India's Foreign Trade

Assignment

Q 1. State and explain nature and importance of Foreign Trade.

Ans. Nature Of Foreign Trade:There are two basic types of trade between countries: the first in which the receiving country either cannot produce the goods or provide the services in question, or where it does not have enough; and the second, in which it has the capability of producing the goods or supplying the services, but still imports them. The rationale for the first kind of trade is very clear. As long as the importing country can afford to buy the products or services, it is able to acquire things that otherwise it would have to do without. Examples of differing significance are the import of computer hardware into the India, in response to consumer demand, or copper to China, an essential for Chinese manufacturing industry.

The second kind of trade is of greater interest because it accounts for a majority of world trade today and the rationale is more complex. India imports motor cars, military equipments, computer and electronics parts and many more products, which it is well able to produce domestically. At first sight, it would seem a waste of resources to import goods from all over the world in which it could perfectly well be self-sufficient. However, the reasons for importing these categories of products generally fall into three classifications:

the imported goods may be cheaper than those produced domestically;

a greater variety of goods may be made available through imports;

the imported goods may offer advantages other than lower prices over domestic production — better quality or design, higher status (eg, prestige labelling), technical features, etc.

Importance:The pattern of world trade over more than a century, from 1870 to 2001, is discussed in detail. Overall, merchandise trade grew by an average of 3.4 per cent per annum from 1870 to 1913 in the period up to World War I. Two World Wars interspersed by the Depression and a world slump effectively reduced the annual rate of growth in international trade to less than 1 per cent in the period 1914 to 1950. Then, as the international institutions that were established in the immediate post-1945 period began to introduce some financial stability and impact on world trade, there followed a 23-year period of more buoyant growth, averaging 7.9 per cent up to 1973. In the next 25 years to 1998, the average growth rate in merchandise trade fell back to 5.1 per cent.

More recently, a less stable period of global economic slowdown saw merchandise exports fall by 4 per cent in 2001 after rising by an exceptional 13 per cent in 2000. Aside from the period between the two World Wars and up to 2001, trade has continuously outstripped growth in the world economy as a whole.

The law of comparative advantage was first articulated by the 19th-century economist David Ricardo, who concluded that there was an economic benefit for a nation to specialize in producing those goods for which it had a relative advantage, and

exchanging them for the products of the nations that had advantages in certain kinds of products. An obvious example is coal, which can be mined in open-cast Australian mines or in China with low-cost labour and shipped more than 16,000 kilometres to the United Kingdom where a dwindling supply of coal can be extracted only from high-cost deep mines. With regard to coal, therefore, Australia and China have comparative advantages.

Above can be extended on a macro-economic scale. Not only will trade take place to satisfy conditions of comparative advantage, but also, in principle, the overall wealth of the world will increase if each country specializes in what it does best. Stated at its most simplistic, of course, the theory ignores many factors, of which the most important is that there may be limited international demand for some nations' specialized output. Nevertheless, the question arises as to why specialization has not occurred on a greater scale in the real world. The main reasons, all of them complex, may be summarized in order of importance, as follows:

strategic defence and economic reasons (the need to produce goods for which there would be heavy demand in times of war);

transport costs that preclude the application of comparative advantage;

artificial barriers to trade imposed to protect local industry, such as tariffs and quotas.

Q 2. State the difference between Domestic Trade and Foreign Trade.

Ans. Domestic Trade is internal trade. On the other hand, foreign trade is trade between two nations or countries. A controversy is going on among the economists whether there is any difference between in domestic trade and foreign trade. According to classical economists there is fundamental difference between Domestic and foreign trade. So, they put forward a separate theory of foreign trade which is known as theory of comparative Costs. But modern economists like Bertil Ohiln contend that there is no. intrinsic difference between Domestic and Foreign trade. The difference is of degree rather than of kind. Details of Foreign Trade do not differ in kind but they present problems regarding money and banking, wages and prices which are absent in domestic trade. They are more difficult of solution in an foreign than in a national context.There are several reasons to believe the classical view that Foreign Trade is fundamentally different from Domestic Trade.

