MACRO ECONOMIC ISSUES (I)

THE GREAT  DEPRESSION BEGINS

The Great Depression of 1920’s
As  the  1920s  advanced,  serious  problems  threatened  the  economy while Important industries struggled, including:
•Agriculture
•Railroads
•Textiles
•Steel
•Mining
•Lumber
•Automobiles
•Housing
•Consumer goods

Consumer spending down
By the late 1920s, American consumers were buying less. Rising  prices,  stagnant  wages  and  overbuying  on  credit  were to blame. Most  people  did  not  have  the money  to buy  the  flood of  goods factories produced.

Stock prices rise through the 1920s
Through most of the 1920s, stock prices rose steadily. The Dow reached a  high in 1929 of 381 points (300  points higher than 1924). By 1929, 4 million Americans owned stocks.

Causes of the Great Depression:
Tariffs & war debt policies
U.S. demand low, despite factories producing more  Farm sector crisis
Easy credit
Unequal distribution of income

Global recession of 2008
Recession In economics, the term recession descries the  reduction of a country’s Gross Domestic Product (GDP) for  at least two quarters. The usual dictionary definition is “a period of reduced  economic activity” A recession is a contraction of business cycle.
Recession that affects many countries around the world. That  is,  a  period  of  economic  slowdown  or  declining  economic output.
Since world war II there were only four global recessions:
July 1980 – November 1982
(2 years total)
July 1990 – March 1991
(8 months)
March 2001- November 2001
(8 months)
December 2007- March 2009 (15 months)
Impact of recession in India:
Indian companies have major outsourcing deals from the US.
India’s exports to the US have also grown sustainability  over the years.
For the first time in five years, India’s export growth has  turned negative.
Exports for October 2008 contracted by 15% on a year-  on-year basis as over 40% of India’s export market had been  slowing for months.
This became on those reasons due to recession stroked  India.
Corrective Steps Taken to Check Recession
RBI needed to neutralize the outflow of FII money by  unwinding the market.
In the IT sector, there should be correction in salary  offerings rather than job cutting.
Public should spend wisely and save more.
Taxes including excise duty and custom duty should be  reduced to lighten the adverse effect of economic crunch on  various industries.
In real estate the builders should drop prices, so as to  bring buyers back into the market.
Current Economic Scenario-Impact of Recession on  India
Recession has grabbed almost all the organizations of the  world.
Several  people  have  lost  jobs  –  facing  the  financial  problems.
Government – doing best to come out of the problem.  Banks are providing business loans at low rate.
Government – providing money packages to organizations.
If I talk about India, here the situation is still satisfactory  if compare it with other countries of the world.
Reserve bank of India (RBI) has decreased the rate of  interest.
SBI  and  ICICI  are  also  providing  different  types  of  loans at a low rate of interest.
Organizations are cutting cost to stand in the market.  Export businesses of India is going up.
The real state was doing good business.
But now a days the condition of real state is still worse  because of recession.

Euro Zone
It is an economic and monetary union (EMU) of 16  European Union (EU) member states They have adopted the euro as their sole trading  currency. Euro became a reality on Jan 1, 1998 , but came  for the European consumers on Jan 1 2002. It  currently  consists  of  Austria,  Belgium,  Cyprus, Finland,  France,  Germany, Greece, Ireland, Italy, Luxembourg,  Malta,  the   Netherlands, Portugal, Slovakia, Slovenia and Spain.
Introduction to Euro Zone crisis
It is the biggest challenge Europe has faced since 1990.  Due to global financial crisis that began in 2007-08 the  euro zone entered its first official recession in third quarter of 2008. The official figures were released in 2009 Jan. On 11 Oct 2008, a summit was held in Paris by the  Euro group heads of state and Govt., to define a joint  action plan for euro zone and central banks of Europe to  stabilize the economy.
Beginning of Crisis
Started in – Oct 2009 in Greece. Its immediate causes lie with the US crisis of 2007-09.  The result in Euro Zone was Sovereign debt crisis.

PIIGS: Portugal, Italy, Ireland, Greece, Spain.

