements.
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7. Encouraging Economic Growth and Development
WTO especially focuses on helping developing and least-developed countries. By giving
them special concessions, longer timelines, and technical assistance, WTO ensures that
weaker nations are not left behind in the global race.
So, to summarize in simple words: WTO’s objectives are to make trade freer, fairer,
smoother, and more beneficial for all countries.
Principles of WTO
Now imagine again the global marketplace. Just having objectives is not enough; there must
also be some golden rules that everyone agrees upon. These guiding rules are the principles
of WTO.
1. Non-Discrimination
This principle has two main parts:
• Most Favoured Nation (MFN): If one country gives a special benefit to another (say,
lower tariffs), it must extend the same benefit to all WTO members. For example, if
India gives cheaper tariffs on tea imports from Sri Lanka, it must offer the same tariff
to all other WTO countries.
• National Treatment: Once a foreign product enters a country, it must be treated
equally as domestic products. For instance, if imported mobile phones arrive in India,
the government should not impose extra taxes on them compared to Indian phones.
This principle ensures equality and prevents discrimination.
2. Free Trade Through Negotiations
Trade barriers should be reduced, but not suddenly. WTO believes in gradual reduction
through continuous negotiations among members. This is like students in a classroom
discussing and agreeing on rules together.
3. Predictability and Transparency
Imagine if shopkeepers in the market changed prices every hour without notice. Customers
would be confused and afraid to buy. Similarly, WTO ensures that trade rules, tariffs, and
regulations remain stable and transparent. Countries must publish their policies clearly so
others can trust them.
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4. Promoting Fair Competition
No cheating allowed! WTO ensures that unfair practices like dumping, subsidies, or hidden
restrictions do not disturb fair competition. Everyone must compete honestly in the market.
5. Special and Differential Treatment for Developing Countries
Not all students in a class are equally strong; some need extra time or simpler tasks.
Similarly, WTO gives special treatment to developing and least-developed countries by
allowing them longer timeframes to implement agreements, technical support, and more
flexibility.
6. Sustainability
A newer principle in WTO discussions is environmental protection. WTO encourages trade
practices that do not harm nature, ensuring that growth is sustainable and resources are
preserved for future generations.
Bringing It All Together
Think of WTO as a referee in the world’s largest sports match—international trade. Its
objectives are like the goals of the match: fair play, prosperity, peace, and development. Its
principles are like the rules of the game: non-discrimination, fairness, transparency, and
special care for weaker players.
Without WTO, global trade would be like a classroom without a teacher—full of chaos,
quarrels, and unfair advantages. But with WTO, there is order, fairness, and an effort to
ensure that everyone benefits, whether big or small.
Conclusion
The Objectives and Principles of WTO together create a system where world trade is not
just about profit, but about growth, fairness, peace, and development for all nations. WTO
has its critics, and it faces challenges, but its fundamental aim—to make the global
marketplace balanced and peaceful—remains one of the noblest goals in modern
international relations.
So, if you picture the world as a busy bazaar, WTO is the guide who makes sure every shop,
big or small, gets a fair chance to do business, and that the bazaar runs smoothly for the
benefit of all.
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SECTION-D
7. What do you mean by EOUs? Explain briefly.
Ans: Export Oriented Units (EOUs) – A Story of Growth and Opportunity
Imagine a small town. In this town, most people grow fruits and vegetables. Some sell them
in the local market, but there is one special farmer who thinks differently. Instead of only
selling in the village, he decides: “Why not send my fruits to the big city, or even to other
countries? I will earn more and my work will be recognized at a global level.”
This farmer then gets special permission from the government to grow fruits mainly for
exports. The government supports him with tax relief, less restrictions, and easier rules so
that he can compete in the international market.
Now, replace this farmer with a factory or business, and replace fruits with goods like
clothes, software, medicines, or electronic items. That’s what we call an Export Oriented
Unit (EOU).
What is an EOU?
