Foreign Trade Policy

A country’s Foreign Trade Policy (FTP) is the official set of guidelines and strategies that the government creates to regulate its exports and imports. Think of it as the master plan or rulebook that governs how India trades with the rest of the world.

The main authority responsible for framing and implementing the FTP is the Directorate General of Foreign Trade (DGFT), which operates under the Ministry of Commerce and Industry.

Key Objectives of the Foreign Trade Policy

The primary goal of any FTP is to make the country a leader in international trade. The key objectives are:

To boost exports: The main aim is to increase the amount of goods and services that India sells to other countries.
To support domestic manufacturing: The policy aims to create a favorable environment for Indian companies through initiatives like “Make in India.”
To promote ease of doing business: Simplifying rules and procedures to make it faster, easier, and cheaper for businesses to trade.
To generate employment: When exports increase, domestic factories produce more, which leads to more jobs.
To achieve national economic growth: Using international trade as a powerful engine for increasing the country’s GDP.

Highlights of the Current Foreign Trade Policy (FTP 2023)

For your November 2025 exam, the framework of FTP 2023 will be crucial. Unlike previous policies that had a five-year end date, FTP 2023 is a dynamic policy with no fixed end date and will be updated as needed.

Its vision is built on four key pillars:

Incentive to Remission: Shifting from giving subsidies (incentives) to a system based on remitting or refunding duties and taxes paid during the export process. This makes the system more compliant with global trade rules (WTO).
Export Promotion through Collaboration: Encouraging collaboration between exporters, states, districts, and Indian diplomatic missions abroad to boost trade.
Ease of Doing Business: Reducing transaction costs and using technology to automate and simplify processes for exporters.
Focus on Emerging Areas: Actively promoting exports in new and rising sectors like e-commerce, and developing districts as export hubs.

Key Initiatives Under the FTP

Online Approvals & Automation: Most approvals for exporters are now granted automatically through online systems, reducing delays and paperwork.
Towns of Export Excellence (TEE): The policy identifies and supports towns that are known for producing specific goods for export (e.g., Tiruppur for textiles). These towns are given special benefits to boost their exports further.
Promoting E-Commerce Exports: Recognizing the massive potential of online sales, the FTP has introduced special provisions to simplify the process for small businesses selling their products abroad through e-commerce platforms like Amazon or Etsy. The export limit for this channel has been increased significantly.
Streamlining Merchanting Trade: The policy has made it easier for Indian entrepreneurs to conduct merchanting trade. This is where a trader in India buys goods from one foreign country (e.g., Vietnam) and sells them directly to another foreign country (e.g., UAE) without the goods ever entering India.

In summary, the Foreign Trade Policy is a critical tool that the government uses to make Indian exports more competitive on the global stage. It aims to create a simple, predictable, and supportive environment for Indian businesses to expand their reach across the world.

Foreign Investments

FDI is a long-term investment where a foreign entity establishes a lasting interest and physical presence in the Indian economy. The investor’s goal is to manage and control the business they have invested in.

Simple Analogy: Think of FDI as buying a house. The buyer is committed for the long term, is directly involved in managing the property, and cannot sell it overnight.
Key Feature: The investor has significant influence or control over the company’s operations.
Examples:
- When Apple Inc. opens its own retail stores in India.
- When Hyundai sets up a car manufacturing plant in Chennai.
- When Amazon builds its own warehouses across the country.

FDI is highly sought after because it brings not just capital, but also technology, management skills, and jobs into the country.

Foreign Portfolio Investment (FPI)

FPI consists of investments in financial assets, such as stocks (shares) and bonds, of Indian companies. These are generally short-term investments, and the investor does not have any active control over the company’s management.

Simple Analogy: Think of FPI as day-trading in the stock market. The investor buys shares for potential profit and can sell them very quickly. Their interest is purely financial, not managerial.
Key Feature: The investor is a passive player, and the investment is liquid (can be easily bought or sold).
Examples:
- When a pension fund from the UK buys shares of Infosys on the National Stock Exchange (NSE).
- When an American investor buys bonds issued by the Government of India.

FPI is often referred to as “hot money” because it can enter and exit the market quickly, which can sometimes lead to market volatility.

FDI vs. FPI: The Key Differences

This comparison table is essential for quick revision.

Feature	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Nature	Long-term, stable investment	Short-term, liquid investment
Control	Active control and management influence	Passive investment, no control
Entry/Exit	Relatively difficult to enter and exit	Easy to enter and exit through stock markets
What it brings	Capital, technology, and management skills	Primarily brings only capital
Stability	Considered stable and reliable	Can be volatile (“hot money”)
Regulator	Primarily governed by FDI Policy (DPIIT) and FEMA (RBI)	Primarily regulated by SEBI

Export to Sheets

Why is Foreign Investment Important for India?

Fills the Capital Gap: It provides the funds needed for industrial growth that domestic savings alone cannot meet.
Boosts Competition: The entry of foreign players forces domestic companies to become more efficient and improve quality.
Creates Jobs: New factories and businesses established through FDI generate massive employment.
Develops Infrastructure: Foreign investment often leads to the development of better roads, ports, and power facilities.

Economic Development

Economic Development is the process by which the overall health, well-being, and quality of life of a nation’s people improve. It’s a much broader and more meaningful concept than just economic growth.

Economic Growth vs. Economic Development

This distinction is very important for your exam.

Economic Growth: This is a quantitative measure. It simply means an increase in the country’s real output or GDP (Gross Domestic Product). It’s about the country becoming richer in monetary terms.
- Example: If India’s GDP increased from ₹200 lakh crore to ₹210 lakh crore, it shows economic growth.
Economic Development: This is a qualitative measure. It includes economic growth, but also focuses on social progress and improvements in the standard of living. It’s about the lives of citizens getting better.
- Example: Economic development means not only is the GDP increasing, but people also have better access to hospitals, more children are going to school, and poverty is decreasing.

Key Analogy: Imagine a person who gets a big salary hike. That’s growth. But if they also start eating healthier, exercising, and spending quality time with family, their overall well-being improves. That’s development.

How Do We Measure Economic Development?

Since it’s a broad concept, we look at several indicators:

Increase in Real Per Capita Income: This is the average income per person, adjusted for inflation. It’s the most basic measure of how much richer, on average, citizens are becoming.
Human Development Index (HDI): This is a composite index and a very important indicator. It combines three key dimensions:
- A long and healthy life: Measured by Life Expectancy at birth.
- Knowledge: Measured by the average years of schooling for adults and expected years of schooling for children.
- A decent standard of living: Measured by Gross National Income (GNI) per capita.
Literacy Rate: The percentage of the population that can read and write. A higher literacy rate indicates a more skilled and informed populace.
Infant Mortality Rate (IMR) and Maternal Mortality Rate (MMR): A decrease in these rates shows that healthcare facilities, nutrition, and sanitation are improving.

Main Objectives of Economic Development in India

The ultimate goal of all economic policies in India is to achieve development. The main objectives are:

Poverty Alleviation: To lift millions of people out of poverty.
Improving Standard of Living: To ensure citizens have access to basic necessities like food, shelter, healthcare, and education.
Creating Employment: To provide stable and meaningful jobs for the growing population.
Reducing Inequality: To bridge the gap between the rich and the poor and ensure that the benefits of growth reach everyone.
Sustainable Growth: To achieve development without harming the environment, ensuring that future generations can also prosper.

In summary, Economic Development is the true goal for a country like India. It’s a holistic vision where the economy grows, and every citizen reaps the benefits through a better, healthier, and more prosperous life.

Foreign Trade Policy, Foreign Investments and Economic Development