A country’s foreign trade policy relates to various aspects of its exchange with the rest of the world. The foreign trade policy of a developing country like India is essentially growth-oriented. It is guided by the country’s general objective of industrialisation.
Such a policy aims at achieving the twin objectives of – (a) promoting exports and (b) restricting as well as substituting imports. Thus, there are two main constituents of foreign trade policy- (a) Import policy and (b) export policy.
The import policy deals with four questions – (a) what products should be imported? (b) What should be their quantities? (c) Who should be allowed to import? (d) From which source the imports may be allowed? India requires a development-oriented import policy. Such a policy cannot be a laissez- faire policy, i.e., allowing unrestricted imports of all kinds.
The proper import policy for a developing country includes measures – (a) encouraging certain essential imports; (b) discouraging unessential imports; (c) keeping the quantities of imports within the specified limits; and (d) adopting all sorts of import instruments, like tariffs, quotes, licenses, etc., for the implementation of import policy.
After independence, India’s import policy has been formulated keeping in view- (a) the limited foreign exchange reserves of the country; (b) shortages of essential commodities in the country; (c) capital goods requirements for the development of basic and heavy industries in the country; (d) scope of import substitution; and (e) needs of export industries. Broadly, there are two aspects of government’s import policy- (a) import restrictions and (b) import substitution.
Although import policy during the planning period has been varying from time to time, yet its basic growth-oriented nature remained unchanged.
Various developments of the import policy under five year plans are given below:
1. Import Policy during 1948-52:
During the immediate post-independence period (1948-52), a restrictive import policy was followed towards Dollar areas because of the existing Dollar scarcity in the country.
2. Import Policy in First Plan:
During the First Plan, the government adopted a liberal import policy, resulting in large imports of consumer goods and capital goods. This led to foreign exchange crisis in the country.
3. Import Policy in Second Plan:
Due to unprecedented rise in imports during 1956-57 and 1957-58, the government was forced to impose restrictions on imports, particularly of consumer goods.
4. Mudaliar Committee (1962):
On the recommendations of the Import and Export Policy Committee (1962) headed by Mr. Mudaliar, the import policy was broadened. The Committee recommended that- (a) facilities should be provided for the import of maintenance and developmental goods which are essential for the development of industries; and (b) priority should be given to the new industries, particularly the import substituting industries and export-oriented industries.
5. Broad-Based Import Policy after Devaluation:
After the devaluation of rupee in June 1966, imports were liberalised in respect of export industries, capital building industries and the industries catering the needs of common people, i. e., sugar and cotton textiles. Provision was also made for the large scale import of agricultural inputs like fertilisers, seeds, pesticides, etc. This type of selective but broad-based import policy continued till 1977-78.
6. Import Liberalisation Policy:
The year 1977-78 saw the beginning of the phase of import liberalisation. The main features of this policy of import liberalisation are- (a) Priority was given to the import of capital goods and other inputs for export industries and essential goods of mass consumption. (b) The list of Open General License (OGL) was enlarged to include 570 items, (c) Special considerations were given to small units in matters of imports (d) Administrative procedures were simplified to reduce the delay in obtaining import licenses.
Import substitution has been the important constituent of India’s import policy during the entire planning period. Import substitution means production at home what is being imported from abroad. The policy of import substitution aims at achieving two broad objectives; (a) to save foreign exchange for the import of more essential goods; (b) to achieve self-sufficiency in the production of as many goods as possible.
Through time, three stages of the policy of import substitution may be distinguished- (a) In the earlier stage there was import substitution of consumer goods. (b) In the second stage, the emphasis shifted to the substitution of the import of capital goods, (c) In the third stage, which continues till today, the emphasis is on reducing the dependence on imported technology by developing the indigenous technology.
The policy of import substitution has significant impact on the structure of imports and industrial growth. As a result of this policy, many products which were previously imported are now being produced within the country.
The production of a number of products like iron and steel, automobiles, railway wagons, textile machinery, machine tools, etc. has increased considerably as a result of this policy.
The policy of import substitution has serious drawbacks:
(a) The import substitution policy is accompanied by strict control over imports. Under the system of protection, many industrial units became inefficient, thus producing low quality goods at high costs.
(b) Under the cover of protection, some non-priority industries (such as, T.V. sets, refrigerators, synthetic fibres, etc.) developed on uneconomic scale, ignoring the principle of social essentiality,
(c) The rate of industrial production which accelerated before the mid sixteen showed a declining tendency later on. The decline was larger in the basic capital goods industries as compared to the consumer goods industries.
(d) Moreover, exports earnings did not rise enough to meet the increasing import bill thus worsening the balance of payments position.
