Foreign Trade Policy

208 Abhinav Singh Khanduja209 Aayush Sharma215 Nalini Katiyar220 Mohit Rathi236 Kriti Singh261 Keshav Kishore

Objectives

• To study India’s Foreign Trade Policy and its variables.• To study changes in Foreign Trade Policy from last year.• To compare India among BRICS countries on the basis of

foreign trade performance and Exchange Rate.

FLOW OF PRESENTATION

1. INTRODUCTION AND HISTORY2. FERA AND FEMA3. KEY CHANGES FROM PREVIOUS FTP (2004-09)4. FOREIGN TRADE POLICY (2009-14)5. VARIABLES OF FTP6. SEZ7. COMPARISON AMONG BRICS COUNTRIES8. CASE STUDY ON SEZ9. CASE STUDY ON TEA EXPORTS

What is Foreign Trade Policy?

The Union Commerce Ministry, Government of India announces the integrated Foreign Trade Policy FTP in every five year. This is also called EXIM policy. This policy is updated every year with some modifications and new schemes. New schemes come into effect on the first day of financial year i.e. April 1, every year.

The Foreign trade Policy which was announced on August 28, 2009 is an integrated policy for the period 2009-14.

International trade is exchange of capital, goods, and services across international borders or territories.

Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders.

There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

Trade In India

• Textiles and spices were the first products to be exported by India. The Indian trade scenario evolved gradually after the country’s independence in 1947. From the 1950s to the late 1980s, followed socialist policies, resulting in protectionism and heavy regulations on foreign companies conducting trade with India.

• India’s fast growing agricultural production and to keep pace with the population growth and growing Industrial infrastructure it felt the need of changing it’s trade policies.

• To meet the oil import bill, export is unavoidable.

• In India, Govt. has come out from time to time with various policies on foreign trade to promote export thereby increasing the “Foreign Exchange Reserve”. These policies are termed as “Exim Policy”

FERA The 1973 law was created during the tenure of Prime Minister Indira Gandhi with

the goal of conserving India's foreign exchange resources.

The country was facing a trade deficit, which was followed by a devaluation of the currency and an increase in the price of imported oil.

The act specified which foreign exchange transactions were permitted, including those between Indian residents and nonresidents.

The FERA (Foreign Exchange Regulation Act) deals with laws which relate to foreign exchange in India

In 1957 the act was made permanent. As the industrialization grew in India, there was an increase in the foreign exchange investments. As a result, there arose a need to protect it.

Accordingly, in 1973 the Foreign Exchange Regulation Act was amended. FERA consists of 81 complex sections Under FERA, any offence was a criminal one which included imprisonment as per code of criminal procedure, 1973.

Objectives

• To prevent the outflow of Indian currency• To regulate the transaction indirectly affecting foreign exchange• To regulate import and export of currency and bullion• To regulate employment of foreign nationals• To regulate foreign companies• To regulate acquisition, holding etc of immovable property in

India by non-residents.• To regulate dealings in foreign exchange and securities.• To regulate the transactions indirectly affecting foreign

exchange.

FERA to FEMA

The FERA was introduced in 1974 when India’s foreign exchange reserves position was not satisfactory. It required stringent controls to conserve foreign exchange and to utilize in the best interest of the country.

The main objective was conservation and proper utilization of the foreign exchange resources of the country.

There was a demand for a substantial modification of FERA in the light of ongoing Economic liberalization and improving foreign exchange reserves position. Accordingly, a new act ,FEMA( Foreign Exchange Management Act ) 1999 replaced the FERA.

The rules regarding foreign investments were simplified to encourage more foreign investment in India and consequently ensure better foreign cash flow.

FEMA came into effect from 1st June, 2000. Some structural changes were made.