1) Factor ImmobilityLabour and Capital are regarded as immobile between countries, while they are perfectly mobile within a country. There is complete adjustment to wage differences and factor price disparities within a country with quick and easy movement of labour and other factors. Labour is not mobile because of difference in languages, customs, occupational skills, unwillingness to leave familiar surroundings and family ties, high travelling expenses to foreign country and restrictions imposed by the foreign country. The immobility of capital due to political uncertainty, ignorance of prospectus of investment in foreign country, imperfections of banking system and instability of foreign currency. Such problems do not arise in the case of domestic trade.

2) Difference in Natural ResourcesDifferent Countries have different natural resources, e.g. India has got labour in abundance whereas England is abundant in capital. So. India will specialize in the production of labour intensive goods. Labour will be cheap in India, England will specialize in the production of capital intensive goods such as machinery. Capital is relatively abundant and cheap in England. Commodities requiring more labour will be produced in India and commodities requiring more capital will be produced in England. Both the countries will trade each others commodities on the basis of comparative cost differences in the production.

3) Geographical and Climatic DifferencesEvery country cannot produce all commodities due to geographical and climatic conditions. For example, Brazil has favourable climate for the production of coffee, Bangladesh for jute, Cuba for beat, sugar ete. Countries having climatic and geographical advantages specialize in the production of particular commodities and trade them with others.

4) Different Markets

National markets are often separated from rest of the foreign markets by Iheir peculiar individualities such as metric and non-metric units of measurements, different and peculiar tasles, traditions, habitual preferences of certain type of commodities. Foreign markets are separated by differences in languages, usage, habits, taste etc. A big firm may be producing and selling a number of products in different countries but it may be able to standardize its products and enjoy the economies of large scale production. Whereas the firm which specializes in the line of only cne type of product for the domestic market may enjoy the economics of large scale production.

5) Different CurrenciesDifferent countries have different currencies for instances U.S.A i.e. American dollar, British pound, German Mark and Japanese Yen. Changes in the relative values between the two currencies is very important from the point of foreign trade. Exchange rate may vary by much greater amounts. In case of domestic trade currency throughout the country is the same. But when we cross the borders of the country the currency changes. Different countries follow different monetary policies and exchange rate policies which affects the import and export of goods and services. It is this difference in policies rather than the existence of different which distinguishes Foreign from Domestic trade.

6) Problem of Balance of PaymentThere is greater mobility of capital within regions than between countries. When the value of imports exceeds value of exports the balance of payments is in disequilibrium. The policies adopted by the country to correct disequilibrium in balance of payments such as devaluation, exchange control, import restrictions or export promotions will give rise to number of other problems. Such problems do not arise in the case of domestic trade.

7) Transportation CostTrade between countries involves high transport costs as against domestic within a country because of geographical distances.

8) Different National PoliciesPolicies relating to commerce, trade, taxation etc. are the same within the country but in foreign trade, there are artificial barriers in the form of quotas, import duties, tariffs, exchange control etc. On ihe movement of goods and services from one country to another. Such restrictions are not found in domestic trade.

9) Different Political GroupsDomestic trade is among people belonging to the same country even though they differ on the basis of castes, creeds, religions, tastes or customs. They have a sense of belonging to one nation and their loyalty to the region is secondary. But in foreign trade there is no cohesion among nations and every country trades with other countries in it's

own interests. As remarked by Friedrich List domestic trade is among us and foreign

trade is between us and them.

Table : Difference between Domestic Trade and Foreign Trade

Domestic Trade Foreign Trade It is a trade between the traders

of the same country. It is a trade between traders of

two different countries. It is a trade within the boundaries

of the country. It is a trade beyond the

boundaries of the nation Volume of trade is large. Volume of trade is small.

Transport is not a problem. Mostly Ocean transport is used.

Insurance of goods is not compulsory.

Insurance of goods is compulsory.

Transactions are settled in rupee currency.

Different Currencies are used.

Government policy does not change within the country.

Different nations have different trade policies.

There is no Severe Competition. There is Severe Competition.

Factors of production are mobile within country.

Factors of production Land and capital cannot be moved from one country to another.

Q 3. Explain the importance of Foreign Trade for a developing country.