As a consequence of the limitations of import substitution policy and other unhealthy developments, the government, since early 1970’s has been emphasising the importance of export promotion measures in the plans. At present, the strategy of export promotion has been given priority over that of import substitution in the country’s import-export policy.
Export policy refers to the measures influencing the level and composition of exports of a country. India’s export policy has been primarily that of promoting exports. The broad strategy has been to identify sectors, industries and products having good export potential and provide a policy framework for their export growth.
An appropriate foreign trade policy framework should include:
(a) Promotion of the products having lasting comparative advantage;
(b) Freeing of the exports from the adverse effects of import restrictions, other regularly measures and indirect taxes, etc.;
(c) Restricting import to essential items,
(d) Efficient import substitution;
(e) Improvement in the overall productivity and
(f) Resources mobilisation and better management of domestic demand.
India has been following a policy of export promotion. Its export strategy is guided by the considerations of- (a) promoting the exports of those projects in which the country has long term comparative advantage; (b) encouraging diversification in terms of products and markets; (c) increasing the bargaining power of exports; and (d) reducing the costs of exports. Keeping in view these guidelines, the government of India has undertaken a series of measures for export promotion.
These measures can be discussed under two main headings:
(A) Measures Relating to Fiscal, Monetary and Industrial Policies:
The government has undertaken various measures relating to fiscal, monetary and industrial policies to promote exports of the country.
They are as given below:
I. Duty Drawback Scheme:
The term ‘duty drawback’ means repayment of duties earlier collected. Under the duty drawback scheme, the duties of customs and central excise paid on the raw material and components used in export production are reimbursed to the exporters.
About 80% of the amount disbursed is determined on the basis ‘all industry’ rates of draw-backs which applies to all goods irrespective of the manufactures. The remaining 20% is determined according to the ‘brand rates’ which applies to the products of the individual manufactures.
From February, 1986, the government has simplified the procedure of drawback disbursement at all custom houses. Drawback claims are now sanctioned within 24 hours of presentation and the amount is then transferred to the bank account of the exporter with 15 days. The duty drawback schedule with respect to drawback rates and the export products has been revised from time to time.
II. Cash Compensatory Support (CCS):
Cash assistance for exports, later on termed as Cash Compensatory Support (CCS), was introduced in 1966. The scheme is selective and the assistance is given in the form of compensation to the Indian exporters for unrelated indirect taxes paid on inputs of the exported products and for certain other specified disadvantages. The scope of the scheme has been steadily extended over the years.
In July, 1986, a new scheme of CCS has been introduced.
The grant of CCS under the new scheme will be based on the following six principles:
(i) The refund of indirect taxes, including sales tax, etc. on inputs that are not refundable through the duty drawback mechanism will continue to be the main element for determination of the CCS rates.
(ii) Compensation for product/market development will be given in a highly selective manner.
(iii) Compensation for higher incidence of rate of interest on working capital for export production and pre-shipment/ post-shipment credits has been taken off the CCS scheme and will be provided under a separate scheme being operated by the Reserve Bank of India.
(iv) For fruits and vegetables which are perishable in nature, special elements of compensation will be the high cost of transportation within India,
(v) For handicraft items, value added by labour will be the main factor for determining CCS rates.
(vi) There would be neutralisation of discriminatory higher freight rates.
Under this new scheme, approximately 260 items have been granted CCS in eight products groups.
III. 100 Percent Export-Oriented Units (EOUs) Scheme:
The government has introduced a 100 per cent export-oriented units (EOUs) scheme from 31 December, 1980 in order to ensure local advantage in production and provide all facilities of a free trade zone.
Various measures taken to improve the performance of the EOUs are:
(i) These units are permitted to sell 25% of their production in the domestic market.
(ii) These units have been extended the benefit of tax holiday as is admissible to the units located in the Export Processing Zones.
(iii) These units have been permitted to sub-contract part of their production for job work to units in the domestic tariff area in order to establish linkage with indigenous industry and installed capacity.
(iv) These units have been exempted from the operation of the Export Control Order.
(v) In order to reduce the cost of bindings, concessional charge is made where there is cluster of EOUs.
(vi) The benefits of 100 per cent EOUs scheme have also been extended to mining projects and integrated projects involving mining.
IV. Industrial Licensing Policy:
Various facilities relating to industrial licensing policy have been extended to export units with a view to improve their general industrial competitiveness and efficiency.
Important facilities are:
(a) The policy of broad-banding has been extended to a large number of items so as to provide production units with requisite flexibility to adjust their production to the prevailing international demand.
(b) Exemption from the requirement of licensing has been granted for any expansion of capacity exclusively for export production,
(c) Liberal approach is adopted for constant up gradation of technology in the key sectors.
