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B.A L.L.B. 2nd Year ECONOMICS – II Unit – 4 (Economic Problems and Polities in India)

UNIT -4

MEANING OF PARTNERSHIP

You have studied that single proprietorship form of business organization has certain limitations. Its financial and managerial resources are limited. It is also not possible to expand the business activities beyond a certain limit. In order to overcome these drawbacks, another form, i.e., partnership form of business has come into existence. Let us first find out what is ‘partnership’. It is basically a relation between two or more persons who join hands to form a business organization with the objective of earning profit. The persons who join hands are individually known as ‘Partner’ and collectivelya ‘Firm’. The name under which the business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal& Co,Gupta & Co is the names of some partnership firms. The partners provide the necessary capital, run the business jointly and share the responsibility. You must be thinking how much capital each partner contributes? Do all the partners jointly manage the business or can any of them manage the business on behalf of others? Who will take the profits? If there is any loss then who will suffer the loss? Yes, these are the few questions that might be coming to your mind. Actually, when you invite your friends to start such a business, it should be the duty of all of you to decide

the amount of capital to be contributed by each one of you;
who will manage;
How will the profits and losses be shared.

Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written. Actually, it is always better to insist on a written agreement among partners in order to avoid future controversies.

A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”

Features of Partnership form of business organization

After having a brief idea about partnership, let us identify the various features of this form of business organization.

Two or more Members – You know that the members of the partnership firm are called partners. But do you know how many persons are required to form a partnership firm? At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of banking business and 20 in case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. A new form of business will be formed, the details of which you will learn in your next lesson.
Agreement: Whenever you think of joining hands with others to start a partnership business, first of all, there must be an agreement between all of you. This agreement containso the amount of capital contributed by each partner; o profit or loss sharing ratio; o salary or commission payable to the partner, if any; o duration of business, if any ; o name and address of the partners and the firm; o duties and powers of each partner; o nature and place of business; and o any other terms and conditions to run the business.

Lawful Business – The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business.

Competence of Partners – Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only
Sharing of Profit – The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-.
Unlimited Liability – Just like the sole proprietor the liability of partners is also unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/- from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal properties of the partners.

Voluntary Registration – It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: o Your firm cannot take any action in a court of law against any other parties for settlement of claims. o In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. o Your firm cannot claim adjustments for amount payable to or receivable from any other parties.
No Separate Legal Existence– Just like sole proprietorship, partnership firm also has no separate legal existence from that of it owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm.

Principal Agent Relationship – All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time the others become the principal. So there always exists a principal agent relationship in every partnership firm.
Restriction on Transfer of Interest – No partner can sell or transfer his interest to any one without the constent of other partners. For example – A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work any more. He can not do so until B and C both agree.
Continuity of Business – A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship.

Advantages of partnership form of business organisation

Partnership form of business organisation has certain advantages, which are as follows –

Easy to form: Like sole proprietorship, the partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in writing, is sufficient to create a partnership firm.
Availability of large resources – Since two or more partners join hand to start partnership business it may be possible to pool more resources as compared to sole proprietorship. The partners can contribute more capital, more effort and also more time for the business.

Better decisions – The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict they can sit together to solve the problems. Since all partners participate in decision-making, there is less scope for reckless and hasty decisions.

Flexibility in operations – The partnership firm is a flexible organisation. At any time the partners can decide to change the size or nature of business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
Sharing risks – In a partnership firm all the partners share the business risks. For example, if there are three partners and the firm suffers a loss of Rs. 12,000 in a particular period, then all partners may share it and the individual burden will be Rs. 4,000 only.
Protection of interest of each partner – In a partnership firm every partner has an equal say in decision making. If any decision goes against the interest of any partner he can prevent the decision from being taken. In extreme cases a dissenting partner may withdraw himself from the business and can dissolve it.

Benefits of specialization – Since all the partners are owners of the business they can actively participate in every aspect of business as per their specialisation and knowledge. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per their specialization. Similarly two or more doctors of different specialization may start a clinic in partnership.

Limitations of Partnership form of Business Organisation

Inspite of all these advantages as discussed above, a partnership firm also suffers from certain limitations. Let us discuss all these limitations.

Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties.
Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting member can also give notice at any time for dissolution of partnership.

Lack of Harmony: You know that in partnership firm every partner has an equal right to participate in the management. Also every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this sometimes there is a possibility of friction and quarrel among the partners. Difference of opinion may lead to closure of the business on many occasions.

Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.
No transferability of share: If you are a partner in any firm you cannot transfer your share of interest to outsiders without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

Types of Partners

In a partnership firm you can find different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Let us learn more about them.

Active partners – The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm.
Dormant partners – Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any.

Nominal partners – These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm.

Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
Partner by estoppel – If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in Ram Hari& Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari& Co and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel.
Partner by holding out – In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari& Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out.

Difference between Partnership and Single Proprietorship for of business

The difference between a partnership and sole proprietorship form of business may be follows. This helps the entrepreneur in selecting form of business of his choice.

Membership: Partnership is owned by two or more persons subject to the limit ten in banking business and twenty in case of other business. Single proprietorship is owned by one and only one person.
Formation: It is formed through an agreement which may be oral or in writing, is formed quite easily as it is the outcome of a single person’s decision without any legal administrative approval.

Registration: The registration is not compulsory. It needs no registration excepting some compliance. Regulating law: It is governed by the rules contained under the Indian Partnership Act, 1932. There is no specific statutory law to govern the functioning of sole/single proprietors business.

Capital: There is more scope for raising a larger amount of capital as there < more than one person. It has a limited financial capability. Hence, the scope for rising capital is naturally least.
Management: Every partner has the right to take active part in the management the affairs of the business. Each partner also enjoys the authority to bind the firm and other partners for his acts in the ordinary course of business. The sole/ single proprietorship is self-managed one and few employees may support him. However, the decision of the proprietor is final and binding.
Risk: The risk connected with the business is comparatively less as it is shared all ,the partners. The risk of the sole/single proprietor is greater than that of partnership form business.

Duration: It continues as long as the partners desire. Even though legally it co to an end on the death, insolvency or retirement of any of the partners, the business i continue with the remaining partners. It comes to an end with the death, insolvency incapacity of the proprietor. Thus, there is uncertainty of duration of sole proprietorship
Quickness in decision-making: Decision-making in partnership is corporately delayed as the partners arrive at decision after the consultation with one another. The decision of the sole proprietor is prompt as he need not consult anyone.

Maintenance of secrecy: Maintenance of absolute secrecy is not possible in of partnership as business secrets are accessible to more than one partner. The single proprietor need not share his business secrets with anybody.

The Similarities and Difference between Sole/Single Proprietorship and Partnership

Full Liability: both sole proprietorships and partnerships place full debt and legal liability onto the shoulders of the operators. This means that if creditors need to recover bad debts incurred by the business, the operators’ personal assets may be at risk. In the event of a lawsuit against the business, the operators assume full responsibility for any financial obligations that may be a part of a judgment. The business and the operator(s) are the same entity in the eyes of the law.
Taxation The government requires that business owners report profits from sole proprietorships and partnerships on their personal income tax forms. Both sole proprietorships and partnerships do not pay corporate income tax. The owners pay taxes on earnings from the business or receive a deduction for any losses. In a general partnership, the percentage of business income or loss reported on individual tax returns may differ according to the partnership agreement. For example, one partner may receive and report 60 percent of the company’s profit or loss, while the other partner receives and reports 40 percent.

Reporting The federal government does not require that sole proprietorships file any type of annual report. In contrast, general partnerships must file an annual return with the Internal Revenue Service (IRS). The return indicates the company’s annual income, tax deductions, gains and losses from operations. This is merely part of a check and balance system which ensures that each partner accurately reports the correct amount on his individual tax return. According to the IRS, partnerships may need to file forms 1065, 940, 941, and 8109-B.

Ownership and Responsibility One owner and operator forms a sole proprietorship. A single individual makes all of the strategic decisions related to the business. In a sole proprietorship, one person receives the profits. Sole proprietors may operate out of their homes. General partnerships involve two or more owners. Partners may have a written or implied verbal agreement with each other. One owner may only handle certain aspects of the business, such as sales. Partners may equally contribute to start-up costs or one owner may finance a larger portion of the company’s operations