Countries Affected By Greek Crisis
South-eastern Europe
Neighboring  Serbia,  Albania,  Macedonia,  Bulgaria and Turkey

IMPACT
Contagion Effect:
Greek crisis has made investors nervous about lending  money to governments through buying government bonds.
Reduced wealth:
Take-home pay is likely to fall as it is eroded by rising  taxes. Impact on private individuals

Effect on India
India’s exports to Europe could witness a slump  to 10%.
Export driven sectors such as textiles and software are  likely to bear the brunt.
About 22-28 percent of revenues of India’s top tech  majors come from Europe whose revenues will definitely be  affected. Government’s overall target of $200 billion for the fiscal  could be at stake.

WTO and its impact of Indian Agriculture

World Trade organization
“The World Trade Organization is ‘member-driven’, with  decisions taken by General agreement among all member of  governments and it deals with the rules of trade between  nations at a global or near-global level. But there is more to  it than that.”
The World Trade Organization (WTO) is an organization  that intends to supervise and liberalize international trade.
The WTO is the only global international organization  dealing with the rules of trade between nations.

WTO: The Beginnings/ History
The World Trade Organization (WTO) came into being on  January 1st 1995.
It was the outcome of the lengthy (1986-1994) Uruguay  round of GATT negotiations.
The WTO was essentially an extension of GATT.  It extended GATT in two major ways.
First GATT became only one of the three major trade  agreements that went into the WTO (the other two being the  General Agreement on Trade in Services (GATS) and the  agreements on Trade Related Aspects of Intellectual Property  Rights (TRIPS).

Objective of WTO
The  primary  aim  of  WTO  is  to  implement  the  new  world  trade agreement.
To promote multilateral trade .
To  promote  free  trade  by  abolishing  tariff  &  non  tariff  barriers.
To enhance competitiveness among all trading partners so  as to benefit consumers.
To  increase  the  level  of  production  &  productivity  with  a  view to increase the level of employment in the world.
To expand & utilize world resources in the most optimum  manner.
To  improve  the  level  of  living  for  the  global  population  &  speed up economic development of the member nations.
To  take  special  steps  for  the  development  of  poorest  nations.

Functions of WTO
Implementing  WTO  agreements  &  administering  the  international trade.
Cooperating with IMF & World Bank & its associates for  establishing coordination in Global Trade Policy-Making.
Settling  trade  related  disputes  among  member  nations  with the help of its Dispute Settlement.
Reviewing trade  related  economic policies  of  member countries  with  help  of  its  Trade Policy  Review  Body (TPRB).
Providing technical assistance & guidance related to  management of foreign trade & fiscal policy to its member  nations.
Acting as forum for trade liberalization.
India is one of the founder members of WTO.

WTO and Indian Agriculture
Introduction After over 7 years of negotiation the Uruguay  Round multilateral trade negotiations were concluded on  December 1993 and were formally ratified in April 1994 at  Marrakesh, Morocco. The WTO agreement on agriculture was one of  the main agreements which were negotiated during the  Uruguay round.
Agreement on Agriculture
The WTO Agreement on Agriculture contains provisions  in three broad areas of agriculture.
1.Market access.
2.Domestic support.
3.Export subsidies.
1) Market access
This  includes  tariffication,  tariff  reduction  and  access  opportunities. Tariffication  means  that  all  non-tariff  barriers  such  as….
1.Quotas
2.Variable levies
3.Minimum import prices
4.Discretionary licensing
5.State trading measures
AOA provisions on market access:
Prohibition of quantitative restriction on import
Tariff binding and reduction
Bound versus Applied tariffs
Tariff Rate Quota Special safeguard measures
2)  Domestic Support
WTO uses a traffic light analogy to group program
Green box (non-trade distorting)
Blue box (production limiting)
Amber box (market distorting)  
Prohibited(i.e. red box)
3) Export subsidies:
En export subsidy reduce the price paid by foreign  importer, which mean domestic consumer pay more than  foreign consumer Export subsidy in Agricultural Sector
Direct export subsidies contingent on export performance
Sale  of  non-commercial  product  on  less  prices  than  domestic market
Producer financed subsidy Cost reduction measures
Some of agricultural product under 23 product groups, such  as wheat, coarse grain, sugar, beef, cheese and oilseeds.
Rates of cut Developed countries:
1)21% by volume
2)6% corresponding budgetary outlay  3)Over 6 years
Developing countries:
1)14% by volume
2)24% corresponding budgetary outlay  
3)Over 10 years
Textile Industry:
The  Indian  Textile  Industry  counts among  the leading textile industries in the world.
India’s textile industry contributes about  
1)14 per cent to industrial production;
2)4  per  cent  to  the  country’s  gross  product (GDP);
3)17 per cent to its export earnings;
Abundant raw materials, healthy foreign direct investments  (FDI) and a government willing to invest ensures a bright  future for India’s textile sector.
Second largest textile fiber producer in the world.
India is the largest cotton and jute producer in the world.
Nine million tones of fiber production in 2015-16.
Second largest textile manufacturing capacity globally.
India accounts for 18% of world’s spindles and 9% of  world’s rotor. 5% share in global textiles and apparel trade.
Current facts on Indian textile industry
India  retained  its  position  as  world’s second  highest cotton producer.
Acreage under cotton reduced about 1 % during 2008-09.
The productivity of cotton which was growing up over the  years has decreased in 2008-09.
Substantial increase of Minimum Support Prices (MSPs).
Cotton  exports  couldn’t  pick  up  owing  to  disparity  in  domestic and international cotton prices.
Imports  of  cotton  were  limited  to  shortage  in  supply  of  Extra Long staple cottons.