V. Replenishment Licenses:
There is a separate import policy to allow import of necessary inputs, i.e., raw materials, machinery, etc., for the promotion of export production. The purpose of this policy is to provide, through replenishment (REP) licenses, the imported materials required in the manufacturing of products for export.
A REP license allows the exporters to obtain the items that are either canalised or restricted in the import policy. Recently, the scheme of REP licences has been made more flexible. These licences are freely transferable. The range of export products qualifying for replenishment has been widened.
VI. Supply of Inputs at International Prices:
To encourage export production, the government has started a scheme of supplying selected indigenous raw materials at international prices. Under this scheme, the difference between the domestic price and the international price is reimbursed to the exporter. This scheme covers items like polyester, sulfuric acid, rubber, raw cotton, iron and steel; diesel; etc.
VII. Transport Facilities:
Efforts have been made to provide transport facilities to the exporters. The exporters can complete all export formalities and handover their cargo containers at Inland Container Depots (ICDs) established at Delhi, Bangalore, Coimbatore, Anaparty, Guntur, Guwahati and Ludhiana. These ICDs have all facilities of dry port and thus facilitate the movement of exports and imports.
VIII. Free Trade Zones:
Free trade zones or export processing zones are intended to provide an internationally competitive duty-free environment for export production. Earlier there were two Free Trade Zones (FTZs), i.e., Kandla Free Trade Zone (KAFTZ) at Kandla (Gujarat) and Santacruz Electronics Export Processing Zone (SEEPZ) at Santacruz (Bombay).
Encouraged by the experience of these two zones, the government has set up five new zones, i.e., Cochin Export Processing Zone (CEPZ) at Cochin, Chennai Export Processing Zone (MEPZ) at Chennai, Falta Export Processing Zone at Falta Noida Export Processing Zone (NEPZ) at Noida, and Visakhapatnam Export Processing Zone (VEPZ) at Visakhapatnam.
IX. Export Finance:
The government and Reserve Bank of India have taken various measures to extend finance to the exporters at reasonable rate of interest. The exporters can get both pre-shipment and post-shipment credit from commercial banks at concessional interest rates.
X. Export-Import Bank (EXIM):
A specialised Export-Import Bank has been set up to facilitate export finance. The bank has been supporting suppliers’ credit as well as providing buyers’ credit. Suppliers’ credit occurs where Indian exporters offer credit directly to the overseas importers. Buyers’ credit occurs when the EXIM Bank directly lends to an overseas buyer. The lending rate has been reduced over the years.
(B) Institutional Arrangements:
The government has established several specialised organisations for export promotion. Important among them are:
I. Commodity Boards:
Commodity Boards are statutory bodies and are responsible for production, development and export of certain commodities. At present, there are five such Boards dealing with tea, coffee, rubber, spices and tobacco.
II. Export Promotion Council:
Exports Promotion Council aims at securing the co-operation of consumers, producers and exporters in the country for export promotion. The councils perform both advisory and executive functions. At present, there are 20 such Councils functioning in the country.
III. Export Houses:
Export Houses specialise in export trade. The export house certificates are issued to those exporters who fulfill the minimum prescribed requirements in terms of their export performance during the last three years.
IV. Central Advisory Council on Trade:
The Council was constituted on February 15, 1987 to advise the government on matters relating to- (a) export and import policy programmes; (b) operation of import and export trade controls; (c) organisation and development of commercial services (d) organisation and expansion of export production.
V. Federation of Indian Export Organisations:
It is an apex body of various export promotion organisations and institutions. It functions as primary servicing agency to provide integrated assistance to the government recognises export houses and has a central coordinating agency in services in the country. The Federation has its headquarters at New Delhi.
VI. Trade Development Authority:
The Trade Development Authority (TDA) was set up in July, 1970 with its headquarters at New Delhi. Its Primary objective is to induce and organise entrepreneurs, largely in medium and small scale industries, to develop their individual export capabilities.
VII. Indian Institute of Packing:
The Indian Institute of Packing was established in 1986 to- (a) undertake research on raw materials for the packing industry; (b) organise training programmes on packing technology and consultancy services for the industry; and (c) stimulate consciousness of the need for good packing. It has its head office in Bombay and two regional offices, one in Madras and the other in Calcutta.
VIII. Indian Institute of Foreign Trade:
The Indian Institute of Foreign Trade, New Delhi, is primarily engaged in- (a) training of personnel in modern techniques of international trade (b) organisation of marketing research, area surveys, commodity surveys and market surveys; and (c) dissemination of information arising from its activities relating to research and market studies.
IX. Export Inspection Council:
The Export Inspection Council is a statutory body set up in Calcutta to adopt measures for the introduction and enforcement of quality control and compulsory pre-shipment inspection of various exportable commodities.