Meaning of Co-operative Society

Let us take one example. Suppose a poor villager has two cows and gets ten litres of milk. After consumption by his family everyday he finds a surplus of five liters of milk. What can he do with the surplus? He may want to sell the milk but may not find a customer in the village. Somebody may tell him to sell the milk in the nearby town or city. Again he finds it difficult, as he does not have money to go to the town to sell milk. What should he do? He is faced with a problem. Do you have any solution for him? One day that poor villager met a learner of NIOS who had earlier read this lesson. The learner told him, you see, you are not the only person facing this problem. There are many others in your village and also in the nearby village who face a similar problem. Why don’t you all sit together and find a solution to your common problem? In the morning you can collect the surplus milk at a common place and send somebody to the nearby town to sell it. Again in the evening, you can sit together and distribute the money according to your contribution of milk. Of course first you have to deduct all the expenses from the sale proceeds. That villager agreed to what the learner said. He told everybody about this new idea and formed a group of milk producers in his village. By selling the milk in the nearby town they were all able to earn money. After that they did not face any problem of finding a market for the surplus milk. This process continued for a long time. One day somebody suggested that instead of selling only milk why not produce other milk products like ghee, butter, cheese, milk powder etc. and sell them in the market at a better price? All of them agreed and did the same. They produced quality milk products and found a very good market for their products not only in the nearby town but in the entire country. Just think it over. A poor villager, who was not able to sell five litres of milk in his village, is now selling milk and milk products throughout the nation. He is now enjoying a good life. How did it happen? Who made it possible? This is the reward of a joint effort or co– operation. The term co-operation is derived from the Latin word co-operari, where the word co means ‘with’ and operari means ‘to work’. Thus, co-operation means working together. So those who want to work together with some common economic objective can form a society which is termed as “co-operative society”. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it. In the above example, all producers of milk of a village joined hands, collected the surplus milk at a common place and sold milk and milk products in the market. This was possible because of their joint effort. Individually it would not have been possible either to sell or produce any milk product in that village. They had formed a co-operative society for this purpose. In a similar way, the consumers of a particular locality can join hands to provide goods of their daily need and thus, form a co-operative society. Now they can buy goods directly from the producers and sell those to members at a cheaper price. Why is the price cheaper? Because they buy goods directly from the producer and thereby the middlemen’s profit is eliminated. Do you think it would have been possible on the part of a single consumer to buy goods directly from the producers? Of course, not. In the same way people can form other types of co-operative societies as well. Let us know about them.

Types of Co-operative Societies

Although all types of cooperative societies work on the same principle, they differ with regard to the nature of activities they perform. Followings are different types of co-operative societies that exist in our country.

Consumers’ Co-operative Society: These societies are formed to protect the interest of general consumers by making consumer goods available at a reasonable price. They buy goods directly from the producers or manufacturers and thereby eliminate the middlemen in the process of distribution. KendriyaBhandar, Apna Bazar and SahkariBhandar are examples of consumers’ co-operative society.
Producers’ Co-operative Society: These societies are formed to protect the interest of small producers by making available items of their need for production like raw materials, tools and equipments, machinery, etc. Handloom societies like APPCO, Bayanika, Haryana Handloom, etc., are examples of producers’ co-operative society.

Co-operative Marketing Society: These societies are formed by small producers and manufacturers who find it difficult to sell their products individually. The society collects the products from the individual members and takes the responsibility of selling those products in the market. Gujarat Co-operative Milk Marketing Federation that sells AMUL milk products is an example of marketing co-operative society.

Co-operative Credit Society: These societies are formed to provide financial support to the members. The society accepts deposits from members and grants them loans at reasonable rates of interest in times of need. Village Service Co-operative Society and Urban Cooperative Banks are examples of co-operative credit society.
Co-operative Farming Society: These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming. Lift-irrigation cooperative societies and pani-panchayats are some of the examples of co-operative farming society.
Housing Co-operative Society: These societies are formed to provide residential houses to members. They purchase land, develop it and construct houses or flats and allot the same to members. Some societies also provide loans at low rate of interest to members to construct their own houses. The Employees’ Housing Societies and Metropolitan Housing Co-operative Society are examples of housing co-operative society

Characteristics of Co-operative Society

A co-operative society is a special type of business organisation different from other forms of organsation you have learnt earlier. Let us discuss its characteristics. .

Open membership: The membership of a Co-operative Society is open to all those who have a common interest. A minimum of ten members are required to form a cooperative society. The Co–operative society Act does not specify the maximum number of members for any co-operative society. However, after the formation of the society, the member may specify the maximum number of members..
Voluntary Association: Members join the co-operative society voluntarily, that is, by choice. A member can join the society as and when he likes, continue for as long as he likes, and leave the society at will..