Ans. Before 1947 when India was a colony of the British the pattern of her foreign trade was typically colonial. India was a supplier of foodstuffs and raw materials to the industrialized nations particularly England and an importer of manufactured goods. This dependence on foreign countries for manufactures did not permit industrialization at home, rather as a result of the competition from British manufactures, the indigenous handicrafts suffered a severe blow.With the dawn of independence, the colonial pattern of trade had to be changed to suit the needs of a developing economy. An economy, which decided to embark on a programme of development, is required to extend its productive capacity at a fast rate. For this, imports of machinery and equipment, which cannot be produced in the initial stages at home, are essential.For instance, imports required for the setting up of the steel plants, the locomotives factory and the hydroelectric projects are of a developmental nature. Secondly, a developing country, which sets in motion, the process of industrialization at home requires the imports of raw materials and intermediate goods so as to properly utilize the capacity created in the country.

These imports are vital for a developing economy country, as many of the industrial projects are also held up for lack of maintenance imports. For a developing economy, the developmental and maintenance imports sets limits to the extents of industrialization, which can be carried out. in a given period. Besides these imports, a developing economy is also required to import consumer goods, which are in short supply at home during the period of industrialization. Such imports are anti-inflationary because they reduce the scarcity of consumer goods. One example of such imports is the food grains imports in India in the post - independence period which helped to arrest of prices at home.It is, therefore inevitable that during the early years of development. Imports have to be increased at a very fast rate. It is natural that the balance of trade in such a situation will turn heavily against the developing country. This necessitates the enlargement off exports. External assistance can help to share the burden of growth in the short run, but in the long period the development itself. To meet the growing foreign debt in view of inelastic imports, a developing country must increase its exports. Traditionally, underdeveloped countries like India have been the exporters of food stuffs and raw materials. As economic development proceeds, the raw material exports generally decline because their demand increases at home to meet the requirements of growing domestic industries. With fast growing population, the surplus of food grains available for exports either dwindles or is turned into a deficit.

Consequently, a developing economy is required to find new commodities and new

markets in which it can sell its manufactures. The developed nations can help the process of industrialization in an under-developed country by reducing trade barriers, and accepting its consumer goods. Foreign aid is important for an under-developed country, but trade is more significant. Thus, the new slogan, which has been raised by the under-developed nations, is 'Trade and Aid'.

Q 5. Explain the main provision related to Imports and Exports issued in circulars by RBI.

Ans. Exchange Control provisions relating to Imports, Exchange Control provisions relating to Exports, Decentralization of Exchange Control Administration in India, an Introduction, Objective, Liberalization of Exchange Control Administration in India, and Exchange Market Development.In Foreign Trade there are namely two parties involved, the importer and the exporter where there is exchange of goods and services among them. The government has laid down the following statutory rules and regulation to govern the trade by means of EXIM Policy, Handbook of Import and Export Procedure, Exchange control Manual, FEMA, ECGC etc. which are subject to change.

Exchange Control relating to Imports

Under the FEMA regulations, exchange can be obtained from Authorized Persons for any current account transactions. Import is considered a Current Account Transaction. FEMA also authorizes the Central Government to formulate rules and regulations regarding exchange for imports.Reserve Bank of India issues guidelines to Banks dealing in foreign exchange (referred to Authorized Persons) for implementation of the regulations. These guidelines, directives are mandatory in nature and takes the form of regulations applicable to all Banks and persons having transaction in foreign exchange. These circulars are usually referred to APDIR Circulars.Recently, RBI has issued a master circular listing out the exchange control provisions applicable to imports into India. The main provisions listed out in the circular are as under:

1. Imports from Nepal and BhutanFor Exchange Control purposes, the Rupee accounts of Bhutanese and Nepalese nationals and firms, maintained with any Indian Banks are treated as resident accounts and any trade settlements can be freely made through these accounts without anyrestrictions. However these settlements cannot be made out of foreign exchange remittances.

2. Import LicensesWhenever under the trade policy, the import of any item is subjected to an import license, the Banks should not open any letter of credit or effect any remittance unless the original Exchange Control Copy of the License is submitted and is endorsed. Import Licenses are for the GIF value and cannot be utilized to the full amount to cover the FOB value of import.Special conditions if any stated in the license are also to be strictly adhered to.

