Ques1Expl

aint
het
ermsFEMAandFERAi
ndet
ail
.
Forei
gnExchange,sincet
imeimmemor ial
,hasbeenr ecognisedastheexcl
usi
v edomainfor
banksandcorporati
onsatlar
ge.Toaddt oit
,itisal
sothewor ld’
sbi
ggestmarketsofar.
Keepinginmindtheaugmentingimport
anceoft hi
smar ketwherecurr
encygyrati
onscan
dict
atethef
ortunesofoneandal l
,i
twasconsi der
edofpar amounti
mpor t
ancetobri
ngf or
eign
exchangeundertheambitofregul
ati
on.

SotheFERA(Forei
gnExchangeRegul
ationAct
)wasi
ntr
oducedin1973butthi
sacthadsev
eral
l
oopholesanddrawbackssoitwasr
eplacedbyamor
especial
i
sedactcal
ledtheFEMA(Forei
gn
ExchangeManagementAct)i
n1999.

Soi
nor
dert
ounder
standFEMAwef
ir
stneedt
ounder
standFERA.

FERA-1973:
-
Backgr
oundofFERAact-

Asadev el
opingcount rywhichhasbeenpl anni ngt oqui ckent hepr ocessofi tseconomi c
growth,Indi
aal way swantedt ousei t
sf oreignexchangewi selyandj udiciously.Even
duri
ngt heBr i
ti
shr ule,
thegov ernmentlegi slatedmeasur est ocont rol f
oreignexchange
undertheDef enceofI ndi
aRul esi n1939.TheI ndiangov ernmentoff reeI ndiaused
l
egisl
ativeprovisionsofforeignexchangecont roltoenactherownFor eignExchange
Regulati
onAct( FERA)in1947.Thebasi cobj ectivesoft heFERA1947wer ethef ol
lowing:
Itai
medt oregulateandcont rol(i
)businessact i
v i
ti
esoff oreigncompani es;(
ii)thefl
ow
offorei
gncapi tal,t
echnologyandmanager ial enterprises; and( i
ii
)for ei
gncol laborati
ons.
ThisActwasamendedsev eral t
imestoi ncor por atether equi redchangest aking
cognizanceoft hechangingdy namicsoft hecount ry
'seconomi cgrowt h.The
amendment stot heActwer emadei n1957, 1965andmor eimpor tant l
yin1973and
1993.

For
eignExchangeRegul
ati
onAct-

TheFERAwaspr omulgat
edin1973andi tcamei ntoeff
ecton1Januar y,
1974.FERA,
1973wasenactedwhenIndiawaspassi ngt hroughanacuteforei
gnexchangecr i
sis.
I
ndiahadlesst
hanUSD1bi ll
ionfor
eignexchanger eser
vesintheexchequer.Besi
des, i
t
wasat i
mewhenal mostal
lthesectorsoft hegov er
nmentwereunderthet i
ghtcont r
ol
oftheeconomy,i
tbei
ngattheheightofNehr uvi
ansocial
ism.

Obj
ect
ivesofFERA:

Thepri
mar yobjecti
veofFERAwast oconserv
et hecountry
'sforexreser
vesandto
ensur
et hei
rproperuti
l
izat
ionwit
htheviewtohel pi
ngtheeconomi cgrowthofthe
count
ry.Withthisendinvi
ew,FERAcouldregulatetheacquisi
ti
on,holdi
ng,t
ransf
eror
 disposal ofimmov abl epr opertyabr oadbyI ndiannat ionals;itcouldregulate
participati
onbyI ndi ansi nthet rading,commer cialandi ndust r
ialacti
vit
iesabr oadi nthe
form ofj oi
ntv entures; i
tcoul dregul atetheappoi ntmentofanagentort echni calor
managementadv isorofanyper sonorcompanyi ncompani esownedbyf oreigners;it
couldr egulatethebuy ingofgoodsi nI ndi
abyf or ei
gncompani eswithav iewofr esell
ing
them el sewher ebef orepr ocessi ng;itcoul
dr egulateempl oymentoff or
eignnat i
onalsin
India;itcouldregul atet heacqui siti
onofi mmov ablepr opertyinI ndi
abyf oreignnat ional
s
orfor eigncompani es;andi tcoul dregulat
ef or
eigni nv estmenti nIndi
ai nthef orm of
branchest ocar ryonanyt rading, commer cialori ndust r
ialacti
v i
tywit
houtpr ior
permi ssionoft heReser veBankofI ndia.

Maj
orpr
ovi
sionsofFERA-1973:
-

Al
lforei
gncompani
esthatsoughtapproval
underFERA,savet
hosei
nshi
ppi
ngand
ai
rl
ines,
hadtoconv
ertthemselv
esintoIndi
ancompanies.

Ami ni
mum of74percentofshar eholdi
ngbyf orei
gnprinci
palswoul dbepermittedonly
i
ncaseofcompani esthatproduced(a)certai
nspecifi
editemsl i
stedintheIndustri
al
Pol
icyof1973;or(b)pr i
maril
yexpor t
-or
ientedcommodi ti
es;or(c)goodsempl oying
st
ate-of
-t
he-
arttechnology;or(d)tea;or(e)companiesengagedi ntradi
ngnotexceeding
25percentofex-factoryval
ueofpr oducti
onorhav i
ngat urnoveroflessthanINR50
mil
li
on.