State control: To protect the interest of members, co-operative societies are placed under state control through registration. While getting registered, a society has to submit details about the members and the business it is to undertake. It has to maintain books of accounts, which are to be audited by government auditors.

Sources of Finance: In a co-operative society capital is contributed by all the members. However, it can easily raise loans and secure grants from government after its registration.
Democratic Management: Co-operative societies are managed on democratic lines. The society is managed by a group known as “Board of Directors”. The members of the board of directors are the elected representatives of the society. Each member has a single vote, irrespective of the number of shares held. For example, in a village credit society the small farmer having one share has equal voting right as that of a landlord having 20 shares.
Service motive: Co-operatives are not formed to maximise profit like other forms of business organisation. The main purpose of a Co-operative Society is to provide service to its members. For example, in a Consumer Co-operative Store, goods are sold to its members at a reasonable price by retaining a small margin of profit. It also provides better quality goods to its members and the general public.

Separate Legal Entity: A Co-operative Society is registered under the Co-operative Societies Act. After registration a society becomes a separate legal entity, with limited liability of its members. Death, insolvency or lunacy of a member does not affect the existence of a society. It can enter into agreements with others and can purchase or sell properties in its own name.

Advantages of Co-operative Society

A Co-operative form of business organisation has the following advantages:

Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies.
Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will.

Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society.

LimitedLiability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities.
Elimination of Middlemen’s Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemen’s profit is eliminated.
StateAssistance: Both Central and State governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc.

Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members

Limitations of Co–operative Society

Besides the above advantages, the co-operative form of business organisation also suffers from various limitations. Let us learn these limitations.

Limited Capital: The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return the members do not invest more capital. Government’s assistance is often inadequate for most of the co-operative societies.
Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management.

Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently.

Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-operation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society.
Dependence on Government: The inadequacy of capital and various other limitations make cooperative societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the governments sometimes directly interfere in the management of the society and also audit their annual accounts.

Multinational corporations (MNCs)

These are the corporations that has its head quarters in one state and operates in other countries; these corporation are called subsidiary MNCs, works independently and do not alloy the participation of host country.

The combination of companies of different nationalities connected by means for share holding”.
“To a remarkable extent, the ownership and control of both productions and distributions outside the communist countries.” (C.S BURCHILL)
“MNCs are those companies that control facilities in two or more countries” (MENIS).
“These are transnational corporation takes the advantage of the policy making of another country” (SERANTH)

Advantages of Multinational Corporations (MNCs)

Globalization
Increase world dependency
No war
Integration of world mind
Mixture of whole world culture
Transfer of technology
Economic growth
Job opportunities
Multinational Corporations MNCs produce more and better products
World modernization
Multinational Corporations MNCs brings foreign exchange
Multinational Corporations MNCs take economic risk

Disadvantages of Multinational Corporations (MNCs)

Threat to host-state interests
Integration is impossible
Exploit host countries
Changed necessities into luxuries
Destruction of cultural values and social values
Participation in host country politics
Changed People Minds
Population
Destroyed natural resources
Effected local business
Creating Gap
To demolished the culture and traditions of the host countries
Transfer of over price technology

Role ofMultinational corporations (MNCs)

Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over a number of countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies. Such a company may enter into joint venture with a company in another country. There may be agreement among companies of different countries in respect of division of production, market, etc. These companies are to be found in almost all the advanced countries, with the USA perhaps the biggest amongst them. Their operations extend beyond their own countries, and cover not only the advanced countries but also the LDCs.

Many MNCs have annual sales volume in excess of the entire GNPs of the developing countries in which they operate. MNCs have great impact on the development process of the Underdeveloped countries.

Let us discuss the arguments for and against the operation of MNCs in underdeveloped countries.

Arguments for MNCs(The positive role): The MNCs play an important role in the economic development of underdeveloped countries.

Filling Savings Gap:The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings. For example, to achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings that can be domestically mobilized is only 16% then there is a ‘saving gap’ of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve its target rate of economic growth.
Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.
Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC governments are able to mobilize public financial resources for development projects.
Filling Management/Technological Gap:Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts by means of training programs and the process of ‘learning by doing’.

Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable and productive for the recipient country.

Other Beneficial Roles:The MNCs also bring several other benefits to the host country.

(a) The domestic labour may benefit in the form of higher real wages.

(b) The consumers benefits by way of lower prices and better quality products.

(c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs

(d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.

Apart from these there are indirect gains through the realization of external economies.

Arguments Against MNCs(The negative role): There are several arguments against MNCs which are discuss below.

Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.
Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts. The current account may deteriorate as a result of substantial importation of intermediate and capital goods while the capital account may worsen because of the overseas repatriation of profits, interest, royalties, etc.
While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.
The management, entrepreneurial skills, technology, and overseas contacts provided by the MNCs may have little impact on developing local skills and resources. In fact, the development of these local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.
MNCs’ impact on development is very uneven. In many situations MNC activities reinforce dualistic economic structures and widens income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.
MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.
The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.
MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.
Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-s.

Unit -5

FOREIGN TRADE POLICY

On 1st April 2015, the new Foreign Trade Policy (FTP) for the period 2015-20 was announced which replaces the 2009-14 FTP which expired on 31st March 2014. With the announcement of new policy, exporters’ one-year wait for new FTP has come to end.

India’s Foreign Trade Policy also known as Export Import Policy (EXIM) in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position. Foreign Trade Policy is prepared and announced by the Central Government (Ministry of Commerce). Foreign Trade Policy or EXIM Policy is a set of guidelines and instructions established by the DGFT (Directorate General of Foreign Trade) in matters related to the import and export of goods in India.

The foreign trade policy, has offered more incentives to exporters to help them tide over the effects of a likely demand slump in their major markets such as the US and Europe.

Foreign trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries.

The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM Policy of the Indian Government and is regulated by the Foreign Trade Development and Regulation Act, 1992.

DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to EXIM Policy. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947.

Indian EXIM Policy contains various policy related decisions taken by the government in the sphere of Foreign Trade, i.e., with respect to imports and exports from the country and more especially export promotion measures, policies and procedures related thereto.

Objectives Of The FTP (EXIM) Policy: –
The main objectives are:
a. To accelerate the economy from low level of economic activities to high level of economic activities by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities.
b. To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,’ consumables and capital goods required for augmenting production.
c. To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness.
d. To generate employment. Opportunities and encourage the attainment of internationally accepted standards of quality.
e. To provide quality consumer products at reasonable prices.

Governing Policy – Institutions

The Government of India notifies the foreign trade Policy for a period of five years (for example 2015 -20) under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current Export Import Policy covers the period 2015-2020. The FTP is updated every year on the 31st of March and the modifications, improvements and new schemes become effective from 1st April of every year.

All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister of Commerce and Industry who co-ordinates with the Ministry of Finance, the Directorate General of Foreign Trade and network of DGFT Regional Offices.

FTP 2015-2020

Some highlights of the present Foreign Trade Policy 2015-2020

India to be made a significant participant in world trade by 2020
Commerce Minister announced two new schemes in Foreign Trade Policy 2015-2020Two New Schemes announced in FTP Are MEIS & SEIS. FTP 2015-20 introduces two new schemes, namely “Merchandise Exports from India Scheme (MEIS)” and “Services Exports from India Scheme (SEIS)”. These schemes (MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility and usage.
Merchandize exports from India (MEIS) to promote specific services for specific Markets Foreign Trade Policy
For services, all schemes have been replaced by a ‘Services Export from India Scheme'(SEIS), which will benefit all services exporters in India.
FTP would reduce export obligations by 25% and give boost to domestic manufacturing
Incentives (MEIS & SEIS) to be available for SEZs also. FTP benefits from both MEIS & SEIS will be extended to units located in SEZs. – Both MEIS and SEIS firms and service providers can now get subsidized office spaces in SEZ (Special Economic Zones), along with other benefits. With a view to boost the Special Economic Zones, Government has decided to extend both the incentive schemes for export of goods and services to units in SEZs.
e-Commerce of handicrafts, handlooms, books etc., eligible for benefits of MEIS. e-Commerce exports up to Rs.25000 per consignment will get SFIS benefits.
e-Commerce Exports Eligible For Services Exports From India Scheme. – As part of Digital India vision, mobile apps would be created to ease filing of taxes and stamp duty, automatic money transfer using Internet Banking have been proposed. > Online procedure to upload digitally signed document by Chartered Accountant/Company Secretary/Cost Accountant to be developed.
Agricultural and village industry products to be supported across the globe at rates of 3% and 5% under MEIS. Higher level of support to be provided to processed and packaged agricultural and food items under MEIS.
Industrial products to be supported in major markets at rates ranging from 2% to 3%.
Branding campaigns planned to promote exports in sectors where India has traditional Strength.
Business services, hotel and restaurants to get rewards scrips under SEIS at 3% and other specified services at 5%.
Duty credit scrips to be freely transferable and usable for payment of customs duty, excise duty and service tax.
Debits against scrips would be eligible for CENVAT credit or drawback also.
Nomenclature of Export House, Star Export House, Trading House, Premier Trading House certificate changed to 1,2,3,4,5 Star Export House. – Some major overhauling of nomenclature and naming have been done. For instance, Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. The allocation of the status will now be based on US dollars, instead of Indian Rupees
The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings. – A new position called ‘Status Holder’ have been formulated, which will recognize and reward those entrepreneurs who have helped India to become a major export player. All IT and ITeS firms, Outsourcing companies and KPOs can rejoice.
Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as originating from India. – Tax and duty on Indian manufacturers have been reduced, to boost Make in India vision
Reduced Export Obligation (EO) (75%) for domestic procurement under EPCG scheme.
Inter-ministerial consultations to be held online for issue of various licences.
No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.
Validity period of SCOMET export authorisation extended from present 12 months to 24 months.

Impact on the Economy:

According to some experts the focus in this FTP has been “Simplicity And Stability”. Accordingly, the policy on the one hand seeks to realign the multiple schemes with the objective of reducing complexities. On the other had it want to promote the increased use of technology to reduce the transaction cost and manual compliances.

Supporters have given their verdict for this new FTP, stating it as ‘progressive’, ‘path breaking’ and ‘development friendly’ as exports of books, handicraft, handlooms, toys, textiles, defence and ecommerce platforms would be easier and faster.According to them, a big step is cleaning up the plethora of export promotion schemes and clubbing them under two schemes, one for goods (Merchandise Exports from India Scheme) and one for services (Services Exports from India Scheme).The duty scrips under these schemes come without conditions and can be freely transferred.

One significant announcement in the policy is that it will move away from relying largely on subsidies and sops. Critics however point out that, this is prompted by World Trade Organisation (WTO) requirements that export promotion subsidies should be phased out, but according to some experts there are ways of getting around it and other countries are doing it all the time.

There has been talk of boosting services exports for quite a few years now, but information technology and information technology-enabled services (IT/ITES) dominated the basket. The share of this segment in the overall export basket is 50 percent and 90 percent in the services export basket.

More importantly, this sector was overly dependent on western markets and, consequently, extremely vulnerable to even the smallest of developments there. The policy, fortunately, turns its attention to other sectors where India has inherent advantages – healthcare, education, R&D, logistics, professional services, entertainment, as well as services incidental to manufacturing.

By extending benefits under EPCG on domestic procurements and offering them more products under MEIS, the policy further seeks to incentives the exports. Right direction.

According to the Commerce Minister NirmalaSitaraman, It’s a focused policy, one in which exports through Make in India is underlined by looking at sectors that give greater employment and have high-tech value addition. That is because the intention is to join the global value chain and above all, the environment part, where you are looking at eco-friendly systems and producing wealth out of waste. So, the priority areas are technology-driven, labour-intensive-driven and environment-driven. You are also looking at traditional markets, emerging markets and diversifying into new markets.

Limitations Of Foreign Trade

Rapid Depletion of Exhaustible Natural Resources:

It could lead to a more rapid depletion of exhaustible natural resources.

As countries begin to up their production levels, natural resources tend to get depleted with the time and it could pose a dangerous threat to the future generation.

Import of Harmful Goods:

Foreign trade may lead to import of harmful goods like cigarettes, drugs, etc., which may harm the health of the residents of the country. For example, the people of China suffered greatly through opium imports.

It may Exhaust Resources:

International trade leads to intensive cultivation of land. Thus, it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources

Over Specialization:

Over specialization may be disastrous for a country. A substitute may appear and ruin the economic lives of millions

Danger of Starvation:

A country might depend for its food mainly on foreign countries. In times of war, there is a serious danger of starvation for such countries.

One Country Gains at the Expense of Other:

One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. For example, the Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century.

May Lead to War:

Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and Second World War.

Language Diversity:

Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade.

Problems of Indian Export Sector.

Primary Exporting:

Most of the developing countries, in its initial stage of development are exporting mostly primary products and thus cannot fetch a good price of its product in the foreign market. In the absence of diversification of its export, the developing countries have failed to raise its export earnings.