The import license, the Exchange Control Copy shall be endorsed by the Bank at the following transactions, under its stamp and signature.a. Opening of a letter of creditb. Remittance of import bill received under letter of creditc, Remittance of import bill not drawn under letter of creditd. Advance remittancee. Forward Contract booked for imports covered under the Licensef. Insurance and /or Freight paid by the importer in INROccasionally, the import contracts are concluded on fob basis and the actual amount of freight and insurance are to be reimbursed over and above the invoice value of imports. In such cases, the freight amount as mentioned in the BL and the insurance premium as stated in the Policy/cover note will be endorsed by the Bank effecting the remittance of the same, Import Licenses are to be retained by the Authorized Dealer after full utilization till scrutiny by the internal inspectors/auditors.

3. Obligations of the purchaser of exchangeThe purchaser of the exchange has to ensure that the exchange is utilized for the purpose for which it was purchased from the A.D. Where the exchange is purchased for payment of import, the evidence of import in the form of Bill of entry is required to be submitted to the Authorized Dealer through whom exchange is purchased.

Exchange Control Copy of Bill of Entry for home consumption; or EC copy of Bill of Entry for Warehousing, in case of EOUs; or Customs Assessment Certificate or Postal Appraisal Form,

is treated as evidence of import and has to be submitted to the Bank through whom the payment is effected/due to be effected. Where the import is in a non physical form, (e.g. data over internet), a certificate from the Chartered Accountant to the effect that the data/design/software has been received by the importer is acceptable. (Importers in such cases must keep customs authorities informed about their imports under this clause.)Where imports are through courier and value is less than Rs. 1 lakh, a copy of Bill of Entry issued by the customs in the name of courier, certified by the courier company, including the particulars of the consignment is to be submitted. Where the value is Rs. 1 lakh or above, EC Copy of bill of entry in usual form is required to be submitted.

4. Manner of rupee paymentPayment for import bills whether under letters of credit or on collection basis must be made by debt to the account of the importer (if account is maintained with the A.D.) or by crossed cheque drawn by importer on his banker. Under no circumstances payment in cash can be accepted by the A.D.

5. Letter of AuthorityLetters of credits can be opened and/or remittances can be effected by a person other than the importer himself, on the strength of letter of authority issued by the importer in the name of such person- The obligations of submission of evidence of imports shall rest on such LA holder.

6. Advance RemittanceAdvance remittance is subject to the following conditions:

a. EC Copy of a valid import license, if the item of import is subject to import license.

b. Beneficiary of remittance is the supplier.c. Where the amount remitted is over USD 25000 or its equivalent, a guarantee

from a bank of international repute should be obtained. Such guarantee/stand by letter of credit should have adequate validity to cover for the purpose of enforcing payment.

d. Physical import must be made within a period of 3 months from the date of remittance. Importer to undertake to submit such evidence, at the time of remittance.

e. In the event of non event, the remitting bank to ensure that the advance remittance is repatriated.

7. Time limit of settlement of import billRemittance against imports should be completed within 6 months from the dale of import. Payment terms involving settlements beyond 6 months from import date are treated as External Commercial Borrowings and require Prior approval of RBI/GOVT, However payment upto 15% can be withheld guarantee of performance of goods imported. No interest is payable on such amount.Delayed Remittances : Remittances can be effected even after the lapse of 6 months subject to the conditions that

a : The remitting bank is satisfied that the reasons for delay are genuine; and b : No interest is payable for the delayed period.

As an exception remittance if payment for imports of books is allowed beyond 180 days subject to there being no interest payment.

8. Interest on ImportInterest for usance as well as overdue interest, not exceeding six months from the dale of shipment can be remitted provided the rate is not more than the prime rate. (or LIBOR).Where an import bill is retired before due date, interest at the contracted rate for the unexpired usance will have to be deducted. Where no separate Interest is claimed, interest at Prime rate will be deducted for the unexpired usance.

Import under PenaltyWhere the goods were imported without authority but were later cleared by the customs under penalty, the invoice value can be remitted value can be remitted against EC Copy of Bill of entry.

Exchange Control relating to Exports

FEMA: Even though the exports form the current account transactions and the remittances can be brought in India without any restrictions, Section 7 of the Act provides authorities the Reserve Bank to make such regulations as its may think for to monitor the exports from India.Reserve Bank of India in turn has issued Export Regulations and has issued the same by way of notification on 3rd May, 2000. These regulations are effective from 1st June, 2000. Main features of these regulations are as under:

Declaration of exports: Every export from India has to be declared on form prescribed by the Reserve Bank of India for the purpose. This declaration is not applicable in the following cases :

a) Trade samples of goods and publicity material supplied free of payment,b) Personnel effects of the traveler,c) Goods/software not exceeding Rs.25000 (declaration from exporter to

accompany).d) Goods exported as tree gift, value not exceeding Rs. 1 lakh,e) Goods previously imported on free of payment on re-report basis,f) Goods being sent for testing subject to re-import,g) Goods being sent abroad for repair and re-import.