Ifacompanyis100percentexpor
toriented,
aforei
gnsharehol
dingexceedi
ng74per
centmightbeper
mit
ted,thedeci
sionbeingbasedonmeritineachcase.

Aforei
gnshareholdi
ngof40percentwoul dbepermitt
edi ncaseofcompaniesengaged
i
nt heproduct
ionofit
emsot hert
hanthoselist
edintheIndustr
ial
Poli
cyof1973,tr
ading,
consul
tancyandplantat
ioncompaniesotherthant
hoset hatpr
oducetea.

I
ncaseofai
rl
inesandshippingcompani
es,
theext
entoff
orei
gnshar
ehol
dingwoul
dbe
det
ermi
nedonar eci
procalbasi
s.

I
ncaseofbankingcompani es,t
heextentoffor
eignshareholdi
ngwil
lbedet
ermi
ned
basedontheguidel
i
nesi ssuedbytheReserv
eBankofI ndiaandtheBanki
ng
Depart
mentoftheMi ni
stryofFi
nance,Gover
nmentofI ndia.

Theseguidel
inesofFERA,1973wereagai
nrev
isedin1976wit
haviewofincr
easi
ng
part
ici
pati
onofIndi
ansinsomekindsofcompaniesgover
nedbyt
heAct,especi
all
ythoseof
export
-or
ient
edcompanies.

Apartfr
om theseguidel
ines,FERAalsosti
pulat
edregul
ati
onswithregar
dtodeal
ingsi
nfor
eign
exchangeandsecuriti
es;tr
ansact
ionsindi
rectl
yaf
fecti
ngfor
eignexchangeandi
mportand
exportofcur
rency.
 FERAwasahi
ghl
yrest
ri
cti
vel
egi
slat
ionduet
othef
oll
owi
ng-

(
i)t
heRBIwast
hesol
eaut
hor
it
ytor
egul
atef
orei
gnexchanget
ransact
ions;

(
ii
)Sect
ion9i
mposedcer
tai
nrest
ri
cti
onsonpay
ment
s;

(ii
i
)Rest ri
cti
ononimpor tandexportofcert
aincurrencyandbull
ion:TheActlaid
downt hatexceptwiththeapprovaloft
heRBI ,nopersoncanbringorsendintoIndi
a
anyforeignexchangeoranyI ndi
ancurrencyotherthanfor
eignexchangeobtainedby
hi
mf rom anaut hor
izeddealerorfr
om amoney -
changer;

(
iv)Dut
yofper
sonsent
it
ledt
orecei
vef
orei
gnexchange:

Cr
it
ici
sm ofFERA-1973-
93:
-

FERA, 1973wasconsi deredapieceofdr aconianlegisl

ati
onbecauseoft heenormous
power sthatwerevestedwi t
htheEnfor cementDi rectorat
e.Unli
keotherlawswhere
everythi
ngispermittedunlessspecif
icallyprohibit
ed,underFERAnot hingwaspermitt
ed
unlessspecif
ical
lypermitt
ed.Hence, thet enorandt oneoftheActwasv er
ydrasti
c.I
t
providedfori
mpr i
sonmentofev enav erymi noroffence.UnderFERA, apersonwas
presumedgui l
tyunlesstheyprovedthemsel vesinnocentwhereasunderot herl
aws,a
personispresumedi nnocentunlesshei spr ovengui l
ty.
 FEMA-1999-
Backgr
oundofact-

Thef orei
gnexchanger eservesofI ndi
aar enowmanagedundert heprovi
sionsofFEMA.
Intheaf t
ermat hoft heeconomi cliberal
izati
onof1991andt hecopiousfl
owoff orei
gn
exchanget hatf oll
owedi t,i
twasf oundt hatFERAev okedstrongreacti
onsf r
om the
mar ketplayersf ori
tsdr aconianpr ovi
sionst hatl
ookedatthem ascr i
minals.Therefore,
i
twasf oundnecessar ytor eplaceFERAwi thanewandmor eacceptabl
eActt oregulate
andcont rolforeignexchanger eserves.Ther efor
e,t
hegover nmentwaspr omptedt o
i
ntroduceFEMAi ntheplaceoft heverystri
ngentFERA, whichnowst andscancel l
ed.

For
eignExchangeManagementAct-

TheFor ei
gnExchangeManagementAct( FEMA) ,1999hasr epealedt
heForeign
ExchangeRegul at
ionAct( FERA)1973.TheFEMAconsol idatesandamendst heAct
relat
ingtofor
eignexchange.FEMAwaspassedbyLokSabhaon2December ,1999.I
t
extendstothewhol eofI ndiaandappli
estoallbranches,
of f
icesandagenciesoutsi
de
Indiaownedorcont rol
ledbyanyI ndi
annat i
onal.I
talsoappliestoanycont
raventi
on
thereundercommi ttedout si
deIndi
abyanyper sont owhom t hi
sActappli
es.TheAct
camei ntofor
cewi theffectfrom 1June,2000.