X. Indian Council of Arbitration:
The Indian Council of Arbitration was set up in 1965 in New Delhi to- (a) promote arbitration as a means of settling commercial disputes and (b) popularise arbitration among the traders.
XI. Export Credit and Guarantee Corporation of India:
The Corporation was originally set up 1957 as Export Risk Insurance Corporation. Later on, in January 1964, it was transformed into Export Credit and Guarantee limited and in December 1983 again renamed as Export Credit and Guarantee Corporation of India Limited. Its aim is to promote exports from India by providing export credit insurance and guarantee facilities to Indian exporters and commercial bankers.
XII. Trade Fair Authority of India:
The Trade Fair Authority of India (TFAI) was set up on March 1, 1977 with the objective of giving a new orientation to the country’s trade promotion through fairs and exhibitions. The main functions of TFAI are; (a) the participation in the international trade fairs; (b) holding exclusive Indian exhibitions abroad; (c) participation in international fairs; and (d) organisation of commercial publicity through mass media. TDA has been merged with TFAI in January 1992 to form a new organisation under the name of India Trade Promotion Organisation (ITPO).
XIII. State Trading Corporation:
The State Trading Corporation (STC) was set up in 1956. Its primary objective is to diversify the country’s foreign trade to enlarge the scope of India’s exports and to arrange for essential imports.
Its main activities are directed towards the- (a) diversification of exports; (b) expansion of existing markets; (c) development of new markets for traditional and non-traditional production; (d) undertaking price support operations to protect the interests of the producers; (e) buffer stocking to ease the problem of shortage of essential items; and (f) managing various items of exports and imports channelised through the government.
From a small beginning in 1956, the STC has been continuously enlarging and diversifying its activities. The total turnover of the STC in 1993-94 was Rs. 1096 crores. This consisted of exports worth Rs. 755 crores, imports worth Rs. 258 crores and domestic sales worth Rs. 83 crores.
XIV. Other Public Sector Agencies:
In addition to the STC, there are some other public sector agencies in India to promote country’s export trade. They are- (a) Minerals and Metals Trading Corporation (MMTC); (b) Project and Equipment Corporation (PEC); (c) Cashew Corporation of India; (d) Handicrafts and Handloom Export Corporation; (e) Mice Trading Corporation; (f) State Chemical and Pharmaceutical Corporation of India.
XV. National Centre for Trade Promotion:
National Centre for Trade Promotion (NCTP), a specialised organisation utilising modern methods of storage and collection of trade data was set up in March 1995. Its objectives are to establish linkages with export promotion bodies and collection, value-addition and dissemination of trade data among interested parties.
Success of Export Promotion Policy:
India’s export promotion policy has been successful in achieving its objectives in many ways:
(i) There has been a considerable increase in India’s export from Rs. 600 crores in 1950-51 to Rs. 1535 crores in 1970-71, Rs. 6711 crores in 1980-81 and Rs. 32527 in 1990-91.
(ii) Composition of exports has changed from primary products like jute, leather, etc. to manufactured goods, e.g., engineering goods.
(iii) Direction of Indian exports has also changed from a few markets in U.K. and U.S.A. to a large number of markets in other countries.
(iv) Schemes of export assistance have enabled the exporters of non-traditional products to compete in the world market.
(v) The government undertook special measures to encourage non-traditional exports. Important among them are- (a) export of capital goods on deferred payment terms; (b) establishment of joint ventures abroad; (c) supporting export of consulting services; (d) establishing of 100% export oriented ventures in free-trade zones.
(vi) The policy of imposing export obligations on all units in selected industries has enforced them to develop export markets for their products.
(vii) The exchange rate policy of the government (such as devaluation of rupee in 1966 and in 1991) has direct impact on the expansion of exports.
Difficulties in Promoting Exports:
In spite of the government’s best efforts to promote exports, Indian exports face a number of external as well as internal difficulties in increasing their exports:
The external difficulties in the way of India’s export promotion efforts are as given below:
(i) Primary products have constituted a major portion of Indian exports for a very long time and the international demand for these products in general has remained stagnant.
(ii) Growth of synthetic substitutes in case of jute and cotton textile industries has also considerably reduced international demand for these products.
(iii) There has been a deterioration in the terms of trade and fluctuations in the international prices for primary products.
(iv) Moreover, India has to face severe competition from other underdeveloped countries in regard to the export of primary products.
(v) Industrially advanced countries have imposed restrictions on the entry of Indian exports by adopting tariff system. The tariff rates become increasingly higher as one moves from raw material to manufactured goods.
II. Internal Difficulties:
The internal difficulties in expanding export are- (a) high prices of Indian exports; (b) poor quality of products due to low technology; (c) decline in the exportable surplus due to growing domestic demand; (d) inadequate publicity in the foreign markets about Indian exports; and (e) absence of long-term and stable export strategy.