Format of declarationsGR forms : To be completed in duplicate For physical exports other wise than by postPP forms : To be completed in duplicate For physical exports through postSOFTEX forms : To be completed in triplicate For export of software otherwise than physical mode. SDF forms : To be completed in triplicate : For physical exports from selectedports/airports. GR PP and SOFTEX forms are bearing specific identification numbers which need to be quoted in all correspondence with Reserve Bank. The SDF form will bear the port code and the Shipping Bill number.

Disposal of GR PP and SDF SOFTEX forms: GR and SDF in duplicate are to be submitted to the Commissioner of Customs. After duly verify in and authenticating, the customs will forward the original of the GR/SDF to the nearest office of the Reserve Bank of India and handover the duplicate to the exporter.The exporter will submit the duplicate of the GR/SDF form to the Bank along with shipping documents and documents required for claiming payment from the buyer. The Bank will report the receipt of the GR/SDF form in its periodical return to Reserve Bank. It will continue to hold the GR/SDF form till the full proceeds of the export covered by those forms are realized and then it will certify on the back of GR/SDF form about realization of the bill and forward to Reserve Bank.The declarations in PP forms are to be submitted to the Bank (Authorized Dealer). The Bank will countersign the form and return the original to the exporter for submission to the postalauthorities. The postal authorities shall, after the goods are dispatched forward the original PP form to the nearest office of Reserve Bank, Exporter will submit the export bill to the bank branch, that had certified the PP form. On receipt of the bill the Bank will report the transaction to Reserve Bank in its periodical return.The duplicate of the PP form will be endorsed on realization of the proceeds and reported to Reserve Bank.The SOFTEX form in triplicate will be submitted to the designated officer at the Software Technological Park (STP) or at the Export Processing Zone (EPZ) or Special Economic Zone (SEZ). After certifying the form, the designated officer will retain the third copy and send original directly to RB1, the duplicate will be returned to the exporter.The exporter will submit the duplicate of the SOFTEX form and other documents to the Bank. The treatment of SOFTEX duplicate is the same as that of GR/SDF at the Bank.

Manner of payment of export bills: Normally the export bill should be realized according to the method of payment prescribed for country of destination.For exports to countries in the ACU group (Iran, Bangladesh, Pakistan, SriLanka and Myanmar) the invoicing and payment is to be in ACU Dollars.For the exports to Nepal and Bhutan payment has to be only in Indian Rupees.For all other countries the payment should be either in any convertible currency or by debit to the convertible Rupee account maintained in India, in the name of a Bank situated in the buyer's country.

Payment can also be recorded in one or more of the following methods :(a) In the form of a bank draft, pay order or a personnel cheque.(b) Foreign current notes, coins, travellers cheques, provided these are handed over

by the buyer during his personal visit to India.(c) Payment by debit to the NRE/FCNR account of the buyer with a Bank in India.(d) Payment through International Credit Cards, provided the payment is received by

the exporter's Bank in foreign currency.

Payment through the mechanism of ESCROW Account in case of export on counter trade basis Provided RBI's prior approval currency.

Time limit for realization: The amount representing full export value must be realized through an authorized dealer the export proceeds of months from the date of export.Status Holder Exporters and units in Special Economic Zones are permitted to repatriate the export proceeds within a period of 12 months from the date of export.As a temporary measure, exporters of goods and software to certain countries have been allowed a period of 360 days for realization and repatriation of sale proceeds. Initially this concession was valid for one year from 01 Sept., 2001 and which been extended by one more year.In respect of exports with prior permission of Reserve Bank of India, to warehouses established outside India, the realization can be on sale of the goods, but within 15 months from the date exports.In case where exporter is unable to realize the export proceeds within the specified period of 6 months, for reasons beyond his control he should make an application to Reserve Bank through the Bank who has handled the export bill in form ETX with supporting documentary evidence.Authorized Dealers have been permitted to consider such applications where invoice value does not exceed USD 100000 subject to following conditions.

a) The Bank is satisfied about the reasons of delay being beyond the control of exporter.

b) The exporter submits a declaration undertaking to realize the proceeds within the extended period.

c) The extension should not be more than 3 months at a time. While considering extension beyond 1 year from date of export, the export outstanding of the exporter should not exceed 10% of the average annual export realization during the last three calendar years.