Obj
ect
ivesofFEMA-

Tof
aci
l
itat
eext
ernal
tradeandpay
ment
s

Topromotetheorder
lydevel
opmentandmaintenanceofforei
gnexchangemarketi
n
I
ndia.I
notherwords,t
heobject
iveofFEMAistoconsoli
dateandamendFERAsoast o
promotef
oreignt
rade,whi
lepromoti
ngthecountr
y'sfor
eignexchangemarket
.

Maj
orpr
ovi
sionsofFEMA-

Accordi
ngtoSect
ion3oftheFEMA1999,nooneshal
ldeali
nort
ransf
erf
orei
gn
exchangeorf
orei
gnsecur
ityt
oanyunaut
hori
zedper
sons.

Section4ofFEMA1999statesthatnoI ndi
annati
onalshall
acquir
e,hold,own,possess
ortransf
eranyf
orei
gnexchange,for
eignsecuri
tyoranyimmov abl
epr opert
ylocated
outsideI
ndi
aexceptasot
herwiseprovidedfori
ntheAct .

Secti
on5ofFEMA1999st i
pulatesthatanypersonmaysellordrawforeignexchanget o
orfr
om anauthori
zedper sonifsuchsaleordrawal i
soneofcurrentaccounttransacti
on
“pr
ovidedt
hattheCent r
alGov er
nmentmay ,i
npubli
cinter
estandinconsultati
onwi t
h
RBI,i
mposedsuchr easonablerestr
icti
onsforcurr
entaccounttr
ansacti
ons, asmaybe
pr
escr
ibed”
.

Secti
on5ofFEMA1999, provi
desthatanyi
ndivi
dual maysel l
ordr awforeignexchange
toorfrom anyaut hor
izedpersonforacapit
alaccountt r
ansaction.TheReser veBank
mayi nconsultat
ionwi t
ht heGovernmentofI
ndiaspeci f
ytheclauseofper missi
ble
capit
alaccounttransactions,
theli
mituptowhichf orei
gnexchangeshal l beadmi ssi
ble
forsuchtransacti
ons.Howev er,t
heRBImaypr ohibit
,restr
ictorregulat
ethef oll
owing:

Tr
ansferori
ssueanyforei
gnsecuri
tybyanIndi
annat
ionalbyapersonl
ivi
ngout
side
I
ndia,
orbyanybranch,off
iceoragencyi
nIndi
aofapersonresi
dentout
sideI
ndi
a

Bor
roworl
endi
nter
msoff
orei
gnexchangei
nwhat
everf
orm orbywhat
evernamei
tis
cal
l
ed

Bor
roworl
endi
nrupeesbet
weenanI
ndi
annat
ional
andaper
sonr
esi
dentout
sideI
ndi
a

Deposi
tsbet
weenI
ndi
annat
ional
andaper
sonout
sideI
ndi
a

Expor
t,i
mpor
torhol
dingacur
rencyorcur
rencynot
es

Concl
usi
onofFERA&FEMAact
s-
FEMAonl ypermi t
sanaut hori
zedpersont
odeali
nForei
gnexchangeorfor
eign
securi
ty(shares,stocks,bondset
c).FEMAbecametheneedofanhourtobe
repl
acedbyanol dactwhichwasFERAasFERAwasst r
ingentandFEMAisli
beral
andalsomor eflexi
blethanFERA.

Anyper sonwhowant stodobusi nessi naf or

eigncountryortobuyforei
gn
securi
ti
eshe/sheneedsanaut hori
sedper sont odothatandalsotounder standthis
Actinordert
oav oidpenalt
iesandhe/ sheshouldalsobeawar eoftherestri
ct i
onson
i
t.Themai nobjecti
veofFEMAwast oconsolidat
eandamendt helawsrelatingto
thefor
eignexchangewi t
hther easont ofacil
it
atetheexternalt
radeandpay ment s
andforthemaintenanceoft heforeignexchangemar ketinIndi
a.FEMA’s
repl
acementwithFERAt oanext enthasboost edtheIndi
aneconomyasi tisflexi
ble
andalsoacivi
loffenceincompar isonwi thFERA.

Bi
bli
ogr
aphy-
htt
ps:/
/lear
ning.
orei
ll
y.
com/ l
i
brary
/vi
ew/ busi
ness-
envi
ronment/9788131792292/xht
ml/chapter
032.xht
ml
 ht
tps:
//www.enf
orcementdi
rect
orat
e.gov.
in/
forei
gn_exchange_r
egul
ati
on_
act
_1973.
pdf
%3Fp1%3D118891536537600064&ved=2ahUKEwjcgrnv0snoAhVOl
EsFHUI
6C4kQFj
Afeg
QI
CRAB&usg=AOv Vaw2ZyaRwezAgpdlOcwBo8Y_G

https:/
/www.googl
e.com/
amp/
s/www.
99acr
es.
com/
art
icl
es/
what
-i
s-f
orei
gn-
exchange-
regulati
on-
act
.ht
ml/amp

ht
tps:
//cl
ear
tax.
in/
s/f
ema-
for
eign-
exchange-
management
-act

htt
ps:
//www.
dri
pcapi
tal
.com/
en-
in/
resour
ces/
blog/
all
-y
ou-
need-
to-
know-
about
-r
bi-
fema-
gui
del
ines

htt
ps:
//www.
googl
e.com/
amp/
s/bl
og.
ipl
eader
s.i
n/f
orei
gn-
exchange-
management
-act
-
1999/
amp/

Ques2Expl
ainWor
ldTr
adeOr
gani
sat
ion(
WTO)
.
TheWor l
dTr
adeOrgani
zat
ion(WTO)istheonlygl
obal
int
ernat
ional
organi
zati
ondeali
ngwith
ther
ulesoft
radebet
weennati
ons.Ati
tsheartar
etheWTOagr eement
s,negoti
atedandsi
gned
bythebul
koftheworld’
str
adingnationsandrat
if
iedi
nthei
rparl
iament
s.Thegoal
ist
ohel
p
pr
oducersofgoodsandservi
ces,export
ers,
andimport
ersconductt
hei
rbusi
ness.