India's Export Performance (1999-2000 to 2003-04)

63623

47742

52856

439764414736760

29751

0

10000

20000

30000

40000

50000

60000

70000

1999-2000 2000-01 2001-02 2002-03 2003-04

Years

US$

mill

ion

All Commodities Agricultural & allied productsOres & minerals Manufactured goodsPetroleum & crude products

India’s Export Performance

Source: DGCIS, MOC&I

India's Import Performance (1999-2000 to 2003-04)

77237

566135158850056

61572

49799

37172

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1999-2000 2000-01 2001-02 2002-03 2003-04

Years

US$

mill

ion

All Commodities Petroleum crude & products Non-POL items

Source: DGCIS, MOC&I

India’s Import Performance

EXIM Policy of India 2004-09

Hon. Kamal Nath minister for commerce and Industry has announced on 31st Aug 2004,India’s first exim policy

The duration of the policy from 1st sept. 2004 to 31st march 2009.

It takes an integrated view of the overall development of India's foreign trade

Aim of the policy is to double the global merchandise trade within the policy time period of 5 year

Exim policy

The foreign trade of India is guided by the Export Import policy of the govt. of India

Regulated by the foreign trade development and regulatory Act 1992.

Exim policy contain various policy decisions with respect to import and exports from the country

Exim policy is prepared and announced by the central govt.

Exim policy of India aims to developing export potential, improving export performance encouraging foreign trade and creating favorable balance of payment position

General Objective of EXIM PolicyTo establish the framework for globalizationTo promote the productivity competitiveness of Indian IndustryTo Encourage the attainment of high and internationally accepted

standards of qualityTo augment export by facilitating access to raw material,

intermediate component, consumables and capital goods from the international market

To promote internationally competitive import substitution and self reliance

To double percentage of share of global merchandise trade within the five year .

To act as an effective instrument of economic growth by giving a trust to employment generation

INDIA’S FOREIGN TRADE POLICY 2009-14

Objectives of Foreign Trade Policy 2009-14

• To Double India's exports of goods and services by 2014.

• To double India's share in global merchandise trade by 2020 as a long term aim of this policy. India's share in Global merchandise exports was 1.45% in 2008.

• Simplification of the application procedure for availing various benefits

• To set in motion the strategies and policy measures which catalyze the growth of exports.

Key highlights of Foreign trade policy 2009-14

Higher support for Market and Product Diversification.

• 29 new markets have been added under focus market scheme (FMS).• Incentive available under FMS raised from 2.5% to 3%.• Incentive available under Focus Product Scheme (FPS) raised from

1.25% to 2%.• Higher allocation for Market Development Assistance (MDA) and

Market Access Initiative (MAI).• To aid technological up-gradation of export sector, EPCG Scheme at

Zero Duty has been introduced.• Export obligation on import of spares, moulds etc. under EPCG

Scheme has been reduced by 50%.

Status Holders

• To accelerate exports and encourage technological upgradation, additional Duty Credit Scrips shall be given to Status Holders @ 1% of the FOB value of past exports.

• This facility shall be available for sectors of leather (excluding finished leather), textiles and jute, handicrafts, engineering, plastics and basic chemicals (excluding pharma products)

Flexibility provided to exporters•  Payment of customs duty for Export Obligation (EO) shortfall

under EPCG Authorisation has been allowed by way of debit of Duty Credit scrip. Earlier the payment was allowed in cashonly.

• Import of restricted items, as replenishment, shall now be allowed against transferred DFIAs, in line with the erstwhile DFRC scheme.

• Time limit of 60 days for re-import of exported gems and jewelry items, for participation in exhibitions has been extended to 90 days in case of USA.

EOUs• EOUs have been allowed to sell products manufactured by them

in DTA upto a limit of 90% instead of existing 75%, without changing the criteria of ‘similar goods’, within the overall entitlement of 50% for DTA sale.

• During this period of downturn, Board of Approvals (BOA) to consider, extension of block period by one year for calculation of Net Foreign Exchange earning of EOUs.

• EOUs will now be allowed CENVAT Credit facility for the component of SAD and Education Cess on DTA sale.

Thrust to Value Added Manufacturing

• To encourage Value Added Manufactured export, a minimum 15% value addition on imported inputs under Advance Authorization Scheme has now been prescribed.

• Coverage of Project Exports and a large number of manufactured goods under FPS and MLFPS.

Marine sector

• Fisheries exempted from maintenance of average EO(Export Obligation) under EPCG(Export promotion of Capital goods) Scheme however Fishing Trawlers, boats, ships and other similar items shall not be allowed for this exemption.