Where ECQC has settled the claim of the exporter towards unrealized bill, the exported is not absolved from his liability to get the proceeds realized/repatriated and is under statutory obligation to take all steps for recovery in consultation with the ECGC.

Reduction in Invoice ValueReduction in Invoice value on account of prepayment. At the request of the exporters, Banks can allow reduction in the invoice value on account of cash discount for prepayment of an usance bill provided the cash discount so allowed is to the extent of proportionate interest on unexpired usance at the contracted rate of interest. If contract does not specify any rate of interest then this reduction will be calculated at the Prime/ LIBOR rate of the currency concerned.Reduction in value : Other cases

If after sending the bill for collection, the value is sought to be reduced, for any reason, the same will be considering by the Bank subject to following conditions :a. The reduction should not more than 10% of the invoice value.b. The item of export is no! subject to floor price restrictions.c. The exporter is not in the Exporter' Caution List of Reserve Bank.d. The exporter is advised to surrender the proportional export incentives availed of if any.

The ceiling of 10% is not applicable to the exporters who have been in the trade for over 3 years and whose export outstanding are not more than 5 % of their average annual export realizations over the past three calendar years.

Change of buyer/consignee: No approval is required to change the consignee/buyer. If however this is resulting in reduction in invoice value, the conditions specified for reduction in invoice value should be complied.Write off of an unrealized export billIf after taking all the efforts the export bill is not realized, the exporter can request his banker (the Bank who has handled the GR form) to write off the bill with supporting documentary evidence. The Bank will consider (he case subject to the following conditions :

1. The bill is outstanding for over a year,2. The total amount of write offs allowed by the Bank in a year does not exceed 10% of the

average annual export realizations of the exporter during the proceeding three calendar years.

3. Exporter has submitted satisfactory evidence to show that he has taken all the possible efforts.

4. The case falls under one of the category:

Buyer insolvent and official liquidators certificate indicates no possibility of recovery.

Buyer not traceable over a long period. Goods auctioned/destroyed by authorities in buyer country. Cost of resorting to legal action is uneconomical. The case is not a subject matter of any criminal/civil suit. The exporter is not being investigated by CBI/Enforcement directorate. The proportionate incentives are surrendered by the exporter.

Consignment ExportConsignment exports mean goods dispatched to the agent of the exporter on sale or return basis. The consignment exports must be so declared on the GR forms. The firm sale export cannot be converted as a consignment sale. In case of consignment exports, the goods are delivered to the buyer against a trust receipt. As and when the goods are sold the consignee abroad will be remitting the proceeds along with the account sales. In

such cases the price at which the goods are sold may vary with the value declaration inthe GR forms. The Account sales therefore must account for the entire quantity of the goods consigned. The unsold goods are to be re shipped back to India. This transaction has to be completed over a period of 6 months. The consignee abroad is entitled to deduct the charges (subject to original receipts) and his lee from the sale proceeds.In case of export of goods on consignment basis, the freight and insurance must be arranged in India.In case of export on consignment basis to CIS countries and east European countries, longer realization period is allowed by Reserve Bank if requested by exporter.

Exports requiring prior approval of Reserve Bank/Govt. Authorities

a) Counter Trade Agreements : Any agreement involving adjustment of value of goods imported against value of goods exported from India requires prior approval of Reserve Bank of India.

b) Project Export : approval is required from the working group.c) Export under trade agreements between Government of India and the

Government if a foreign state.d) Export on elongated payments terms. Advance Payments against exports

Occasionally the exporters who are in a better bargaining position and/or exporters who manufacture produces as per specializations from overseas buyers ask for and get a portion of the invoice amount as advance payment. It is obligatory on the part of the exporter to submit the documents of exports as and when shipments are effect to the authorized dealer through whom the advance payments is received. In case this advance payment is interest bearing then the interest amount should exceed 100 bps over corresponding LIBOR.