TheWorl
dTradeOrgani
sat
ion(
WTO)camei
ntof
orceon1Januar
y1995andi
sbasedi
nGenev
a.
Moret
han150nati
onsaremember
s.

Backgr
oundofWTO-

TheWTOwasof ficial
l
ycr eatedi nJanuaryof1995andessent ial
lyrepl
acedt heGener al
AgreementonTar if
fsandTr ade( GATT),whichhadbeeni nf orcesince1948, af ewyears
aft
ertheSecondWor l
dWar .Bef oretheWTOwascr eated, aniniti
ati
vet ostart
somet hingsi
mi larknownast heI nter
nati
onalTradeOr ganization(I
TO)t ookpl ace.
Unfort
unat el
y, t
heI TOt r
eatywasnotappr ovedbyt heU. S.andaf ewot hercount ri
esand
ult
imat el
ynev erwenti ntoef fect.TheGATT, wasest ablishedonapr ovisionalbasisaft
er
theSecondWor l
dWari nthewakeofot hernewmul ti
lateralinsti
tuti
onsdedi catedto
i
nternat i
onaleconomi ccooper ation-notabl
ythe" BrettonWoods"i nsti
tut i
onsnow
knownast heWor ldBankandt heInter
nati
onalMonet aryFund.

Inthe1980s, asthewor ldeconomiesbecamemor egl

obalintradeandbusi ness,i
t
becameev identthatGATTwasnotbui l
torstructuredtoaddressmanyoft henewgl obal
tradi
ngchallengesthatwer eari
sing.Asar esult
,thebiggesttradenegotiat
ingev enton
recordbegani n1986.Itwasknownast heUr uguayRound, seeingasi tt
ookpl acein
PuntadelEst e,Ur
uguay .Oneofthef i
nalaccompl ishmentsoft hi
sroundwast he
creat
ionoft heWTO.TheWTOi scur r
entl
ywor kingonnewnegot iat
ionsandagr eements,
knownast heDohaDev elopmentAgenda, andt hesestartedin2001.

St
ruct
ureofWTO-

TheWTOhasnear l
y153membersaccounti
ngforov
er97%ofwor
ldtr
ade.Ar
ound30
othersar
enegotiat
ingmember
shi
p.Decisi
onsaremadebyt
heent
iremembershi
p.Thi
s
i
st ypi
cal
lybyconsensus.

A major
ityvotei
salsopossibl
ebutithasneverbeenusedi
ntheWTOandwas
ext
remelyrareundertheWTO’spr
edecessor,
GATT.TheWTO’ sagr
eement
shav
ebeen
rat
if
iedi
nallmember s’par
li
aments.

TheWTO’stopleveldeci
sion-makingbodyistheMini
steri
alConferenceswhi
chmeet sat
l
eastoncei
nev erytwoyears.Bel
owt hi
sist
heGeneralCouncil
(nor mall
yambassadors
andheadsofdelegati
oninGenev a,butsometi
mesoffi
cial
ssentf r
om member s’
capit
als)
whichmeet
ssev eralt
imesay earintheGenevaheadquart
ers.

General
Counci
lal
someet
sast
heTr
adePol
i
cyRev
iewBodyandt
heDi
sput
es
Set
tl
ementBody.

Att
henextl
evel
,theGoodsCounci
l
,Ser
vicesCounci
landI
ntel
l
ect
ual
Proper
ty(
TRI
Ps)
Council
repor
ttotheGeneral
Counci
l.Numerousspeciali
zedcommitt
ees,worki
ng
groupsandworki
ngparti
esdealwi
ththeindi
vidualagr
eementsandotherar
eassuchas,
theenvi
ronment,
devel
opment,membershipappli
cati
onsandregi
onaltr
adeagreement
s.

Secr
etar
iat-

TheWTOsecr et
ari
at,basedi nGenev a,hasar
ound600st affandisheadedbyaDi rect
or-
General.It
sannual budgetisr oughly160mill
ionSwissFrancs.Itdoesnothavebranch
off
icesout sideGeneva.Sincedeci si
onsaretakenbyt hemember sthemselves,t
he
secret
ariatdoesnothav et hedecisionmakingtherolethatotherint
ernat
ional
bureaucraciesaregiven.

Thesecr et
ari
at'
smai nduti
estosuppl ytechni
calsupportfort
hev ar
iouscounci
lsand
commi tt
eesandt hemi ni
ster
ialconferences,t
oprov i
detechni
calassist
ancefor
developi
ngcountries,toanal
yzewor ldtradeandtoexplainWTOaf fai
rstothepubl
icand
media.Thesecretariatal
soprovidessomef or
msofl egalassi
stanceinthedi
spute
set
tlementprocessandadv i
sesgover nmentswishingtobecomemember softheWTO.