Trade Policy during Nineties:
Trade Policy 1991:
In 1991, the Government of India made a departure from the existing foreign trade policy which had been formulated in a system of administrative controls and licences. The government realised that the prevailing system, which includes a bewildering number and variety of lists, appendices and licences, had led to delays, wastes, inefficiencies and corruption.
As the Commerce Minister, Mr. P. Chidambaram, remarked- “Human intervention-described as discretion-at every stage, has stifled enterprise and spawned arbitrariness.” The new liberalised trade policy, which was announced on July 5, 1991, was formulated in a ‘transparent and free’ system and introduced drastic trade reforms.
The main features of the new trade policy are given below:
(i) Cash compensatory scheme (CCS) has been suspended with effect from July 3, 1991. In fact, CCS has become redundant in the light of substantial liberalisation of trade regime and depreciation of the rupee.
(ii) Replenishment licensing scheme (Rep) will become the principal instrument for export-related imports. It will now be called Exim scrip and can be freely traded.
(iii) All exports will have a uniform Rep rate of 30% of freight on board (FOB) value. This uniform rate is much higher than the existing rates ranging from 5 to 20% of the FOB value. This would mean that the exporters bringing in foreign exchange can use 30% of their earnings to import goods. This is the Rep license or Exim scrip, which can now be freely bought and sold.
(iv) The new Rep scheme will give maximum incentive to exporters whose import intensity is low (like agricultural exporters). The exporters who do not need to import can make lot of money by selling his Exim scrip’s in the market at a premium.
(v) All supplementary licenses stand abolished except in the case of the small scale sector and for the producers of life- saving drugs/equipment. These two categories would be entitled to import both under open general license (OGL) and through supplementary licenses.
(vi) All additional licenses granted to the export houses stand abolished. However, they will enjoy a Rep rate of 30% of the FOB value and will be granted an additional Rep rate of 5% of the FOB value.
(vii) All items which figure in lists like the limited permissible list will now be imported through the Rep route.
(viii) Unlisted OGL contained in the Exim policy stand abolished and all items under this category will be imported through the Rep scheme.
(ix) Advance licensing for obtaining imports for exports remain open. However the Rep rate for advance licence exports has been increased from 10% of the net foreign exchange (NFE) to 20% of NFE.
(x) All import licensing for capital goods and raw materials except for a small ‘negative list’ will be removed in three years.
(xi) All items will be decanalised except that are essential.
(xii) Financial institutions would also be allowed to trade Exim scrip’s. In due course, the Exim scrip will be replaced with foreign exchange certificates which will be more easily tradable.
(xiii) The rupee was expected to be fully convertible on the trade account in three to five years.
In short, the 13-point new trade policy aimed at- (a) suspending the cash-compensatory scheme; (b) making the replenishment licensing (Rep) scheme freely tradable; and (c) proposing to make the rupee fully convertible.
LERMS and Rupee Convertibility:
The Liberal Exchange Rate Mechanism System (LERMS) was introduced in the Budget for 1992-93. This was a dual exchange rate system under which 40% of foreign exchange earnings were to be surrendered at the official rate while the remaining 60% were to be converted at the market- determined rate.
The foreign exchange surrendered at the official rate was to be used for the import of essential items and the foreign exchange converted at the market rate was to be used to finance all other imports. Thus LERMS introduced partial convertibility of rupee.
In 1993-93 Budget, the government announced full convertibility of rupee on trade account. With this the dual exchange rate system has been replaced by a unified exchange rate mechanism. The new mechanism allows all exporters and other foreign exchange earners to convert 100% of their earnings at market rate.
Finally, in August 1994, the government announced full current account convertibility and thus completely liberalised the invisible payment. With this India attains Article VIII status of IMF.
Export-Import Policy 1992-97:
A 5-year export-import policy was announced by the government on 31 March, 1992. The direction of this policy was towards fewer restrictions, greater freedom to trade and less administrative controls. The aim of the new policy was to provide a boost to exports and to lay a path for self- sustained growth of the economy.
The main objectives of the new policy are:
(a) To establish the framework for globalisation of India’s foreign trade;
(b) To promote the productivity, modernisation and competitiveness of Indian industry and thereby to increase its export capabilities,
(c) To encourage the attainment of high and internationally accepted standards of quality and thereby increase the image of India’s products aboard;
(d) To increase India’s exports by facilitating access to raw materials, intermediates, components, consumables and capital goods from the international market;
(e) To promote efficient and internationally competitive import substitution and self-reliance under a deregulated framework for foreign trade;
(f) To eliminate or minimise quantitative, licensing and other discretionary controls in the framework of India’s foreign trade;
(g) To foster the country’s research and development and technological capabilities, and
(h) To simplify and streamline the procedures governing exports and imports.