Remittances connected with Exports

Agency Commission: Agency commission can be remitted provided the commission is declared on the GR form and the shipment has actually taken place.Agency commission is not allowed to be remitted in case of exports under Rupee Credit route.

Export claims: Any claim against the export bill already realized can be remitted provided the exporter is not in the caution list of Reserve Bank and he is advised to surrender the export incentives availed if any.

Decentralization of Exchange Control Administration in India: Exchange Control in India is more than five decades old. It was introduced as an emergency measure under Defense of India Rules 1939, at the outbreak of the second WORLD WAR. The measures taken at that time were meant to converse foreign exchange mainly dollar

resources which were very valuable to the United Kingdom for purchase of war materials. Even after the war ended, the exchange control measures had to continue in view of post war developmental efforts and released of pent up demand for foreign exchange (i.e. US Dollar). Thus, the Exchange Control was made to stay on a long term basis and was placed on statutory footing by enactment of the Foreign Exchange Regulations Act of 1947. This act was in turn substituted by the Foreign Exchange Regulation 1993, which took effect from January 1, 1974. Under the Act ot 1973. several notifications were issued by Government of India and Reserve Bank of India, over a period of time. With the changing global atmosphere and shift of emphasis in the policy formulations of Government of India from one of import substitution to export promotion, one of controls and restrictions to liberalizations, several changes took place in the trade and industrial policy outlook. As a sequel to policy liberalizations of Government of India and for creating a more conducive climate for attracting foreign direct investment with a view to increasing production and promoting exports, ths FERA 1973 was amended through an ordinance issued on 8th January, 1993 which was later passed as an Act of Parliament known as Foreign Exchange Regulations (Amendment Act 1993).

Objectives of Exchange Control in India

As stated in FERA 1973, the objectives of Exchange Control in India is conservation of the foreign exchange resources of the country and proper utilization thereof in the interest of the economic development of the country. Accordingly Exchange Control has been the subject of frequent review and modifications.

Decentralization & Liberalization of Exchange Control Administration in IndiaThe main objectives of Exchange Control viz. Conservation of foreign exchange resources and proper utilization thereof in the interest on economic development of the country has remained intact since inception even through the manner in which the objective has been achieved has changed from time to time. As a result, apart from periodical modifications to the regulations, efforts are constantly made to simplify the procedures, soften the rigours of control, decentralize its administrations and improve the quality of customer service. The changing global environment has caused many a change in the approach towards foreign exchange management. The country is increasingly now depending on export led growth. On the import front too there has been an accelerated liberalization in the trade policy. Licensing is required for much fewer commodities than before. To bring stability Trade Policy has been announced for period of five years i.e. from 1992 to 1997. Industrial policy has been relaxed to a great extent. Foreign direct investment in industrial sector and investment in the stock market have created an atmosphere which cannot be effectively managed by an administrated exchange rate and rigid exchange control system.

Exchange Market DevelopmentThe worst ever balance of payment crisis was experienced by the country in the years 1990-91. The foreign exchange reserve were at a record low level; the current account deficit was widening. Coupled with this, there was a dwindling of inwards remittances form non-resident Indians and there was in fact a withdrawal of savings. This position was aggravated by rising oil import bill on account o! gulf crisis. The result was severe import compression and efforts to repatriate the foreign exchange dues. Government of India and Reserve Bank of India resorted to very unconventional measures to tide over the problems and to meet international commitments. Gold was sold out of Government stock with repurchase option. Gold was pledged by Reserve Bank of India in order to borrow foreign exchange. The value of rupee was adjusted downwards by 18.7% against US Dollar in order to improve the exports and contain the imports.With the severe measures, the temporary problem was solved. However there was a felt to promote an atmosphere in which balance of payment crisis of such a magnitude will not recur. A high level committee was formed under the Chairmanship of Dr. C. Rangarajan, the then Member of Planning Commission. The committee among the other things studied the utility of the Exim Scrip Scheme introduced in August 1991, wherein the exporters were given transferable import entitlement in the place of cash compensatory support. As an alternative to Exim Scrip scheme, as dual exchange rate system was recommended which was later formalized as Liberalized Exchange Rate Management System, (LERMS) which came into effect on 1st March, 1992. Under the system, forty per cent of current account receipts were required to be converted at official rate and the balance at the market determined rated.

