Master of Business Administration - Semester 4IB0015: “Foreign Trade of India”

(Book ID: B1144)ASSIGNMENT

Q1. Write a note on India and World Trade.

India’s Globalization

The World Economic Outlook (WEO, IMF October 2007) observed that the recent expansionary phase in the global economy, with average growth of 5 per cent, was the longest since the early 1970s. The WEO, updated in January 2008, however, revised these estimates based on new PPP exchange rates from the 2005 international comparison programme (ICP). There is considerable uncertainty in quantifying the downside risk to global growth arising from the downturn in housing market and the sub-prime mortgage market crisis in the United States. Monetary policy actions by the United States and other developed countries seems to have contained its immediate impact, though more surprises in the next six months cannot be ruled out.

The Indian economy has been progressively globalizing since the initiation of reforms. Trade, an important dimension of global integration, has risen steadily as a proportion of GDP. Inward FDI has taken off and there is a surge in outward investment from a very low base, with net FDI continuing to grow at a good pace. The surge of capital flows in 2007-08 is a third indicator that testifies to the growing influence of global developments on the Indian economy. Capital flows, as a proportion of GDP, have been on a clear uptrend during this decade. They reached a high of 5.1 per cent of GDP in 2006-07 as compared to 3.1 per cent in 2005-06. This is a natural outcome of the improved investment climate and recognition of robust macroeconomic fundamentals like high growth, relative price stability, healthy financial sector and high returns on investment. Even as the external environment remained conducive, the problem of managing a more open capital account with increasing inflows and exchange rate appreciation surfaced.

The globalization of Indian enterprises and planting of the seeds for the creation of Indian multinationals have taken place in the last few years. Outward investment from India shot up to US $ 14.4 billion in 2006-07 from less than US $ 2 billion in the period 2003-04. The trend continued in the current year with outward investment of US $ 7.3 billion in April-September 2007. Net FDI flows were, therefore, modest at US $ 3.9 billion during this period. The proportion of payments to receipts under FDI into India was in the range of 0.7 per cent to 0.4 per cent in 2005-06 and 2006-07, respectively. This indicates the lasting and stable nature of FDI flows to India.

Further, India’s greater integration with the world economy was reflected by the trade openness indicator, the trade to GDP ratio, which increased from 22.5 per cent of GDP in 2000-01 to 34.8 per cent of GDP in 2006-07. If services trade is included, the increase is higher at 48 per cent of GDP in 2006-07 compared to 29.2 per cent of GDP in 2000-01 reflecting greater degree of openness.

In addition, trade with the top 12 trading partners increased by over 11.2 percentage points since 2001-02 to 53.8 per cent of total in 2006-07. The share of the United States, the largest trading partner, declined by 2.5 per cent points to 9.8 per cent in 2006-07, while China became the second largest partner in 2006-07 with its share increasing by 5.2 percentage points over the decade. China’s trade share during April-October 2007 is even higher than that of United States by Rs. 600 crore.

India has continued to favour multilateral trading arrangements which are both transparent and fair to the developing economies. However, the negotiations in the Ministerial Meeting were suspended in July 2006 due to differences in perceptions with respect to safeguarding the interests of low income and resources poor agricultural producers. WTO mini-ministerial meeting held in the last week of July 2008 in Geneva, Switzerland also failed to reach any conclusive agreement on agricultural products due to tough position taken by U.S.A. and European Countries.

Q2. Discuss the salient feature of foreign trade policy 2009-14.

Foreign Trade Policy 2009 – 2014

The main provisions of the policy are as follows:

1.Liberalization of Exports and Imports

The foreign trade enterprises are given freedom to export or import items of their choice without any restriction except for a few products.

The restrictions on exports take the form of item being:

a. Banned for exports

b. Restricted for export against an export license or subject to fulfillment of certain terms and conditions.

c. Export by State Trading Enterprises

Likewise, import of items has been liberalized in tandem with the provisions of the international trade agreement (Uruguay Round: GATT 1994). However, there are some restrictions on the import of few tariff lines. These restrictions are in terms of:

a. Items banned for import

b. Items restricted for import against licence or subject to restrictions on the grounds of health, safety and moral conduct

c. Items allowed for import through State Trading Enterprises.