New Import Policy:
Main features of the new import policy are:
(a) All items other than those mentioned in the Neglected List can be imported freely.
(b) Capital goods, raw materials, intermediates, components, consumables spare parts, accessories, instruments and other goods may be imported without any restriction,
(c) Second hand capital goods and other second-hand goods shall not be imported unless permitted by this policy or in accordance with a license issued.
(d) Import of certain specified capital goods or parts thereof may be sent abroad for repairs and reimported without a license.
(e) Construction machinery, equipment’s, related spares, tools and accessories used in overseas projects can be imported without a license after the completion of the project.
New Export Policy:
Main features of the new export policy are:
(a) Due to convertibility of rupee, the Exim scrip has been abolished.
(b) The definition of deemed exports has been revised and benefits such as Duty Exemption Scheme, Duty Drawback Scheme, refund or terminal excise duty has been extended,
(c) The diamond, gem and jewellery export promotion schemes have been retained,
(d) The export promotion capital goods (EPCG) scheme has been liberalised,
(e) The role of export promotion councils has been recognised.
(f) In the Modified Duty Exemption Scheme, the scope has been enlarged by way of introduction of the value- based advance licences in addition to the quantity- based scheme already in existence.
(g) A new scheme called ‘Self- declared Pass Book Scheme’ has been introduced. Under this scheme, the eligible exporters may obtain a pass-book and effect import on the basis of self-declaration with regard to item, quantity and value,
(h) Export oriented unit scheme and export processing zones have been liberalised. These schemes have been given greater autonomy and flexibility and have been extended to horticulture, agriculture, aquiculture, animal husbandry or similar activities.
The new export-import policy 1997-2002 (coterminous with the Ninth Plan) was announced by the Government of India on March 31, 1997.
The main features of this policy are given below:
The new policy seeks to consolidate the gains of the previous policy and to carry forward the process of liberalisation.
Its main objectives are as follows:
(i) To accelerate the country’s transition to globally-oriented vibrant economy to derive maximum benefits from expanding global opportunities;
(ii) To stimulate sustained economic growth by providing access to essential raw-materials, intermediates, components, consumables and capital goods required for augmenting production;
(iii) To enhance the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitiveness, while generating new employment opportunities and encourage the attainment of internationally accepted standards of quality;
(iv) To provide consumers with good quality products at reasonable prices;
(v) To focus on areas where we have strength; and advantage to meet global competition and also such areas which have trade potentials;
(vi) To simplify the procedural formalities and follow the rational for expanding the freely importable list and further pruning the negative list;
(vii) To let the exporters concentrate on manufacturing and marketing of their products globally and operate in a hassle free environment; and
(viii) To achieve greater economic strength and facilitate sustained growth of production and exports.
II. Import Policy:
The restricted list of imports has been substantially pruned. Import of 542 items has been liberalised which includes about 150 items that can now be imported against Special Import Licence (SIL). About 60 items have been moved from SIL to the Open General Licence (OGL) list. Restrictions have been placed on 5 items on ground of environmental safety, strategic importance, public health and security.
The Export Promotion Capital Goods (EPCG) scheme has been continued and import of second-hand capital goods has also been allowed subject to certain restrictions.
This scheme offers two windows:
(i) Under the first window, capital goods may be imported at a concessional rate of customs duty of 10% and in such cases the importer is under obligation to export four times the c.i.f. value of imported capital goods over a period of five years.
(ii) The second window offers zero duty imports in case the c.i.f. value of capital goods is Rs. 20 crore or above and export obligation is six times to be fulfilled in eight years.
(iii) The threshold limit is Rs. one crore for agriculture, animal husbandry, floriculture, etc., and Rs. 10 lakh for software.
The duty exemption scheme is an important instrument for boosting exports.
It consists of duty-free licence and duty entitlement pass-book (DEPB):
(i) Duty-free licensing scheme consists of- (a) advance licence, (b) advance intermediate license, and (c) special impress license.
(ii) The new pass-book scheme (DEPB) allows certain categories of exporters to avail of all the facilities of a value-based advance licence with greater flexibility and without actually going through all the procedural formalities of obtaining a licence.
V. Deemed Exports:
The scope of deemed exports has been widened by according certain categories of supply of goods manufactured in India the ‘deemed goods’ status.
Such exports are eligible for the following benefits:
(a) Special impress license/advance intermediate licence,
(b) Deemed exports drawback scheme,
(c) Refund of terminal excise duty, and
(d) Special import licence at the rate of six per cent of f.o.r. value.