Q 7. Explain the Export-Import Policy from 1998-2007.

Ans. Modified Export-Import Policy, April 1998The new Government at the Center, which assumed office in March 1998, announced its Export and Import Policy for the year 1998-99 on April 131998. As part of the annual Export-Import Policy modification, the Government freed from import restrictions a large number of consumer goods and liberalized all major export promotion schemes. This new dose of liberalization of the trade regime by the new Government was necessitated by the commitments made by India at the World Trade Organization (WTO) The timing of the import policy liberalization conclude with the scheduled review of India's trade policy by WTO on April 16 and 17,1998. Apart from the general global pressure on India to remove restrictions on imports, the US has filed a complaint with the WTO against India's import regime.The following were the main provisions of the modified Export-Import Policy unveiled by the Commerce Minister on April 13,1998.

1. 340 more items were shifted from the restricted list to Open General License (OGL). Thus, out of the total number of 10,202 items covered under the Export-Import Policy, only 2,200 remained on the restricted list.

2. The revised policy set an export growth target of 20 per cent for the year 1998-99 which in other words required total exports of the order of $41.4 billion during 1998-99.

3. Zero-duty Export Promotion Capital Goods (EPCG) scheme was extended to all software exporters by lowering the threshold limit of importable capital goods from Rs. 20 crore to Rs. 10 lakh. The lowering of threshold limit was expected to help software companies to proliferate throughout the length and breadth of the country. In other words, they could import any capital goods without paying any import duty and in return sign an export obligation of 5 times the value of capital goods on net foreign exchange earnings basis for a period of six years. In case of garments, agriculture, food processing, gems and jewellery, electronics, leather, sports goods and toys, the minimum limit was lowered to Rs. 1 crore.

4. In a bid to prevent cheap imports being dumped at unreasonable prices, the Government set up an anti-dumping cell called Directorate General (DG) of Anti- Dumping and Allied Duties. The DG would be responsible for investigation into alleged cases of dumping as well as subsidised cases. The DG would also commend anti dumping duties where it is found that dumped import are causing harms to the domestic industry, where harm is caused to industry by subsidizing exports by the exporting country, then the DG would have the jurisdiction to investigate all such cases and recommend possible imposition of countervailing duties. The DG would also advise the industry groups and consumer for an on how to go about collecting information and procedures involved in making out a case for anti-dumping duties.

5. Other provisions included; (a) delegation of powers to regional licensing offices, (b) doing away with the minimum value addition of 33 per cent under advance licensing scheme, (c) Simplified procedures for clubbing of advance license scheme and (d) Private bonded warehouses to be set up to import stock and sell even negative list items.

Export-Import Policy 1999-2000In its effort further dismantle the import control regime and hasten the integration of the Indian economy with the world economy, the Government announced a revised Export-Import Policy on March 31,1999 which came into force on April 1,1999.The new Export-Import Policy freed import of 894 items of consumer goods, agricultural products and textiles from licensing requirements. In other words a number of consumer items could now be imported license-free subject only to the payment of import duty. Physical controls on imports were removed and the only control over import was fiscal in nature, i.e. adjusting import duty to regulate imports. These adjustments were to be made within the upper limits prescribed by WTO.Moreover, another 414 items were removed from the restricted list, allowing these to be imported against special import licenses. India's international commitments require it to remove licensing curbs on imports by the year 2003.

Export-Import Policy, 2000-2001The Union Commerce and Industry Minister announced on March 31, 2000 the new Export-Import Policy of the Government of India for the year 2000-2001. The Export -Import Policy, envisaging a 20 per cent export growth in dollar terms in 2000-2001, brought about a major rationalization in export promotion schemes and launched a series of sector-specific inactivates.

A. Export Promotion : In a major initiative to boost Chinese model, the Government announced the following measures:

B. Special Economic Zones (SEZs): On the pattern of the Chinese model, the Government announced the setting up of two SEZs, at Positra in Gujarat and Nangunery in Tamil Nadu. Industrial units located in SEZs will be exempted form a plethora of rises and regulations governing exports and imports. The entire production will have to be exported from these zones, Sales from Domestic Tariff Area (DTA) can be done only on full payment of customs duty. Several Export Processing Zones (EPZs) will shortly be converted into SEZs. The EPZs located in Kandia, