New Trade Policy during Reform Period in India

The following points highlight the sixteen major factors of the new trade policy during reform period. Some of the factors are: 1. Removing Complexities in Imports and Exports 2. Rationalisation of Tariff Structure and its Peak Rate 3. Decanalisation of Exports and Imports 4. Simplification of Import Licensing 5. Convertibility of Rupee 6. Export Houses and Trading Houses and Others. 

Factor # 1. Removing Complexities in Imports and Exports:

In order to remove complexities and cumbersome procedure of India’s trade policy regime followed during the pre-reform period, substantial simplification and liberalisation in all those policies were curried out in the reform period. In order to start the process, the tariff-line wise import policy was announced for the first time on March 31, 1996 and accordingly 6,161 tariff lines were made free by that time.

The process was continued and this total reached to 8,066 till March 2000. Till this date, quantitative restrictions in 1,429 tariff lines remained in force. Thereafter, the Exim Policy 2000- 01 removed quantitative restrictions (QRs) on 714 items and after that the Exim Policy 2001-02 removed QRs on the remaining 715 items.

Thus, quantitative restrictions on all import lines have been gradually withdrawn as per the commitment made by India to the World Trade Organisation (WTO).

Factor # 2. Rationalisation of Tariff Structure and its Peak Rate:

During the pre-reform period the tariff structure followed by the country was very complex and heavy. In order to rationalise the tariff structure, the Chelliah Committee published its final report in January 1993 and thereby advocated drastic reductions in import duties. The Committee felt that in order to give protection to Indian industries, the rupee was depreciated considerably during the 1980s and early 1990s.

As a result, the real exchange rate of rupee had depreciated by around 57.45 per cent during the seven year period, i.e. 1985-86 to 1992-93, which had raised the cost of imports extensively. The Committee, thus recommended that the prevailing import duties be rationalised and be lowered drastically by 1998-99 in order to attain parity in prices between domestic goods and goods of foreign origin.

Accordingly, on the laws of the recommendations made by the Committee, the Government reduced the maximum rate of duty over the years. The Budget 1993-94 could reduce the rate from 115 per cent to 85 per cent. The process of reducing the rate was continued in the successive budgets. Accordingly, the peak rate of import duty on non-agricultural goods now stands at only 10 per cent.

Factor # 3. Decanalisation of Exports and Imports:

From the very beginning, the extent of canalisation of exports and imports was at a high degree as a large number of exports and imports was canalised through some public sector agencies in India. The Exim Policy, 1991 made an attempt of progressive reduction in the extent of canalisation.

Accordingly, 16 export items and 20 import items were decanalised. Later on, Exim Policy, 1992-97 also decanalised number of imported items including nonferrous metals natural rubber, news print inter-mediated and raw materials for fertilizers.

Factor # 4. Simplification of Import Licensing:

The Exim Policy, 1991 introduced major changes in the import licensing system through the replacement of administered licensing of imports through import entitlement. The system of supplementary licenses was dis-continued and unlisted OGL category was abolished.

The new policy strengthened the system of advance license provided to exporters with duty free access to inputs. The procedure followed for the import of capital goods was simplified. Moreover, the list of restricted items was reviewed and accordingly 98 items were shifted initially from restricted list to limited permissible list and 37 items were also shifted from limited permissible list to OGL list.

Successive trade policies have also continued this simplification strategy in respect of import licensing for the benefit of industrial units and exporters.

Factor # 5. Convertibility of Rupee:

Another reform measure introduced in India was convertibility of rupee. In 1992-93 Budget rupee was made partially convertible. This was an inevitable move for expeditious integration of Indian economy with the world economy. This attempt was followed by full convertibility on the trade account in 1993-94, full convertibility on current account in August 1994.

Later on, substantial capital account liberalisation measures were also announced in recent years.

As per the present system, the exchange rate of rupee in India is now market determined (since March 1993). Accordingly, on the basis of demand and supply conditions, the exchange rate of rupee is largely market determined.

However, in times of necessity, the RBF intervenes in the market in order to check excess volatility, prevent speculative activities, and also for maintaining adequate foreign exchange reserves. Such policy of exchange rate is known as managed floating.

Factor # 6. Export Houses and Trading Houses:

The Exim Policy 1991 permitted Export Houses, Trading Houses and Star Trading Houses to import a wide range of items. Accordingly, the Government permitted to set up Trading Houses with 51 per cent foreign equity for the promotion of exports.

Foreign Trade Policy 1992-97 provided Export Houses and Trading Houses with the benefit of self certification under the advance license system, which usually permits duty free imports for exports. The same facility was followed in the subsequent policies.

The Third Annual Supplement to Foreign Trade Policy, 2004-09, which was announced in April 2007, broadly divided export houses into five categories:

(i) Export House,

(ii) Star Export House,

(iii) Trading House,

(iv) Star Trading House and

(v) Premium Trading House.

Accordingly, exporters of the country were granted those above status on achieving, the volume of exports to the tune of Rs 20 crore, Rs 100 crore, Rs 500 crore, Rs 2,500 crore and Rs 10,000 crore respectively. These houses are enjoying different benefits and concessions accordingly.

Factor # 7. EPZ and EOU Scheme:

During the first part of reforms i.e., during 1990s, Export Processing Zones (EPZs) were given necessary support by providing concessions for raising their volume of exports. Moreover, the Export-Oriented Units (EOUs) scheme which was introduced in early 1981, was also granted several concessions in maintaining their locations, infrastructure and volume of business.