Obj
ect
ivesofWTO-

1.Toi
mpr
ovet
hest
andar
dofl
i
vingofpeopl
eint
hemembercount
ri
es.

2.Toensur
eful
lempl
oymentandbr
oadi
ncr
easei
nef
fect
ivedemand.

3.Toenl
argepr
oduct
ionandt
radeofgoods.

4.Toi
ncr
easet
het
radeofser
vices.

5.Toensur
eopt
imum ut
il
izat
ionofwor
ldr
esour
ces.

6.Topr
otectt
heenv
ironment
.

7.Toacceptt
heconceptofsust
ainabl
edev
elopment
.

Wor
kingofWTO-

TheWorl
dTradeOrgani
zat
ioni
saglobal
member
shi
pgr
oupt
hatpr
omot
esand
managesf
reetr
ade.I
tdoesthi
sint
hreeway
s:

I
tadminister
sexisti
ngmult
il
ater
altr
adeagreements.Ev
erymemberrecei
vesMost
Favor
edNat ionTradi
ngSt
atus.Thatmeanstheyautomati
cal
l
yrecei
velower
edtar
if
fs
fort
heirexport
s.

I
tset
tl
estradedisputes.Mostconflict
soccurwhenonememberaccusesanotherof
dumpi
ng.That'
swheni texport
sgoodsatal owerpr
icet
hani
tcost
stoproduceit.The
WTOstaffi
nvest
igates, andifavi
olati
onhasoccurr
ed,t
heWTOwilll
evysanct
ions.
Itmanagesongoingnegotiat
ionsfornewtr
adeagreements.Thebi
ggestwoul
dhave
beentheDohar oundin2006.Thatwouldhaveeasedtradeamongall
members.I
t
emphasizedexpandinggrowthfordevel
opi
ngcountri
es.

Funct
ionsofWTO:
-

Admi
nist
eri
ngWTOt
radeagr
eement
s

For
um f
ort
radenegot
iat
ions

Handl
i
ngt
radedi
sput
es

Moni
tor
ingt
radepol
i
cies

Techni
cal
assi
stanceandt
rai
ningf
ordev
elopi
ngeconomi
es

Cooper
ati
onwi
thot
heri
nter
nat
ional
organi
zat
ions

I
ndi
aandWTO-

I
ndiaisaf
oundermemberoftheGener
alAgr
eementonTar
if
fsandTr
ade(
GATT)1947
andit
ssuccessor
,theWTO.

I
ndia'spart
ici
pati
oninanincr
easingl
yrul
ebasedsystem i
nthegover
nanceof
i
nternati
onaltr
adeistoensur
emor estabi
li
tyandpr
edict
abil
it
y,whi
chult
imat
elywoul
d
l
eadt omor etr
adeandprosperi
ty.

Indi
ai sagai
nstanyinclusi
onofnon-tr
adeissuesthataredir
ectedi
nthel
ongrunat
enforcingpr
otecti
onistmeasur
es(basedonnon- tr
adeissues,t
hedevel
opedcountr
ies
l
ikeUSAandEur opeanUnionaretr
yingtobant heimportsofsomegoodsli
ketext
il
e,
processedfoodetc.)
, par
ti
cul
arl
yagainstdevel
opingcountri
es.

Fut
ureofWTO-

SincetheWTOisconsensus-based,reachinganagreementonr
efor
msamongal l164
member si
sextremelydif
fi
cult
.Onepossi bil
i
tymovingfor
wardcoul
dbeaplur
il
ateral
agreementwit
hagr oupofli
ke-mindedcount r
iesonanewsetofrul
est
hatser
veasan
addendum (
supplement)tothebroaderWTO.

Concl
usi
on-
 Today ,
theworl
di sgoingthrought
heprotect
ionism,t
radewar(likeUSA&China)
,and
Brexitmaki
ngglobal economysqueezed.TheroleofWTOi nfuturei
sverycr
uci
alto
preservegl
oball
iberali
sedeconomicsystem evolv
edsincetheendofthe2ndWorldWar
.

I
tisri
ghtti
mewhencountriesli
keUSAgivi
ngthreatt
owi t
hdr
awfrom WTOmakingit
dysf
uncti
onal,I
ndi
aandotheremergi
ngeconomiesli
keBrazi
l,
SouthAfr
icaet
ccan
pr
ovideastrongbasef
orstrongWTOwithsavingint
erest
sofdev
elopi
ngcountr
ies.

Bi
bli
ogr
aphy-
1.ht
tps:
//www.
wto.
org/
engl
i
sh/
thewt
o_e/
what
is_
e/t
if
_e/
fact
1_e.
htm

2.ht
tp:
//www.your
art
icl
eli
brar
y.com/
trade-
2/wor
ld-
tr
ade-
organi
zat
ion-
wto-
obj
ect
ives-
and-
funct
ions/
23529

3.htt
ps:/
/www.l
awt
eacher
.net
/fr
ee-
law-
essay
s/t
radi
ng-
law/
pur
poses-
of-
the-
wor
ld-
tr
ade-
organi
sati
on.
php

4.ht
tps:
//www.
inv
est
opedi
a.com/
inv
est
ing/
what
-i
s-t
he-
wor
ld-
tr
ade-
organi
zat
ion/

5.ht
tps:
//www.
thehi
ndubusi
nessl
i
ne.
com/
topi
c/WTO/

Ques3.

a)Expl
aint
hedi
ff
erencebet
weenBal
anceoft
rade(
BoT)and
 Bal
anceofpay
ment
s(BoP)
.

BASI
SFORCOMPARI
SON BALANCEOFTRADE(
BoT) BALANCEOFPAYMENT
(BoP)

Meani
ng BalanceofTr adeisa BalanceofPay mentisa
statementthatcapturesthe statementthatkeepstrackof
country
'sexpor tandi
mpor tof alleconomictransact
ions
goodswi t
ht her emai
ning donebyt hecount r
ywiththe
world. remainingworld.

Recor
ds Transact
ionsr
elat
edt
ogoods Transacti
onsr
elat
edt
obot
h
only. goodsandservi
cesar
e
recorded.

Capi
tal
tranf
ers Arenotincl
udedinthe Arei
ncl
udedi
nBal
anceof
BalanceofTrade. Payment
.

Whi
chi
sbet
ter Itgi
vesapart
ial
viewofthe Itgi
vesaclearvi
ewofthe
countr
y'
seconomicst
atus. economicposit
ionoft
he
countr
y.

Resul
t I
tcanbeFavor
abl
e, Bot
hther
ecei
ptsand
Unf
avor
abl
eorbal
anced. pay
mentsi
destal
li
es.

Component I
tisacomponentofCurr
ent I
tincl
udesbothcurr
ent
AccountofBal
anceof AccountandCapi
talAccount
.
Payment.

Cal
cul
ati
on Expor
ts-
lessi
mpor
ts. BoT+f orei
gninvest
ment+
cashtr
ansfersfr
om abr
oad+
capi
talacct
.

Scope Lessscopeasitdeal
swith Widerscopeasi
tincl
udes
onlyexpor
tsandimport
s. BoTaswel l
.
Pur
pose Ithelpsinf i
ndi
ngnet I
tensureswhetheral
lthe
profit
/lossoncountr
y'
s t
ransacti
onshavebeen
expor t
sandi mpor
ts r
ecordedornot.
transactions.

I
deal
sit
uat
ion I
tshoul
dideal
l
ybeposi
ti
ve. BoPunderi
dealscenar
io
shoul
dbezerobalanci
ng.

Fav
orabl
e I
tisf
av or
abl
ewhenexpor
ts> Iti
sfavor
ablewhentherei
s
i
mports. surpl
usincurr
entaccount
.

Di
ff
erence Iti
sthedi
ff
erencebet
ween I
tisthedif
ferencebetween
export
sandimport
s. thefor
exreceipts-
lessf
orex
payments.

Exchanger
ate BoTdoesn'
taf
fectexchange BoPhasamaj ori
mpacton
rat
emuch. exchanger
ate.

Ques3.

b)Whatar
ethemajorcausesofdi
sequi
li
bri
um i
nbal
anceof
pay
ments(BoP)?
Disequi
li
bri
um isasit
uati
onwhereinternaland/orext
ernalforcespr eventmarketequi
li
bri
um
fr
om beingreachedorcausethemar kettofall
outofbalance.Thi scanbeashor t-t
erm
byproductofachangeinvar
iabl
efact or
sorar esul
toflong-term str
uct ur
ali
mbalances.
Disequi
li
bri
um isal
sousedtodescribeadef ici
torsur
plusinacount ry
’sbalanceofpayments.

Fol
lowi
ngar
ethemaj
orcausesofdi
sequi
li
bri
um i
nBoP-

1.Tempor
aryChanges(
orDi
sequi
li
bri
um)
:

Theremaybeat empor arydi

sequil
i
bri
um causedbyrandom v
ari
ati
onsintr
ade,
seasonalf
luctuations,theeff
ectsofweatheronagr
icul
tur
alpr
oducti
on,et
c.Def
ici
ts
orsurpl
usesar i
singf r
om suchtemporarycausesar
eexpectedtocorr
ectt
hemselves
withi
nashor tti
me.

2.Fundament
alDi
sequi
li
bri
um:

Fundamental
disequi
l
ibri
um r
efer
stoapersist
entandl
ong-r
unBOPdisequi
li
bri
um of
acountr
y.I
tisachronicBOPdefi
cit
,accor
dingtoI
MF.Iti
scausedbysuchdynami
c
fact
orsas:
 Changesi
nconsumertasteswi
thi
nthecount
ryorabr
oadwhi
chr
educet
hecount
ry’
s
expor
tsandi
ncreasei
tsimport
s.

Conti
nuousf
alli
nthecount
ry’
sforei
gnexchangereser
vesduetosuppl
yin-
elast
ici
ti
esof
expor
tsandexcessi
vedemandforforei
gngoodsandservi
ces.

Excessi
vecapital
outf
lowsduetomassivei
mportsofcapi
tal
goods,r
awmat
eri
als,
essenti
alconsumergoods,
technol
ogyandext
ernali
ndebt
edness.