In very simple words, Export Oriented Units (EOUs) are industrial units set up mainly with
the aim of producing goods and services for export. Instead of focusing on the domestic
market, these units are encouraged to send their products abroad, bringing valuable foreign
exchange into the country.
The Government of India introduced this scheme in the early 1980s as a strategy to boost
exports, increase employment, and strengthen India’s presence in global trade.
Think of EOUs like “champions” of international business – they get special facilities so that
they can compete with companies worldwide.
Why EOUs were Introduced?
To understand why EOUs were created, let’s go back in time.
In the 1980s, India was struggling with low foreign exchange reserves. The country needed
more dollars to buy essential goods like oil, machinery, and technology from abroad. At the
same time, Indian products like textiles, handicrafts, software, and spices had huge potential
in global markets.
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But Indian businesses faced many hurdles – high taxes, complicated rules, and lack of
infrastructure. That’s when the government thought:
“If we give special status to some units and encourage them to focus only on exports,
then our products will reach the global stage, we will earn more foreign currency, and
industries will also grow.”
Thus, the EOU scheme was born.
Key Features of EOUs
Now let’s open the “gift box” that the government gives to EOUs.
1. Duty-Free Imports
EOUs are allowed to import raw materials, machinery, and equipment without
paying customs duty. For example, if a textile EOU imports high-quality cotton from
Egypt, it won’t have to pay heavy import taxes.
2. 100% Export Commitment
The name itself says “Export Oriented.” These units must export most (often 100%)
of their production. However, in some cases, they may sell a small part in the
domestic market with permission.
3. Tax Benefits
EOUs enjoy exemption from excise duty, income tax (for a certain period earlier),
and other levies. This reduces their cost of production and makes Indian products
competitive abroad.
4. Infrastructure Support
EOUs are often set up in special zones with world-class infrastructure – like industrial
parks, export processing zones, or near ports for easier transportation.
5. Simplified Procedures
Unlike normal businesses that struggle with too many rules, EOUs enjoy fast customs
clearance and simpler paperwork.
Examples to Understand EOUs
• Software Industry: Suppose a company in Bangalore develops mobile apps. If it
registers as an EOU, it will get benefits like no import duty on advanced computers
and faster approvals. In return, it has to sell its apps mainly to foreign clients.
• Textile Industry: A garment factory in Tirupur (Tamil Nadu) that makes T-shirts for
brands like H&M or Zara can register as an EOU. It will import advanced sewing
machines without duty and then export almost all its T-shirts abroad.
• Pharmaceuticals: An EOU in Hyderabad producing life-saving drugs can get tax
benefits and cheaper raw material imports, while exporting medicines to the US or
Europe.
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Advantages of EOUs
EOUs are not just beneficial for the companies, but also for the entire nation. Let’s see how:
1. Boosts Exports – India earns more dollars when goods are sold abroad.
2. Employment Generation – EOUs provide jobs to thousands of workers, from
engineers to factory laborers.
3. Technological Advancement – Since EOUs can import advanced machinery, they
bring world-class technology to India.
4. Regional Development – Many EOUs are set up in backward or semi-urban areas,
leading to local development.
5. Foreign Exchange Earnings – EOUs help in strengthening India’s foreign reserves,
which can then be used for development projects.
Challenges Faced by EOUs
Like every coin has two sides, EOUs too face challenges:
1. Strict Export Obligation – If global demand falls, it becomes hard for EOUs to export
100% of their production.
2. Competition from SEZs – Later, the government introduced Special Economic Zones
(SEZs) with even more benefits, so EOUs started losing importance.
3. Administrative Hurdles – Despite promises of simplification, sometimes EOUs still
face delays in approvals and clearances.
4. Policy Uncertainty – Frequent changes in tax exemptions or government policies
create insecurity for investors.
Difference Between EOUs and SEZs
To avoid confusion, let’s quickly compare EOUs with SEZs:
• EOUs can be set up anywhere in the country, while SEZs are located in specially
marked areas.