• Additional flexibility under Target Plus Scheme (TPS) / Duty Free Certificate of Entitlement (DFCE) Scheme for the marine sector.

Gems & Jewellery Sector

• Exporters of gems and Jewellery can import / procure

duty free inputs for manufacturing.

• Plan to establish "Diamond Bourse (s) with an aim to make India and International Trading Hub announced.

• Introduction of a new facility to allow import on consignment basis of cut & polished diamonds for the purpose of grading/ certification.

Agro Exports

• Introduction of a single window system to facilitate export of perishable agricultural produce with an aim to reduce transaction and handling cost.

• This system will involve creation of multi-functional nodal agencies. These agencies will be accredited by APEDA(Agricultural and Processed Food Products Export Development Authority).

Leather Exports

• On the payment of 50 % applicable export duty, Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi finished leather from public bonded ware houses.

Tea Exports

• The existing Minimum value addition under advance authorization scheme for export of tea is 100 %. It has been reduced from the existing 100% to 50%.

• DTA (Domestic Tariff Area) sale limit of instant tea by EOU(Export Oriented Unit) units increased from

30% to 50%.

• Export of tea has been included under VKGUY(Vishesh Krishi Gram Udyog Yojana) Scheme benefits.

Pharma Exports

• Export Obligation Period for advance authorizations issued increased from existing 6 months to 36 months.

• Pharma sector included under MLFPS(Market Linked Focus Product Scheme) for countries in Africa and Latin America & some countries in Oceania and Far East.

Handloom Exports

The claims under Focus Product Scheme, the requirement of " Handloom mark" was required earlier. This has been removed

Sports Weapon

Licenses for the import of sports weapon will be issued now by Regional Authorities provided a NOC (No Objection Certificate) is issued by Ministry of Sports & Youth Affairs. (Earlier DGFT Headquarters had to be approached for this)

Manufacturing Wastes

• Disposal of manufacturing wastes / scrap will now be allowed after payment of applicable excise duty also before fulfillment of export obligation under Advance Authorization and EPCG Scheme.

• Earlier it was allowed after fulfillment of export obligation.

Medical Devices

• To solve the problem of medical device industry, the procedure for issue of Free Sale Certificate has been simplified and the validity of the Certificate has been increased from 1 year to 2 years.

Automobile Industry

• Those Automobile industries which have their R&D establishment will be allowed free import of reference fuels (petrol and diesel), upto a maximum of 5 KL per annum, which are not manufactured in India. Simplification in EPCG for automobile industry.

Variables of FTP

Exchange Rate• Also known as the foreign-exchange rate, forex rate or FX rate• Regarded as the value of one country’s currency in terms of another currency.

Types of Exchange Rate•  The spot exchange rate refers to the current exchange rate. • The forward exchange rate refers to an exchange rate that is quoted and

traded today but for delivery and payment on a specific future date.

Quotations:• A currency pair is the quotation of the relative value of a currency unit

against the unit of another currency in the foreign exchange market. Example: The quotation EUR/USD 1.2500 means that 1 Euro is exchanged for 1.2500 US dollars• Quotes using a country's home currency as the price currency (e.g., EUR

0.735342 = USD 1.00 in the euro zone) are known as direct quotation or price quotation

• Quotes using a country's home currency as the unit currency (e.g., EUR 1.00 = USD 1.35991 in the  euro zone ) are known as indirect quotation or quantity quotation

Exchange-rate regime

The way an authority manages its currency in relation to other currencies and the foreign exchange market. The basic ways are-

Fating exchange rate - The market dictates movements in the exchange rate.

Pegged float - Central bank keeps the rate from deviating too far from a target band or value.

Fixed exchange rate - Ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro or a basket of currencies.

India’s major imports comprise of crude oil ,machinery, military products, fertilizers, chemicals, gems, antiques and artworks. Imported goods are divided into the following categories:

• Freely importable items: For these items, no import license is required. They can be freely imported by an individual or a firm.

• Canalized items: These items can only be imported by public sector firms. For example petroleum products fall under this category.