2.Import of Capital Goods: New and Second Hand

The foreign trade firms are allowed to import new capital goods without any licence against payment of applicable import duty. The import of second hand capital goods has also been allowed against payment of applicable import duty freely without any restriction as to age of the capital good. Minimum depreciated value for plant and machinery to be re-located into India has been reduced from Rs. 50 crores to Rs. 25 crores.

3.Export-Import of Resticted Goods

Any goods, export or import of which is restricted under ITC(HS) may be exported or imported only in accordance with an Authorisation or in terms of a Public Notice issued in this regard. Every Authorisation shall contain terms and conditions which may include:

(a) Quantity, description and value of goods

(b) Actual User Condition

(c) Export Obligation

(d) Value addition to be achieved and

(e) Minimum export/import price

4.Importer-Exporter Code (IEC) Number

No person shall make any import or export without and IEC number unless specifically exempted under the FTP. IEC number can be obtained from the concerned regional authority of DGFT on filing of the application in the prescribed format and payment of a fee of Rs. 250/-. An application for IEC Number has to be made by Registered office in case of companies and Head Office in case of others. Only one IEC would be issued against a single PAN. An IEC Number allotted to an applicant shall be valid for all its branches/divisions/units/factories. In case an IEC Number is lost or misplaced, a duplicate copy may be obtained on an affidavit and on payment of a fee of Rs. 200/-

Free of Cost Exports

Status holders shall be entitled to export freely exportable items on free of cost basis for export promotion subject to an annual limit of Rs. 10 lacs or 2% of average annual export realization during preceding three licensing years whichever is higher.

5.Export Promotion Capital Goods Scheme (EPCG Scheme)

The scheme provides for import of both the new and second hand capital goods for the purpose of export promotion against payment of Zero custom duty for computer software and concessional custom duty of 3% in certain cases, of the CIF value of import of the capital good. No other duty is payable on such import. The zero duty EPCG Scheme will be in operation till 31.3.2011. Under this scheme:

· All export firms – manufacturer, merchant & service provider – are allowed to avail of this facility.

· Merchant exporter must be tied to a supporting manufacturer.

· Capital goods are defined to include tools, jigs, dies fixtures, spares and moulds.

· Second hand capital goods are also allowed for import without any restriction as regards its age.

· Import of capital goods shall be subject to Actual User Condition till the export obligation is completed.

· Import of capital goods is allowed for pre–production, production and post production purposes

6.Duty Exemption Scheme

This scheme provides for duty free import of inputs required for the manufacture of export product. Duty Exemption Scheme consists of

1) Advance Authorization Scheme and

2) Duty Free Import Authorization Scheme

Advance Authorization Scheme

The scheme provides for duty free import of inputs, which are physically incorporated in the export product as per the standard Input-Output norms (SION) unless specified otherwise. Advance Authorization can be issued to both the manufacturer – exporter and the merchant exporter tied to a manufacturer. This Authorization is issued subject to Actual User Condition.

Under Advance Authorization, import of inputs is allowed without payment of basic customs duty, education cess, additional customs duty, anti-dumping duty and safeguard duty if any.

The Advance Authorization or the materials imported there under are not allowed for transfer even after completion of export obligation.

Such Authorization are issued with a minimum value addition of 15%. However, in the case of exports for which payments are not received in freely convertible currency, the same shall be subject to value addition norms as specified in Appendix –11 of the Handbook of Procedures Vol. I., 2009-2014.

Duty Free Import Authorization (DFIA) Scheme

Under this scheme the import of inputs used in the manufacture of export products is allowed duty free. A minimum of 20% value addition is required for such Authorization except for items in gems and jewellery sector.

However, under this scheme, Authorization or the import of inputs, which is issued under Actual User Condition initially, is allowed for transfer after the export obligation is fulfilled.

The Duty Drawback is permissible under this scheme also.