3.St
ruct
uralChanges(
orDi
sequi
l
ibr
ium)
:

Str
uct
ural
changesbr
ingaboutdi
sequi
l
ibr
ium i
nBOPov
ert
hel
ongr
un.Theymayr
esul
t
fr
om t
hefoll
owi
ngfactor
s:

Technologicalchangesi
nmet hodsofpr oduct
ionofproduct
sindomestici
ndust
ri
esor
i
nt heindustri
esofothercountr
ies.Theyleadtochangesincost
s,pr
icesandqual
it
yof
products.

I
mpor
trest
ri
cti
onsofal
lki
ndsbr
ingaboutdi
sequi
l
ibr
ium i
nBOP.

Defici
tinBOPalsoari
seswhenacountr
ysuf
fer
sfr
om def
ici
encyofr
esour
ceswhi
chi
tis
requir
edtoimportf
rom ot
hercount
ri
es.

4.Changesi
nExchangeRat
es:

Changesinfor
eignexchangerateinthefor
m ofoverval
uati
onorunderval
uat
ionof
for
eigncurr
encyleadtoBOPdi sequi
l
ibri
um.Whent hevalueofcur
rencyishi
gheri
n
rel
ati
ontoothercurr
enci
es,i
tissaidtobeov er
val
ued.

Opposit
eist hecaseofanunderv
aluedcurr
ency .Overvaluat
ionofthedomest iccurrency
makesf or
eigngoodscheaper&exportsdearerinforei
gncount r
ies.Asar esult
,t
he
countr
yimpor t
smor eandexpor
tslessofgoods.Ther eisalsooutflowofcapital.This
l
eadstounf avourabl
eBOP.Onthecontrar
y,underval
uationofthecur r
encymakesBOP
favour
ableforthecount
rybyencouragi
ngexpor ts&infl
owofcapi tal&reducingimpor ts.

5.Cy
cli
calFl
uct
uat
ions(
orDi
sequi
li
bri
um)
:

Cycl
ical
fluct
uati
onsinbusinessacti
vi
tyal
soleadtoBOPdisequil
i
brium.Whenthereis
depr
essioninacountry
, v
olumesofbothexportsandi
mportsfal
ldrasti
call
yinr
elat
ion
toot
hercountri
es.Butthefalli
nexport
smaybemor ethanthatofimportsdueto
decl
i
neindomest icpr
oduction.

Theref
ore,ther
eisanadv er
seBOPsi tuat
ion.Ont heotherhand,whenthereisboom i
na
countr
yinrelat
iontoothercountr
ies,bot
hexpor t
sandi mportsmayincrease.Butt
here
canbeeitherasurplusordefi
citi
nBOPsi tuat
iondependinguponwhet herthecountr
y
morethanimpor t
sorimpor t
smor ethanexports.Inboththecases,t
herewillbe
 di
sequi
l
ibr
ium i
nBOP.

6.Changesi
nNat
ionalI
ncome:

Anothercauseisthechangei nthecountry’
snat i
onali
ncome.Ift
henat i
onal i
ncomeofa
countr
yincreases,i
twil
ll
eadt oani ncr
easeini mport
stherebycr
eati
ngadef i
citi
nits
bal
anceofpay ments,ot
hert hi
ngsremai ni
ngthesame.I ft
hecountryisalreadyatful
l
employmentlevel,
anincreaseinincomewi lll
eadt oi
nfl
ati
onaryr
iseinpriceswhichmay
i
ncreaseitsimport
sandt husbringdisequi
li
brium int
hebalanceofpayment s.

7.Pr
iceChanges:

Infl
ati
onordef l
ati
onisanothercauseofdi
sequil
ibr
ium inthebalanceofpay ments.I
f
therei
si nf
lati
oninthecountr
y,pri
cesofexport
sincrease.Asaresult,exportsfal
l
.Atthe
samet ime,thedemandf ori
mpor t
sincr
ease.Thusincreaseinexportpricesleadi
ngto
decli
neinexpor t
sandriseinimportsr
esul
tsinadversebalanceofpay ment s.

8.St
ageofEconomi
cDev
elopment
:

Acountry’sbalanceofpay mentsalsodependsoni tsstageofeconomi cdevel

opment.If
acountryisdev elopingitwil
lhaveadefici
tinitsbalanceofpay mentsbecauseit
i
mpor t
sr awmat eri
als,machiner
y,capit
alequipment ,
andser v
icesassociat
edwiththe
devel
opmentpr ocessandexpor tsprimaryproducts.Thecountryhast opaymorefor
costl
yimpor t
sandget slessforit
scheapexpor ts.Thisleadstodisequil
i
bri
um i
nits
bal
anceofpay ment s.

9.Pol
it
icalCondi
ti
ons:

Poli
ti
calcondit
ionofacount r
yisanothercauseofdisequil
ibri
um inBOP.Poli
ti
cal
i
nstabil
it
yinacount r
ycreatesuncert
aint
yamongf oreigninvestor
swhichleadstothe
outfl
owofcapi t
alandretar
dsitsinf
low.Thiscausesdisequil
ibr
ium i
nBOPoft he
country
.Disequil
i
bri
um inBOPal sooccursintheeventofwarorf earofwarwithsome
othercountr
y.

Ques3.
c)Expl
ainv
ari
ousmeasur
est
ocor
rectdi
sequi
li
bri
um i
nBoP.
Ther
ear
etwocat
egor
iesofmeasur
est
ocor
rectt
heBoPdi
sequi
l
ibr
ium:

Aut
omat
icMeasur
es-

TheAut omaticmeasureswereusefulandrel
evantwhentherewasGol dStandard.
Since,nowtheGoldStandar
di snotthere,
thewholemechanism isir
rel
evant,y
etit
wor ksinPapercur
rencyenv
ironmentont hebasi
softhefactthatift
hemar ket
forcesofdemandandsupplyar eal
lowedt ohavefr
eeplay,
incourseoftime,
equili
bri
um will
beautomati
call
yrestored.

Thiscanbeunderstoodbyasi mpleexample.Whenev erther

eisadef i
cit
,demandf or
for
eignexchangeexceedsi t
ssupplyandthisresultinanincreaseintheexchange
rat
eandaf all
intheexternalval
ueofthedomest iccurrency.Thiswouldresulti
nthe
export
softhecountrygocheaperandi mportsdear erthanbefore.Consequentl
y,t
he
i
ncreaseinexport
sandf alli
nimportsrest
orethebal anceofpay mentsequil
ibri
um.

Del
iber
atemeasur
es

Thesemeasur
esref
ertot
hecor
rect
ionofdi
sequi
l
ibr
ium bymeansofmeasures
takendel
i
ber
atel
ywit
hthi
sendi
nv i
ew.Ther
earevar
iousdel
iber
atemeasur
es
suchas-

a) Monet
arymeasur
essuchasMonet
aryCont
ract
ion,
Dev
aluat
ion,
Exchange
Cont
rol

b) Tr
ademeasur
es:
Expor
tPr
omot
ion,
Impor
tCont
rol

c) Mi
scel
l
aneousmeasur
es

1.Monet
aryCont
ract
ion

Thecont
ract
ionorexpansionofmoneysuppl yaff
ectt
helevelofaggregat
edomest
ic
demand,domest
icpri
celev el
andt hedemandforimport
sandexpor t
s,andthi
s
i
nter
vent
ioncanbeusedt ocorrectthedi
sequil
i
bri
um oftheBoP.

2.Dev
aluat
ion

Devaluati
oni
sdefinedasar educti
onoft heoff
icialr
ateatwhichthecur r
encyis
exchangedforanothercur
rency.Thei
deabehi ndcur r
encydevaluat
ionistostimul
atei
ts
exportsanddi
scourageimpor t
stocorrectthedisequil
i
bri
um.Thedi rectimpactof
deval
uationi
sthatitmakest heexpor
tgoodscheaperandi mportsdearer.
3.ExchangeCont
rol

Thisisy etanot
herpopul
armeasur eofcor rectingtheBoPdef icit.Undert heexchange
contr
ol ,t
hegovernmentvi
at heRBIassumescompl et
econt r
ol ov ert
hef oreign
exchanger eser
vesandearningsoft hecount r
y .Thereci
pientsoff or
eignexchange, l
i
ke
exporters,ar
erequi
redtosurrenderforeignexchanget othegov ernment /centr
albankin
exchangef ordomesti
ccurrency.Byv i
rtueofitscont r
olovertheuseoff or ei
gnexchange,
thegov ernmentcancontr
ol i
mpor t
sandal soi ncreaseit
sf or
eigncur rencyr eserv
es.

4.Expor
tPr
omot
ion

Thismayincl
udethereduct
ionandaboli
ti
onoftheexpor
tduti
es,
provi
dingexpor
t
subsi
dy,
encouragi
ngexportproduct
ionandexpor
tmarketi
ngbygiv
ingmonetary
,fi
scal
,
physi
cal
andinsti
tut
ionali
ncenti
vesandfaci
l
iti
es.

5.I
mpor
tCont
rol
:

Thi
smaybedonebyimprovi
ngorenhanci
ngimpor tduti
es,r
est
ri
cti
ngimport
sthrough
i
mportquot
as,
li
censi
ngandevenprohi
bit
ingal
togetherthei
mportofcer
tai
ninessent
ial
i
tems.

6.Mi
scel
l
aneousMeasur
es

Othermeasur
esar
epromotionoft
our
ism t
oat
tractf
orei
gner
sandpr
ovi
dingi
ncent
ives
t
oenhanceinwar
dremit
tances.

Bi
bli
ogr
aphy-
1.ht
tps:
//key
dif
fer
ences.
com/
dif
fer
ence-
bet
ween-
bal
ance-
of-
tr
ade-
and-
bal
ance-
of-
payment.
html

2.ht
tps:
//ef
inancemanagement
.com/
financi
al-
management
/bal
ance-
of-
tr
ade-
vs-
payment

3.ht
tps:
//www.
inv
est
opedi
a.com/
ter
ms/
d/di
sequi
l
ibr
ium.
asp

4.ht
tp:
//www.
micr
oeconomicsnotes.
com/balance-
of-
pay
ment
s/di
sequi
l
ibr
ium-
in-
bal
ance-
of-
pay
ments-
causes-and-
impli
cat
ions/1724

5.ht
tps:
//www.googl
e.com/amp/s/www.
gkt
oday
.i
n/gk/
bal
ance-
of-
pay
ment
-
di
sequil
i
brium-
adjust
ment-of
-bop/
amp/