• Prohibited items: Items such as unprocessed ivory, animal rennet and tallow fat cannot be exported to India.

IMPORTS

• Indian exports comprise mainly of engineering and textile products, precious stones, petroleum products, jewelry, sugar, steel chemicals, zinc and leather products. Most of the exported goods are exempt from export duties.

• India also exports services to several countries, primarily to the US. In fact, India is among the world’s largest exporters of services related to information and communication technology (ICT). It is also the key destination for business process outsourcing (BPO).

EXPORTS

SEZ – Concept•SEZs or Special Economic Zones operate like

foreign entities within the territory of the country for trade purposes

•The laws related to exports and imports are more liberal as compared to the rest of the country in SEZs

•Area of the country excluding the SEZs is called Domestic Tariff Area (DTA)

• India’s trade barriers apply only within the DTA•Goods and services sold by agents within the

DTA to agents within the SEZ are considered to be the exports of the country and vice versa

SEZ – History• Asia’s first EPZ set up in 1965 in Kandla in India

and seven more zones set up thereafter• SEZ policy announced in April 2000 to further

enhance exports• Major Difference between SEZ and EPZ: SEZ is

and integrated township whereas EPZ is just an industrial enclave

• SEZ policy, 2000, intended to make SEZs an engine for economic growth supported by quality infrastructure, an attractive fiscal package and minimum possible regulations both at the state and centre levels

• SEZ Act passed by parliament in 2005

SEZ Scheme – Salient Features

• A designated duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs

• No licence required for import and No routine examination by customs authorities of export/import cargo

• SEZ to be of at least 1000 hectares of area with at least 35% for industrial developlment

• SEZ units to be positive net foreign exchange earners within three years

• Domestic sales subject to full customs duty and import policy in force

• No strikes allowed in SEZ units without giving the employer a 6 week notice

SEZ Act, 2005•Came into force on 10 February, 2006•Objectives:

▫ Generation of additional economic activity▫ Promotion of exports of goods and services▫ Promotion of investment from domestic and foreign sources▫ Creation of Employment opportunities▫ Development of Infrastructure facilities

•Responsibility for promoting and ensuring orderly development of SEZs assigned to Board of Approval

•Administrative Control at Zone level exercised by the Development Commissioner

Incentives under SEZ Act

•Exemption from Customs, central excise, service tax, central sales tax and securities transactions tax

•Corporate Tax Holiday for 15 years•100 % income tax exemption for 10 years in a

block period of 15 years for SEZ developers•ECB upto US $500mn allowed with no

maturity limits•100% FDI allowed in manufacturing units in

SEZs•Setting up of Offshore Banking units allowed

in SEZs

Export Performance of SEZs

YearValue (Rs.

Crore)

Growth Rate ( over previous

year )

2003-2004 13,854 39%

2004-2005 18,314 32%

2005-2006 22 840 25%

2006-2007 34,615 52%

2007-2008 66,638 93%

2008-2009 99,689 50%

2009-2010 2,20,711.39 121.40%

Source: www.sezindia.nic.in

Benefits of SEZs•Help promote exports by cutting through

bureaucratic red tape•Liberal labour market laws allowing easy

hiring and firing of workers help labour intensive manufacturing firms emerge

•Promotion of SEZs help in providing world class infrastructure which is necessary to ensure unhindered production

•SEZs, through their various incentives, help foster a conducive business environment to attract local and foreign investment

Arguments against SEZs• SEZs lead to large scale land acquisition by

developers leading to displacement of farmers, meagre compensation and no alternative livelihood for them

• As SEZs are being built on prime agricultural land, it is bound to have serious implications for food security

• Tax concessions, incentives, exemptions etc. result in huge revenue loss to the government

• Companies may simply relocate to SEZs to take advantage of tax concessions and little net activity may be generated

• As SEZs are being set up in states where there is already a strong industrial base, it will aggravate regional disparities

Overview of BRICS

The acronym BRIC stands for Brazil, Russia, India, and China.The term was coined by the Chief Economist of Goldman Sachs in 2001. In 2010 South Africa also joined this group. The new acronym is, therefore, BRICS and it symbolizes the collective economic power of Brazil, Russia, India, China, and South Africa.