7.Duty Remission Scheme

This scheme enables post export replenishment scheme / remission of duty on inputs used in the export product. Duty Remission Scheme consists of 1) DEPB (Duty Entitlement Pass Book Scheme) and 2) DBK (Duty Drawback Scheme)

i) Duty Entitlement Pass Book Scheme (DEPB)Under this scheme, exporter is given relief for the incidence of Custom Duty and Special Additional Duty on import content of the export product. This facility is given to an exporter on post - export basis and is given by way of grant of import duty credit that can be used to pay for import duties on the import of inputs irrespective of whether the item of input is used in export product. The import duty credit for notified products is expressed as a percentage of FOB value of exports. These rates are notified by Director General of Foreign Trade (DGFT) from time to time.

The DEPB and/or the items imported against it are freely transferable. The DEPB license is valid for a period of 24 months.

ii) Duty Drawback (DBK)

DBK assistance is provided to the exporters as a reimbursement of the incidence of excise & customs duty levied on the raw materials used for the production of the products that are exported. The Ministry of Finance, Department of Revenue announces the rates of drawback every year for each item. The Drawback is sanctioned by the Customs Department through which shipments are effected on submission of relevant documents as indicated in the drawback schedule notified by the Ministry of Finance, Department of Revenue, Government of India.

8.Import and Export of Trade Samples

No authorisation is required for import of bonafide technical and trade samples of items of restricted items except vegetable seed, bees and new drugs. Samples of tea not exceeding Rs. 2,000/- (CIF) in one consignment is allowed without an Import Authorisation by any person connected with Tea industry.

Duty free import of samples upto Rs. 1,00,000/- for all exporters (Rs. 3 lacs for Gems and Jewellery exporters) is allowed.

Exports of bonafide trade and technical samples of freely exportable items is allowed without any limit. An application for export of samples or exhibits, which are restricted for export, may be made to DGFT.

9. Establishment of Agri-Export Zones

The Export Import Policy 2002-2007 had provided for establishment of Agri-Export Zones to promote the export of agricultural products. Such zones will be operated by State Government with the support of Central Government. The Zones provide for setting up common infrastructural facilities such as sorting, grading, polishing, packaging, cold storage, transport equipment/ refrigerated vans, vapour treatment, heat treatment plant, X-Ray screening facility etc.

10. Service Exports

“Services” include all the 161 tradable services covered under the General Agreement on Trade in Services where payment for such services is received in free foreign exchange. A list of services is given in Appendix – 10 of Handbook of Procedures (Vol.1.) All provisions of this Policy shall apply mutatis mutandis to export of services as they apply to goods, unless otherwise specified.

Exporters of 15 specific services listed in Sl. No. 34 of Appendix 2 of Handbook of Procedures (Vol 1) are required to register themselves with Services EPC. However, Software exporters shall register themselves with Electronic and Software Export Promotion Council. Other service exporters are required to register themselves with Federation of Indian Export Organizations (FIEO).

Q3. Write a note on Export Credit Guarantee Corporation (ECGC) with its benefits for exporters.

Export Credit and Guarantee Corporation of IndiaExport Credit and Guarantee Corporation of India Ltd. () acquired its present name in 1983. Its origin can be traced to the establishment of Export Risks Insurance Corporation (ERIC), in July 1957. Later, it was transformed into ECGC Ltd. in 1964.The primary goal of ECGC is to support and strengthen the export promotion drive in India by (a) providing a range of credit risks insurance covers to exporters against loss in export of goods and services and (b) offering guarantees to banks and financial institutions to enable exporters obtain better facilities from them.

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. The commercial risks of the foreign buyer going bankrupt or losing his capacity to pay are heightened due to the political and economic uncertainties. Export Credit Risk insurance is designed to protect exporters from the consequences of the payment risks both political and commercial and to enable them to expand their operations/overseas business without fear of loss. ECGC provides export credit risk insurance to Indian exporters.

Policies offered by ECGC

The policies issued by the ECGC can be divided broadly into four groups:

i) Standard Policies issued to exporters to protect them against payment risks involved in exports on short-term credit;

ii) Specific Policies designed to protect the firms against payment risks involved in (a) exports on deferred terms of payment, (b) services rendered to foreign parties and (c) construction works and turnkey projects undertaken abroad;

iii) Financial guarantees issued to bank in India to protect them from risks of loss involved in their extending financial support to exporters at the pre-shipment as well as post-shipment stages; and

iv) Special schemes, viz Transfer Guarantees meant to protect banks, which add confirmation to Letters of Credit opened by foreign banks. Insurance cover for Buyer’s Credit, Overseas Investment Insurance and Exchange Fluctuation Risk Insurance.