The units undertaking to export their entire production of goods may be set up at Export Processing Zones (EPZ) which have been set up as special enhances, separated from the Domestic Tariff Area (DTA) by fiscal barriers and are intended to provide an international duty-free environment for export production at low cost.
India has seven EPZs at Kandla (Gujarat), Santacruz (Maharashtra), Cochin (Kerala), Chennai (Tamil Nadu), Noida (U.P.), Falta (West Bengal) and Visakhapatnam (A.P.)
Export Processing Zones set up specially for the promotion of export of electronics, hardware and software have been named Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP).
The scheme of Export Oriented Units (EOU) is complementary to the EPZ scheme in that it adopts the same production regime but offers a wide option in location with reference to factors like source of raw materials, ports or exports, availability of technology skills etc.
Regarding these schemes, the following changes have been made in the new Exim policy:
(i) Units in agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and units engaged in service activities are permitted to sell 50 per cent of their production in domestic market subject to net foreign exchange earnings.
(ii) Electronic hardware units have been allowed to sell one half of their production in value terms in the domestic market on an annual basis subject to payment of applicable duties.
(iii) Supply in DTA of samples up to one per cent of the value of previous year’s exports or up to a maximum of Rs. one lakh for new units going into production has been permitted for procurement of export orders.
(iv) Incentives for EPZ units has been enhanced by allowing additional SIL of two percent of freight on board (f.o.b.) value of exports linked to achievement of higher level of exports.
(v) Gems and jewellery units in EOU/EPZ are permitted to sell in DTA 10 per cent of their previous year’s exports.
(vi) The new policy also provides a boost to the software industry- (a) Software exporters can undertake exports using communication links or in the form of physical exports through courier service. (b) Imports of goods from clients on loan for a specified period is also permitted, (c) On-line data communication for DTA sales is permitted.
(vii) Special depreciation norms have been provided for electronic goods upto 70% in three years and also permission is granted for disposal on payment of application duty.
VII. Special Economic Zones (SEZs):
In order to correct the shortcomings of EPZ model, some new features were incorporated in the Special Economic Zones (SEZs) policy announced in April 2000. This policy intended to make the SEZs an engine for economic growth and employment generation.
The salient features of the SEZ scheme are:
(i) A designated duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs.
(ii) No licence required for import.
(iii) Manufacturing or service activities allowed.
(iv) SEZ units to be positive net foreign exchange earners within three years.
(v) Domestic sales subject to full customers duty and import policy in force.
(vi) Full freedom for subcontracting.
(vii) No routine examination by customs authorities of export/import cargo.
All the 8EPZs have been converted into SEZs. In addition to this 20 more SEZs have since become operational, under SEZ Act, formal approvals have so far been given for setting up of 105 SEZs.
VIII. Simplified Procedures:
Recognising that procedures need be considerably simplified, the new policy aims at making the procedures transparent and less discretionary. For example, initial validity period of duty free licences and export obligation is extended from 12 months to 18 months.
Recent Global Crisis and Its Impact:
Year 2008 and 2009 have been the most turbulent period for the world economy since World War II. The crisis that began in a small corner (Sub-Prime Mortgage Market) in the United States, spread like wild fire to engulf the entire global financial system.
The fall of Lehman in September 2008 was the last-straw which made the crises truly global in terms of outreach, impact and severity for both developed and developing countries.
Various aspects of the crisis are discussed below:
I. Varied Impact:
Countries have been affected by the crisis differently and in varying degrees. Advanced countries as a group have more severely affected with 3.2% negative growth forest for 2009.
Developing countries are likely to grow by 2.1% in 2009 and 6.0% in 2010 leading India and China which remained most resilient to the crisis. Indian economy has been one of the least affected by the global crisis. In fact, India is one of the growth engines, along with China, in facilitating faster turnaround of the world economy.
II. Nature of Impact:
The global crisis has affected the world economy in various ways. The impact was through- (a) reversal of capital flows, (b) fall in the stock markets, (c) depreciation of local currency (d) decline in exports, and (e) general risk aversion, which affected the consumption and investment.
III. Fall out of Reversal of Capital Flows:
There are signs of recovery in the global economy. The emerging economies, particularly in Asia, are in ahead on the recovery curve. This has negative impact for the emerging economies by way of large flows of capital from rich countries taking advantage of higher returns from interest differentials and stock market boom.
Since these outsized capital inflows are not supported by economic fundamentals like high growth rate, they are contributing to asset price bubbles in the stock market and appreciation of domestic currency by creating supply-demand imbalance in the foreign exchange markets. Both these factors adversely affect the process of recovery.
Domestic currency appreciation made exports uncompetitive and affected the domestic industry through cheaper imports. Stock market boom increases the speculative activity and contributes to market volatility.