Important benefits offered by the Indian textile  industry
India  covers  61  percent  of  the  international  market.
India covers 22 percent of the global market.
India  is  known  to  be  the  third  largest  manufacturer  of  cotton across the globe.
India  claims  to  be  the  second  largest  manufacturer  as  well as provider of cotton yarn and textiles in the world.
India holds around 25 percent share in the cotton yarn  industry across the globe.
India  contributes  to  around  12  percent  of  the  world’s  production of cotton yarn and textiles.

Reasons To Invest
Abundant availability of raw materials such as cotton,  wool, silk, jute and manmade fibers.
Comparative advantage in terms of skilled manpower  and cost of production over major textile producers across  globe.
Focused and favorable policies instituted by the  government will give the industry a fillip.
Presence of entire value chain for textile production  beginning from production of natural fiber to the production  of yarn, fabric and apparel within the country giving edge  over countries like Vietnam, Bangladesh etc.
Presence of traditional skill sectors i.e. hand loom and  handicraft.
Market access arrangements with Japan, South Korea,  ASEAN, Chile while negotiations with EU, Australia, Regional  Comprehensive Economic Partnership (RCEP) countries  under process.
Readily available market which is poised to grow in  future with increased penetration of organized retail,  favorable demographics and rising income levels.
The Integrated Skill Development Scheme aims to train  over 2.675 million people up to 2017, covering all sub-  sectors of the textile sector- textiles and apparel, handicrafts,  handlooms, jute and sericulture
The Centers of Excellence focused on testing and  evaluation as well as resource centers and training facilities  have been set up.

Special Economic Zone(SEZ)
It is a specifically delineated duty-free enclave and  shall be deemed to be foreign territory for the purposes of  trade operations and duties and tariffs.
In order words, SEZ is a geographical region that has  economic laws different from a countries typical economic  laws.

SEZ Background
•An  SEZ  Policy  was  announced  for  the  very  first  time  in  2000 in order to overcome the obstacles businesses faced.
•There  were  multiple  controls  and  many  clearances  to  be  obtained before starting a venture.
•Infrastructure facilities were shoddy and well below world  standards in India.
•The fiscal regime was unstable as well.
•In  order to  attract  huge  foreign  investments  into  the country, the government announced the Policy.
•The  Parliament  passed  the  Special  Economic  Zones  Act in 2005 after many consultations and deliberations.
•The Act came into force along with the SEZ Rules in 2006.
•However,  SEZs  were  operational  in  India  from  2000  to  2006 (under the Foreign Trade Policy).

Special Economic Zones Act, 2005 “It is defined as an Act to provide for the establishment,  development and management of the Special Economic  Zones for the promotion of exports and for matters  connected therewith or incidental thereto.”
The chief objectives of the SEZ Act are:
•To create additional economic activity.
•To boost the export of goods and services.
•To generate employment.
•To boost domestic and foreign investments.
•To develop infrastructure facilities.

SEZ Rules
•Simplified procedures to develop, operate and maintain  SEZs and also to set up units and conduct businesses in  the SEZs.
•Single-window  clearance  to  set  up  a  Special  Economic  Zone, and also to set up a unit in an SEZ.
•Single-window  clearance  for  matters  connected  to  the  Central and State governments.
•Simplified compliance procedures and documentation with  a focus on self-certification.
•Different minimum land requirements for different classes  of Special Economic Zones.