Un-Favourable Terms of Trade:

Another problem of trade faced by these developing countries is that the terms of trade are always going against it. In the absence of proper infrastructure and the quality enhancement initiative, the terms of trade of these countries gradually worsened and ultimately went against the interest of the country in general.

Mounting Developmental and Maintenance Imports:

The developing countries are facing the problem of mounting growth of its developmental imports which include various types of machineries and equipment’s for the development of various types of industries as well as a huge growth of maintenance imports for collecting intermediate goods and raw materials required for these industries. Such mounting volume of imports has been creating a serious problem towards round management of international trade.

Higher Import Intensity:

Another peculiar problem faced by the developing countries is the higher import intensity in the industries development resulting from import intensive industrialisation process followed in these countries for meeting the requirements of elitist consumption (viz., colour TVs, VCR, Refrigerators, Motor cycle, cars etc.). Such increasing trend towards elitist consumption has been resulting a huge burden of burgeoning imports in these developing countries, resulting serious balance of payment of crisis.

Lack of Co-ordination:

The developing countries are not maintaining a good co-ordination among themselves through promotion of integration economies grouping, formation of union etc. Thus in the absence of such co-ordination, the developing countries could not realize those benefits of foreign trade which they could have realised as a result of such economic grouping.

Steep Depreciation:

Steep depreciation of the currency with dollar and other currencies in respect of developing countries has been resulting in a considerable increase in the value of its imports which ultimately leads to huge deficit in its balance of trade

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) from the viewpoint of the Balance of Payments and the International Investment Position (IIP) share a same conceptual framework given by the International Monetary Fund (IMF). The Balance of Payments is a statistical statement that systematically summarises, for a specific time span, the economic transactions of an economy with the rest of the world (transactions between residents and non-residents) and the IIP compiles for a specific date, such as the end of a year, the value of the stock of each financial asset and liability as defined in the standard components of the Balance of Payments. We will not deal in this note with other relevant statistical concepts for operations overseas, particularly for financial institutions, such as exposure (foreign claims, international claims, etc.), which belong to the realm of the BIS statistics.3 Sections 2, 3 and 4 give an overview of FDI definitions, concepts and recommendations adopted by the IMF’s Balance of Payments Manual (5th Edition, 1993) and by the OECD’s Benchmark Definition of Foreign Direct Investment (3rd Edition, 1996). Both provide operational guidance and detailed international standards for recording flows and stocks related to FDI. Section 5 gives a quick overview of trends in FDI inward flows and stocks for the period 1980-2001. Section 6 reports on onward FDI flows for Spain, with particular attention to the financial sector. Finally a brief description of the main available sources of FDI is found in an annex.

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The “lasting interest” implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter. Direct investment involves both the initial transaction establishing the relationship between the investor and the enterprise and all subsequent capital transactions between them and among affiliated enterprises4 , both incorporated and unincorporated. It should be noted that capital transactions which do not give rise to any settlement, e.g. an interchange of shares.

Advantages of Foreign Direct Investment

Economic Development Stimulation.
Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.
Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.
Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.
Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.
Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
Reduced Disparity Between Revenues and Costs.
Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.
Increased Productivity.
The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.
Risk from Political Changes.
Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.
Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.
Higher Costs.
If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.
Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
Expropriation.
Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.
Negative Impact on the Country’s Investment.
The rules that govern foreign exchange rates and direct investments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.
Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitations.

New International Economic Order (NIEO)

At the Sixth Special Session of the United Nations General Assembly in 1975, a declaration was made for the establishment of a New International Economic Order (NIEO). It is regarded as “a turning-point in the evolution of the international community.”

NIEO is to be based on “equity, sovereign equality, common interest and co-operation among all States, irrespective of their social and economic systems, which shall correct inequalities and redress existing injustices, make it possible to eliminate the widening gap between the developed and the developing countries and ensure steadily accelerating economic and social development and peace and justice for present and future generations.”

Though the declaration on the NIEO by the General Assembly (GA) is of recent origin, the idea is not altogether a new one. In fact, a similar resolution was adopted by the GA itself long back in 1952. Again, similar demands were raised from time to time by the UNCTAD since its inception in 1964. A.K. Das Gupta, however, says that what is spectacular about the NIEO Declaration is its timing.

The NIEO aims at a development of the global economy as a whole, with the set up of interrelated policies and performance targets of the international community at large.