Together the BRICS account for -• More than 40 per cent of the global population, • Nearly 30 per cent of the land mass,• A share in world GDP (in PPP terms) that increased from 16 percent in 2000 to nearly 25 per cent in 2010.

BRICS Share of Global Trade

Export Linkages of BRICS

(in US $ billion)

BRAZIL

Major exports Items – Transport equipment, iron ore, soybeans, footwear, coffee.

Major exports partners: China (12.49 %), US (10.5 %), Argentina (8.4 %),Netherlands (5.39 %), Germany (4.05 %)

Major imports Items- :Machinery, electrical and transport equipment, chemical products, oil, automotive parts, electronics

Major imports partners: US (16.12 %), China (12.61 %), Argentina (8.77 %), Germany (7.65 %), Japan (4.3 %)

RUSSIA

Major exports Items: oil, natural gas, metals, timber

Major exports partners: EU (44.8%), United States (6.0%), China (5.8%), Turkey (4.9%), Ukraine (3.7%)

Major imports Items: Machinery, transport equipment, plastics, medicines, iron and steel, consumer goods, meat

Major imports partners:EU (50.2%), China (14.1%), Ukraine (5.3%), Japan (3.8%), Belarus (3.4%)

INDIA

Major exports Items:Engineering goods, Gems and Jewellery, Tea, CoffeeCotton, Fabrics, Electronics goods

Major exports partners: UAE (13.41) U S A (10.93) China (6.47)Hong Kong (4.41) Singapore (4.25) Major imports Items:Petroleum crudes and products, Machinery, Gold and silverPearls, Precious- semi precious stones

Major imports partners: China (7.29),USA (6.34)Switzerland (4.39),Australia (3.32)

CHINA

Major Export Items-Electrical goods and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment

Major Export Partners-US (17.7%), Hong Kong (13.3%), Japan (8.1%)South Korea (5.2%) ,Germany (4.1%)

Major Import Items-Electrical components and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics and organic chemicals

Major Import Partners-Japan (13.3%), South Korea (9.9%)US (7.2%),Germany (4.9%).

SOUTH AFRICA

Major exports Items:Gold, diamond ,Platinum ,Other Metals, Machinery

Major exports partners: Japan(11.1 %), USA(11.1 %), Germany(8.00 %), UK(6.8 %)

Major imports Items:Chemicals, Scientific Instruments, Petroleum Products, Food Materials

Major imports partners: Germany( 11.2 %), China (11.1 %), USA (7.9 %), Saudi Arab(6.2 %)

EXCHANGE RATE 1 US dollar = 2.0262 Brazilian reals

1 US dollar = 31.4088 Russian rubles

1 US dollar = 53.5800 Indian rupees

1 US dollar = 6.2485 Chinese yuan

1 US dollar = 8.6463 South African rand

CS 1: AN ECONOMIC ANALYSIS OF SEZs IN INDIA WITH SPECIALREFERENCE TO INCOME AND EMPLOYMENT

Abstract

•The whole idea behind the setting up of SEZ was to increase the exports and hence accelerate the economic development of the country

•The case study is about employment and income creation by SEZs, export promotion and attracting domestic as well as foreign investment

Rationale of setting up SEZs : The Indian perspective

•A synthesis of the three theoretical approaches explain the current SEZ experiment in India.

•These are,•the heterodox approach,•the production network approach, and•the agglomeration economies’ approach

Economic benefits of SEZs : The Indian experience

• Quantifiable benefits

• Promotion of economic activity▫ Investment and Employment▫ Indirect employment and investment

• Promotion of Exports

• Non quantifiable benefits

• Structural shift in the economy• Diversification of exports• Scale advantage• Augmenting existing clusters and industrial estates• Geographical diversification of industries• Localising global value chains• Shift of production activity from unorganised to organised sectors

Economic Activity

Value Addition

Value addition by newly notified SEZ 2005-08 US $ Mn

Diversification of Exports

EXPORTS FROM THE SEZS UNITS IN INDIA

Year Value Growth Rate Share in Total (Rs. Crore) (%) Exports

2000-01 8552.30 - 4.22001-02 9198.60 7.5 4.52002-03 10053.40 9.4 3.92003-04 13853.58 37.8 4.82004-05 18309.00 32.2 5.12005-06 22839.53 24.8 5.62006-07 34615.00 52.3 6.82007-08 66638.00 91.6 6.92008-09 101265.00 35.7 6.1

Learnings

• Growth is a dynamic process by which one state of the economy evolves into another. Growth requires not only augmenting the available resources but rearranging them so that they generate a greater value.