• SEZs often provide better infrastructure than EOUs.
• Both aim at exports, but SEZs are considered more attractive in recent years.
The Human Angle – Why EOUs Matter?
Beyond economics and policies, EOUs also tell a human story.
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Take the example of Ramesh, a tailor in Tirupur. Earlier, he stitched clothes for the local
market, earning just enough to survive. But when a garment factory became an EOU, it
employed Ramesh. Now, the same hands that stitched clothes for a nearby market are
stitching shirts worn by people in London and New York.
This not only changes Ramesh’s life but also fills him with pride. His work now carries the
“Made in India” tag across the globe. Multiply this story by thousands, and you’ll see how
EOUs have silently transformed lives.
Conclusion
In simple words, Export Oriented Units are special industrial units set up mainly to produce
goods and services for the global market. They are like ambassadors of Indian industries,
carrying our products to every corner of the world.
With tax benefits, duty-free imports, and government support, EOUs have helped India
boost exports, earn foreign exchange, generate jobs, and bring technology into the country.
Though they face challenges and are now overshadowed by SEZs, they remain an important
chapter in India’s journey towards becoming an export-driven economy.
So, whenever you hear “EOU,” don’t just think of it as a technical term. Think of it as India’s
special effort to stand tall in the global marketplace – just like that farmer in our story who
decided to dream bigger and take his fruits beyond the village boundaries.
8. Discuss in detail Types and Flows of Foreign Investment in Indian Perspective.
Ans: Types and Flows of Foreign Investment in Indian Perspective
Imagine India as a young, ambitious student in the global classroom. She has big dreams:
building modern infrastructure, creating jobs, improving technology, and becoming a world
leader in trade. But just like any student, she needs resources—money, knowledge, and
support—to turn those dreams into reality. This is where foreign investment comes in.
Foreign investment is like a helping hand from international friends who are willing to put
their money into India’s growth story. In return, they also hope to earn profits or gain long-
term benefits. Over the years, India has attracted a lot of attention because of its huge
market, skilled workforce, and potential for economic growth.
Now, let’s carefully open the treasure box and look at the types of foreign investment and
understand how these investments flow into India’s economy.
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1. Types of Foreign Investment
Foreign investments are not just one kind; they are like different characters in a play, each
with a unique role. Broadly, there are two main types of foreign investments in India:
(a) Foreign Direct Investment (FDI)
Think of FDI as a long-term friendship. When a foreign company invests directly into an
Indian business—say, building a factory, setting up offices, or acquiring a stake in a
company—it is called FDI.
FDI is not just about sending money; it is about coming to India, staying here, and working
hand-in-hand to create something lasting. For example:
• When Toyota sets up a car manufacturing plant in India.
• When Amazon builds warehouses and invests in logistics here.
FDI usually comes with not just capital, but also technology, management practices, and
global exposure. That’s why FDI is considered more stable and beneficial for long-term
development.
(b) Foreign Portfolio Investment (FPI)
Now, imagine a visitor who comes to India for a short trip—he invests in India’s stock
market, bonds, or other financial assets, but doesn’t settle down. That’s what FPI looks like.
Foreign Portfolio Investors are more like traders who buy shares of Indian companies but
don’t get involved in running the business. They can withdraw their money quickly, which
means FPI is often called “hot money” because it moves fast depending on global market
conditions.
Examples:
• Foreign investors buying stocks of Infosys or Reliance.
• Investing in Indian government bonds.
While FPI brings liquidity and depth to financial markets, it is also risky because it can exit
quickly if conditions turn unfavorable.
(c) Other Types of Foreign Investment
Beyond FDI and FPI, there are also some special forms:
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1. Foreign Institutional Investment (FII): These are large institutions like pension funds
or mutual funds investing in Indian markets. FIIs are technically part of FPI but are
often discussed separately due to their influence.
2. External Commercial Borrowings (ECBs): When Indian companies borrow money
from foreign lenders (like banks or financial institutions), it is also a form of foreign
investment.
3. NRI Investments: Non-Resident Indians (Indians living abroad) also invest heavily in
real estate, startups, and Indian businesses.
2. Flows of Foreign Investment
Now that we know the types, let’s see how the money flows into India. Picture India as a
riverbed and foreign investment as streams of water flowing in. These streams can be
categorized in different ways.
(a) Inward and Outward Flow
1. Inward Flow: This is the money coming into India from foreign countries. For
example, if a German company sets up a solar power project in Rajasthan, that is
inward FDI.
2. Outward Flow: Sometimes Indian companies also invest abroad. For example, Tata
Motors acquiring Jaguar Land Rover in the UK. This is outward foreign investment.
(b) Automatic and Approval Routes
Foreign investment in India doesn’t come without rules. The government decides how and
where foreign money can enter. There are two main routes:
1. Automatic Route: Here, no prior government approval is needed. The investor can
directly bring in money. For instance, investment in certain sectors like IT services or
manufacturing often comes under the automatic route.
2. Approval Route: In sensitive sectors like defense, telecom, or media, prior
permission from the government or Reserve Bank of India (RBI) is necessary. This
ensures national security and protects strategic interests.
(c) Sectoral Flows
Foreign investment doesn’t spread evenly—it flows into specific sectors depending on
opportunities. For example:
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• Manufacturing & Automobiles: Heavy FDI in companies like Hyundai, Suzuki, and
Kia.
• Information Technology & Startups: Big investments from companies like Google
and Facebook into Indian tech startups.
• Retail & E-commerce: Amazon and Walmart pouring billions into Indian online retail.
• Banking & Finance: Foreign portfolio investors actively trade Indian stocks and
bonds.
(d) Greenfield vs Brownfield Investments
1. Greenfield Investment: Like planting a new tree, this is when a foreign company
starts from scratch—building new offices, factories, and systems. Example: Samsung
setting up a mobile manufacturing plant in Noida.
2. Brownfield Investment: Like buying an old tree and nurturing it, this happens when
a foreign company acquires or merges with an existing Indian company. Example:
Vodafone merging with Idea Cellular.
3. Importance of Foreign Investment in India
Why does India welcome foreign investment with open arms? Let’s understand:
1. Capital Formation: It brings in money for infrastructure and industrial development.
2. Technology Transfer: Foreign companies bring advanced technology and skills.
3. Employment Generation: New factories and businesses create jobs for millions.
4. Boost to Exports: FDI helps India produce goods for the global market.
5. Integration with Global Economy: Foreign investment makes India a part of global
supply chains.
4. Challenges and Concerns
Of course, every coin has two sides. Foreign investment also comes with challenges:
• Over-dependence on foreign money can make India vulnerable.
• FPI can leave suddenly, creating financial instability.
• In some sectors, too much foreign ownership may threaten local industries.
• Regulatory hurdles and bureaucracy sometimes discourage investors.
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5. The Road Ahead
India is continuously reforming its policies to attract more investment—simplifying
procedures, improving infrastructure, and strengthening the “Ease of Doing Business.”
Initiatives like Make in India, Digital India, and Startup India are magnets for global
investors.
The future looks promising: India aims to not just be a receiver of foreign investment, but
also a major global investor.
Conclusion
So, in the Indian perspective, foreign investment is like opening doors to friends who bring
not just gifts of money, but also wisdom, technology, and opportunities. The two main
pillars—FDI (the long-term friend) and FPI (the short-term visitor)—along with other flows,
have shaped India’s economic journey.
If India is a growing tree, foreign investment is the water and sunlight that help it grow
faster and stronger. Yet, India must ensure that while welcoming foreign support, she also
protects her roots and independence.
In short, foreign investment is not just about dollars and rupees—it is about partnerships,
growth, and India’s place in the global economy.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