Details of various policies shall be discussed in a subsequent section on Role of ECGC.

Q4. Name the various thrust export products from India.

Thrust Export Products from India The exports from India are broadly classified into the following categories namely: 1. Agriculture and Allied Products

2. Ores and Minerals

3. Manufactured goods

4. Crude & Petroleum Products

5. Others & Unclassified Items

The contribution of each of the above five categories to the total exports of India for the years 2004-2005, 2005-2006 and 2006-2007 is given in Table 9.1

Product Group 2004-05 2005-06 2006-07

1. Agriculture & Allied Products 2. Ores & Minerals 3. Manufactured Goods

4. Crude Oil & Petroleum Products 5. Misc. Goods

The break-up of the major export product groups and their contribution to total exports during the years 2004-2005 and 2005-2006 are given in Table 9.3. A study of the contribution of various products and their rates of growth suggests that the following are the main products of exports from India. 1. GEM & JEWELLERY

2. READY-MADE GARMENTS

3. LEATHER PRODUCTS

4. ENGINEERING GOODS 5. CHEMICALS AND ALLIED PRODUCTS

6. HANDICRAFTS

7. TEXTILES AND HOME-FURNISHINGS

8. MARINE PRODUCTS

9. SPICES

10. TEA AND COFFEE

11. RICE (BASMATI AND NON-BASMATI)

12. TOBACCO UN-MANUFACTURED

13. FEEDING STUFF FOR ANIMALS

Q5.What is the support given to status holders by the government?

Privileges of Export and Trading House Status Holders

A Status Holder shall be eligible for privileges as under:

i) Authorization and Customs Clearances for both imports and exports on self-declaration basis;

ii) Fixation of Input-Output norms on priority within 60days;

iii) Exemption from compulsory negotiation of documents through banks. Remittance / Receipts, however, would be received through banking channels;

iv) 100% retention of foreign exchange in EEFCaccount;

v) Exemption from furnishing of BG in Schemes under FTP;

vi) SEHs and above shall be permitted to establish Export Warehouses, as per DoR guidelines.

vii) For status holders, a decision on conferring of ACP Status shall be communicated by Customs within 3 0days from receipt of application with Customs.

viii) As an option, for Premier Trading House (PTH), the average level of exports under EPCG Scheme shall be the arithmetic mean of export performance in last 5 years, instead of 3 years.

ix) Status Holders of specified sectors shall be eligible for Status Holder Incentive Scrip

x) Status Holders of Agri. Sector shall be eligible for Agri. Infrastructure Incentive Scrip under VKGUY.

Q6. Write short notes on (a) WTO (b) IMF

WTOWTO was established on 1st January 1995. WTO held its last round of international trade negotiations at DOHA in July 2006. WTO today has 153 members.Objectives of W.T.O.

The objectives of WTO are as follows:

1. To oversee the implementation of all the multilateral and plurilateral agreements negotiated during the Uruguay Round 1993. (Leading to GATT ’94)

2. To raise standards of living and income, ensuring full employment.

3. To expand production and trade.

Functions of W.T.O.

1. It shall facilitate the implementation, administration and operation of the Uruguay Round legal instruments and of any new agreements that may be negotiated in the future.

2. It shall provide a forum for further negotiations among member countries on matters covered by the agreements as well as on new issues falling within its mandate.

3. It shall be responsible for the settlement of differences and disputes among its member countries.

4. It shall be responsible for carrying out periodic reviews of the trade policies of its member countries.

The Uruguay Round: Multilateral Trading System

The most significant outcome of the Uruguay Round has been the strengthening of Rule Based Multilateral Trading System. This system is based on a set of four rules, as explained below:

1. Protecting the domestic industries by tariffs only.

2. Tariff should be reduced and bound against further increases.

3. Trade should be conducted according to the Most Favoured Nation Clause.

4. National Treatment Rule.

IMF

International Monetary Fund (IMF)

The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

Since the IMF was established its purposes have remained unchanged but its operations – which involve surveillance, financial assistance, and technical assistance – have developed to meet the changing needs of its member countries in an evolving world economy.