Factor # 8. Special Economic Zones (SEZs):

In order to overcome the shortcomings of EPZs, and to attract larger foreign investments in India, the special Economic Zones (SEZs) Policy was announced in April 2000 which was again proposed by the Export and Import Policy, 2000. This policy was intended to make SEZs an engine for economic growth, complemented by an attractive fiscal package both at the centre and the state level, with minimum possible regulations.

In order to instil confidence in investors and signal the government’s commitment to a stable SEZ policy regime and also to generate greater economic activity and employment, the Special Economic Zones Act, 2005 was passed in the Parliament in May, 2005.

The SEZ Act, 2005, supported by SEZ Rules, came into effect on February 10, 2006. The main objectives of the SEZ Act are generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities and development of infrastructure facilities.

Various incentives and facilities are offered to SEZ units and SEZ developers.

Factor # 9. Agriculture Export Zones (AEZs):

The concept of Agriculture Export Zones (AEZs) was introduced by the Exim Policy, 2001 in order to give primacy to the promotion of agricultural exports and also adopt a reorganization of our export efforts on the basis of specific products and that too of specific geographical areas. This policy adopted on end-to-end approach of integrating the entire process starting from the stage of production to marketing.

The AEZs would maintain the state-of-the-art services like pre-post harvest treatment and operations, plant protection, processing packaging, storage and also on research and development. Under AEZs, the exporters can avail of different export promotion schemes introduced under Exim Policy and can also get recognition as a status holder.

Factor # 10. Market Access Initiative Scheme:

In 2001-02, Market Access Initiative Scheme was launched in order to undertake marketing promotion efforts abroad. The scheme arranges in depth market studies for select products in some chosen countries in order to generate date for promotion of exports from India. This scheme also helps in displaying Indian brands or products in the international market.

The scheme shall also assist in upgrading quality of products as per requirement of overseas market and also in making publicity, campaigns etc.

Factor # 11. Five Important Thrust Sectors:

The Foreign Trade Policy, 2004-09 incorporated specific strategies (known as Special Focus Initiatives) for five important sectors: Agriculture, handicrafts, handlooms, gems and jewellery and leather and footwear sector. As for example, in agriculture, a new scheme, i.e. Visesh Krishi Upaj Yojona was introduced to boost exports of fruit, vegetables, flowers, minor forest produce and their value added products.

In respect of handlooms and handicrafts sector, the policy also announced to establish a new Handicraft Special Economic Zone.

Factor # 12. Providing Service as a Brand:

Services sector in India is contributing more than 50 per cent of its GDP.

Foreign Trade Policy (FTP) (2004-09) provided thrust to service exports and advocated some steps such as:

(i) Served from India brand will be created in order to catapult India as a major global services hub throughout the world;

(ii) Creating an exclusive Export Promotion Council for services to tap opportunities in key markets;

(iii) Individual service providers who can earn foreign exchange of minimum of at least Rs 5 lakh and other service providers who earn at least Rs 10 lakh would be eligible for duty credit entitlement of 10 per cent of total foreign exchange earned by those service providers etc.

Factor # 13. Reduction of Transaction Cost and Procedural Simplification:

In order to reduce transactional casts and for attaining procedural simplification, the FTP, 2004-09 announced number of rationalisation measures.

These measures include:

(i) Exempting all exporters having a minimum turnover of Rs 5 crore from furnishing bank guarantee;

(ii) Permitting import of second-hand capital goods without any age restrictions;

(iii) All goods and services exported, including those from domestic tariff area (DTA) units are exempted from service tax etc.

Factor # 14. Free Trade and Warehousing Zones:

The FTP, 2004-09 incorporated a new scheme for establishing Free Trade and Warehousing; Zones (FTWZs) in order to creates trade-related infrastructure for facilitating import and export of goods and services with transactional freedom. Foreign direct investment up to 100 per cent are permitted in the development and establishment of the Zones and its related infrastructures.

Factor # 15. Providing Concessions and Exemptions:

In order to liberalise imports and promoting exports, a large number of tax benefits and exemptions have been granted. These include—reducing the peak rate of customs duty to 10 per cent; duty reduction for information technology sector; granting concessions or 10- year tax holiday to the developers of SEZs; tax benefits to exporters; reduction in the customs duty on certain specified equipment’s etc.

Factor # 16. Recent Trade Policy Measures:

In order to boost the performance of export sectors; the government took various measures, which supplemented the announcements made in the budgets and in the Foreign Trade Policy, 2009-14 and its Annual Supplements.

Accordingly, various schemes were strengthened viz., Focus Product Schemes (FPS), Focus Market Scheme (FMS), Market Linked Focus Product Scheme (MLFPS), Vishesh Krishi and Gram Udyog Yojana (VKGUY), Served from India Scheme (SFIS) and Agri Infrastructure Incentive Scheme (AIIS).

In order to diversity market, 7 new markets have been added to FMS and 7 new markets are also added to the special FMS, 46 new items are added to MLFPS and also added 12 new markets for the first time and 100 new items to the FPS list.

In order to boost export services, the government has organised two editions of a services conclave in identified service sectors which are crucial to India. Indian trade portal (www (DOT)Indian trade portal(DOT)in) was launched on 8th December, 2014 for providing information about 42 export markets and mechanism for increased market access.

In order to mainstream the states so that they focus expressly on boosting exports, necessary steps have been distilled and listed. In addition, industry and trade bodies are given support for participation in buyer seller meet (BSM), trade fairs and exhibitions in various countries under Market Access. Initiation Scheme (MAI) and Market Development Assistance (MDA) Scheme.