IV. Impact on International Trade:
Global financial crisis led to a full-blown world recession resulting in unprecedented fall in world trade. World trade volume (goods and services) grew by only 2.8% in 2008 compared to 7.3% in 2007, with trade growth trembling down month after month since September 2008. World trade volume fell to (-) 12.3% in 2009.
V. Impact on Indian Economy:
Indian economy was initially affected through reversal of capital flows, rupee depreciation and stock market decline, thereafter (especially after the collapse of Lehman Brothers) the real sector was affected through a fall in exports and general risk aversion. The decline was partly offset by some appropriate steps taken by the government.
These steps are:
(a) Resilience of the rural economy due to improvement in the agricultural terms of trade because of higher support prices of agricultural produce;
(b) Income generated through the National Rural Employment Guarantee Scheme;
(c) Agriculture loan waivers;
(d) Building up of the rural infrastructure under Bharat Nirman programme; and
(e) Increasing awareness through media and mobile phone penetration.
The response to the crisis has been however, been equally swift. Both conventional and nonconventional monetary and fiscal measures were taken by the governments and nonmonetary authorities. As a result of these, there are signs of recovery in the global economy, with the U.S., Euro Zone and Japan are already out of recession and the momentum of growth rising up in the emerging economies.
Indian economy has been one of the least affected by the global crisis. In fact, India is one of the growth engines, along with China, in facilitating faster turnaround of the world economy. Risks however remain in this revival process. Two types of risks are expected- (a) Risk of double-dip recession, and (b) Impossible-trinity dilemma. Despite recovery, the rich countries continue to face the risk of double-dip recession.
(i) Levels of unemployment remain high despite expansionary policies.
(ii) Extensive use of fiscal policy has led to the growth of fiscal deficit and high public debt; GDP ratios in rich countries.
(iii) Timing of exit is important. An early exit could increase the risk of another recession, while late exit could worsen the public debt ratio, crowd out private investment and full inflationary expectations.
(iv) Return of recession could cause havoc with most toolkits already exhausted little ammunition remains for dealing with another crisis.
VIII. Impossible-Trinity Dilemma:
Growing Asian Countries, including India, face the problem of impossible-trinity. The issue is whether the capital inflows are in excess of domestic observing capacity and whether they could lead to overheating of the economy. The related issue is the need to balancing the competing objectives of price and exchange stability.
Prospective Trade Policy:
India, which has admirably weathered the present economic crisis, however need not be unduly worried; instead, it could once again lead by taking bold steps towards economic reforms, as it did in 1991 at the time of balance of payment crisis, and thus force the wavering leaders of liberalisation and globalisation not to backtrack.
In the Indian case, while in the short term relief and stimulus measures have worked, some fundamental policy changes are needed in the area of international trade. These changes relate to both merchandise sector and service sector.
1. Merchandise Sector:
For merchandise sector, the policy changes are:
(i) Furthering tariff reforms by lowering the peak duties from the present 10% to 7.5%.
(ii) Weeding out unnecessary customs duty exemption and streamlining export promotion schemes to reduce duty foregone which could include reduction of tariffs on all capital goods to a uniform 3%, while simultaneously withdrawing the EPGC scheme.
(iii) Further reduction in excise duties to make exports and industry competitive.
(iv) Giving special attention to export infrastructure along with rationalisation of port service charges based on services rendered by the ports in tune with our competing countries.
(v) Rationalising tax structure including specific duties in a calibrated manner taking into account the specific duty levels in our trading countries.
(vi) Fine-tuning trade strategy by targeting exports of dynamic products to developed markets and employment-intensive non-dynamic products to developing country markets.
(vii) Continuing with our proactive role in multilateral negotiations while taking care of livelihood concerns and the needs of the domestic sector.
2. Services Sector:
In the case of the services sector, a more conducive environment for trade can be created by taking the following measures:
(i) Liberalising FDI in services like health insurance, rural banking, and higher education as FDI inflows and trade in services have a close relationship.
(ii) Making FDI policy available in a user-friendly manner on the official website.
(iii) Rationalising taxes in services like shipping and telecom along with facilitation measures like single returns for service tax and excise tax administered by the same department.
(iv) Continuing with the present initiative on totalisation agreements.
(v) Streaming many of our domestic regulations like licensing requirements and procedures, technical standards and registry transparency which can help the growth and export of services.
(vi) Continuing with our focus on services in multilateral and bilateral negotiations.
(vii) Negotiating for streaming of domestic regulations in our major trading partner countries which can increase our market access.
(viii) Systematic marketing of services.
(ix) Collection and dissemination of market information by setting up a portal services.
(x) Streaming the services data system.
These fundamental changes in the trade policy can help our international trade in making further strides.
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