• While SEZs are stimulating direct investment and employment, their role appears to be more valuable in bringing about economic transformation from a resource-led economy to a skill and technology-led economy; from low value added economic activities to high value added economic activities; from low productive sectors to high productive sectors; and from unorganized to organized sectors, both at the national and regional levels. They have the potential of promoting new knowledge intensive industries; augmenting existing industrial clusters/industrial states; diversifying the local industrial base; and localizing global value chain.

Learnings Contd.

• However the controversy surrounding SEZs has done incalculable harm to the implementation of the policy. State governments are dragging their feet in pushing the programme due to anti-SEZ sentiments. Projects are getting delayed even where land acquisition poses no problem

• Lastly, the SEZ policy is fraught with some major problems. Also it is alone not sufficient. It calls for concerted efforts by the government to reap the maximum benefit of SEZs

CS 2: Tea Export and its Impact at the Grassroots

Abstract• In light of India.s Foreign Trade Policy (2009-14) this

case study looks into the Tea economy of West Bengal (Jalpaiguri and Darjeeling), explores the export-oriented value chain in the sector and shows how various stakeholders are interrelated

• The study investigates into whether export of Tea has increased (or not) after introduction of the Foreign Trade Policy of India; what has been the impact on various stakeholders; what are the bottlenecks for exporting Tea; and what could be the probable measures that will help in improving the export scenario

An Overview of the Tea Economy of West Bengal

Labour Wages & Welfare• Description Amount (R/Kg) • Daily Cash Wages 67.00• Green Leaf Plucking Incentive 4.50• Food Grain (Ration) 15.40• Made Tea (400gm/Month) 1.38• Fuel 3.50• Housing Allowance (8% of Cash Wages) 5.36• Medical Allowance ( 5% of Cash Wages) 3.35• Uniform 1.80• Paid Holiday (12 National Holidays) 2.68• Sickness (Yearly 14 days) 2.09• Annual Leave (Yearly 15 days) 3.36• Maternity Benefit 0.97• Welfare Activity (Education, Club, 2.00• Drinking Water)• Provident Fund (12% of Cash Wages) 8.35• Bonus 11.39• Gratuity (4.8% of Cash Wages) 3.21• Total 136.34

Year-wise Movement of Tea Price for Major Tea-exporting countries (US$ per kg)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sri Lanka 2.28 2.36 2.28 2.24 2.25 2.41 2.58 2.64 3.26 4.02

India 2.38 2.04 1.95 1.79 1.97 2.06 2.09 2.03 2.45 2.71

China 1.7 1.52 1.37 1.21 1.38 1.56 2.06 1.88 2.1 2.30

Kenya 1.93 2.12 1.67 1.58 1.63 1.61 1.59 2.07 1.99 2.34

Export Figures

Major Findings• Impact of climate change and fall in tea

production•Shift in consumer preference•Labour welfare cost and labour shortage•Greater promotion by the Tea Board of India•Lack of packaging facility•Training of small tea growers•Predominance of middlemen (leaf agents)•Absence of transparent price-determining

mechanism

Learnings

• Areas where the Foreign Trade Policy can play an instrumental role Use of ASIDE Use of the Focussed Market Scheme Better regional integration Countries where the per capita consumption of tea is higher

• Areas where complementary domestic policies can play a crucial role Alternate employment to the labourers in tea plantations Labourers in the tea estates could be brought under the purview

of pro-poor development policies

• Areas where Tea Board of India can play a crucial role Interest charged under SPTF by TBI needs to be looked into Develop a greater Reachout Model The TBI should significantly increase its financial allotment to

STGs Setting up a separate Directorate for the STGs

Thank You