SEZs Facilities & Incentives
•The government offers many incentives for companies and  businesses established in SEZs. some of the important  ones are:
•Duty-free import or domestic procurement of goods for  developing, operating and maintaining SEZ units.
•100% Income tax exemption on export income for SEZ  units under the Income Tax Act for first 5 years, 50% for  next 5 years thereafter and 50% of the ploughed back  export profit for next 5 years. (Sunset Clause for Units will  become effective from 2020).
•Units are exempted from Minimum Alternate Tax (MAT).
•They were exempted from Central Sales Tax, Service Tax  and State sales tax.
•These  have  now  subsumed  into  GST  and  supplies  to  SEZs are zero-rated under the IGST Act, 2017.
•Single  window  clearance  for  Central  and  State  level  approvals.
•There is no need for a license for import.
•In  the  manufacturing  sector,  barring  a  few  segments,  100% FDI is allowed.
•Profits earned are permitted to be repatriated freely with  no need for any dividend balancing.

Export processing zone(EPZ)
An export processing zone, or EPZ, is an area set up to  enhance commercial and industrial exports by encouraging  economic growth through investment from foreign entities. Incentives such as tax exemptions and a barrier-free  environment are the main attractions of an EPZ. The main goals and benefits of an EPZ are growth from  foreign exchange earnings through nontraditional exports,  creation of jobs to assist in income generation and develop  labor skill sets, the attraction of direct foreign investment,  and fostering of transfer of technology.

The History of Export Processing Zones
Export Processing Zones first appeared in the 19th  century in the form of free trade zones at ports located in  Singapore, Hong Kong, and Gibraltar.
Formally implemented in the 1930s, EPZs encourage  foreign investment in a country.
By the 1970s, export processing zones gained popularity  to the point where many countries used the mechanism to  boost their economy through investment from more  advanced nations.
In 2006, approximately 130 countries founded over  3,500 EPZs.
Some of these zones were so extensive that residential  neighborhoods were actually established within the zone,  such as in Chinese Special Economic Zones.
EPZs have now evolved to the point where they can  include resorts, designated finance zones, technological  parks, and centers dedicated to logistics.

Features of the Export Processing Zone
Companies based in an EPZ tend to benefit from tax  concessions that are generally long-term in nature.
Imports of materials and goods for export are duty-free.
While parts of countries that do not contain EPZs can remain  underdeveloped in terms of technology and infrastructure,  EPZs are fitted with advanced communication facilities and  enhanced infrastructure.
These zones also provide subsidies for utilities and rent to  their occupants.
EPZ zones can accommodate both domestic and foreign  firms; they even offer the opportunity for joint venture  operations.
The zones are typically located in the vicinity of ports of air  and sea, therefore making the import and export process  more convenient.
Companies do not require as much government approval for  practices as firms outside of the zone, with labor laws being  more flexible.
Differentiating factors of EPZs are related to the  management and quality of goods, services provided, and  facilities. EPZs can be managed either publicly or privately.

Disadvantages of Export Processing Zones
There are significant benefits associated with the  establishment of an EPZ, with countries such as China,  Indonesia, and South Korea boasting great benefits.
However, countries like the Philippines have faced poor  performance from EPZs.
In this example, the cost of establishment of the  facilities has outweighed the gains in profits.

Free trade zone (FTZ)
It is a designated area that eliminates traditional trade  barriers, such as tariffs, some kind of taxes and fees and  minimizes bureaucratic regulations.
The goal of a free trade zone is to enhance global  market presence of the Country or location by attracting  new business and foreign investments.
Tax-free trade zones generate foreign exchange through  exports, and create economic value added.
Free, foreign, and export processing zones all fall under  the umbrella of being free trade zones.

Tax-free trade zones have four policy objectives:
To attract foreign direct investment  To decrease unemployment
To support economic reform strategies by developing  and diversifying exports
To test new approaches to foreign direct investment  and to policies related to law, land, labor, and the pricing  of goods.

KEY BENEFITS OF FTZS IN INDIA
Different  benefits  can  be  obtained  by  a  reputed  and  professional FTWZs. Some of them are mentioned below
Duty freedom
Duty & Tax Deferments  
World-class infrastructure  
Superior and timely services