Origin of NIEO:

The movement for the establishment of the NIEO is caused by the existing deficiencies in the current international economic order and the gross failures of the GATT and the UNCTAD in fulfillment of their vowed objectives.

The present international economic order is found to be a symmetrical in its working. It is biased. It is favouring the rich-advanced countries. There has been over dependence of the South on the North. Rich countries tend to have major control over vital decision making in the matter of international trade, terms of trade, international finance, aids, and technological flows.

As a matter of fact, the basis for the NIEO is constituted by the U.N. Resolution in 1971, in the seventh special session on “Development and International Economic Co-operation” with various reforms in the area of international monetary system transfer of technology and foreign investment, world agriculture and cooperation among the Third World Countries.

The Resolution categorically mentions that “Concessional financial resources to developing countries need to be increased substantially and their flow made predictable, continuous and increasingly assured so as to facilitate the implementation by developing countries of long-term programmes for economic and social development.” It emphasises global interdependence. It seeks radical changes in allied social, economic, political and institutional aspects of international relations.

New developing sovereign countries of the South have insisted on the NIEO. It has been further supported by the non-aligned nations which vehemently criticized the politicalisation of development and trade issues by the developed nations. The developing nations are now asserting their right to participate in the decision making processes of the international institutions like the IMF, World Bank, GATT, UNCTAD, etc.

The origin of North-South dialogue for a new economic order may be traced back to over 30 years ago, at the Afro-Asian Conference at Bandung held in 1955.

However, the formal idea of the NIEO was put forward in the Algiers Conference of non-aligned countries in 1973. In 1975, a declaration for the establishment of NIEO was adopted along with a programme of action in the Sixth Special Session of the UNCTAD.

The North-South Dialogue:

In 1977, there was a negotiation between the North and South at the Paris talks. The developed countries agreed to provide an additional U.S. 1 billion towards the Aid Fund for the development of the poor nations.

In December 1977 the Willy Brandt Commission was set up with a view to review the issues of international economic development. The WB Commission’s Report (1980) stresses the need for North-South co-operation.

Beside establishment of a common development fund, its recommendations include strengthening the structure of development lending a code of conduct for the multinational co-operation as well as the need for intergovernmental co-operation in monetary and fiscal areas along with the trade policies. It also proposed for the increasing participation of developing nations in the decision-making processes at international level.

New developing sovereign countries of the South have insisted on the NIEO. It has been further supported by the non-aligned nations which vehemently criticised the politicalisation of development and trade issues by the developed nations. The developing nations are now asserting their right to participate in the decision making processes of the international institutions like the IMF, World Bank, GATT, UNCTAD, etc.

The origin of North-South dialogue for a new economic order may be traced back to over 30 years ago, at the Afro-Asian Conference at Bandung held in 1955.

The North-South Dialogue:

As Mehboob-ul-Haque observes, the demand for NIEO is to be viewed as a part of historical process rather than a set of specific proposals. Its important facets are the emergence of non-aligned movement, the politicisation of the development issue and the increased assertiveness of the Third World countries.

The NIEO led to a serious thinking on the part of the developed countries (DC) to solve the problems of trade of LDCs. There has been a move towards programmed actions in two directions:

Commodity Agreements, with a view to stabilise prices of exportable of LDCs; and
(ii) Compensatory Financing through IMF’s liberal loans to LDCs having deficits due to fluctuations in prices

Objectives of the NIEO:

In essence, the NIEO aims at social justice among the trading countries of the world. It seeks restructuring of existing institutions and forming new organisations to regulate the flow of trade, technology, capital funds in the common interest of the world’s global economy and due benefits in favour of the LDCs. It has the spirit of a ‘world without borders..

It suggests more equitable allocation of world’s resources through increased flow of aid from the rich nations to the poor countries.

It seeks to overcome world mass misery and alarming disparities between the living conditions of the rich and poor in the world as large.

Its aim is to provide poor nations increased participation and have their say in the decision-making processes in international affairs.

Among to other objectives, the NIEO envisages the establishment of a new international currency the implementation of SDR aid linkage, the increased stabilisation of international floating exchange system and the use of IMF funds as interest subsidy on loans to the poorest developing countries.

The crucial aim of the NIEO is to promote economic development among the poor countries through self- help and South-South co-operation.

The NIEO intends to deal with the major problems of the South, such as balance of payments disequilibrium, debt crisis, exchange scarcity etc.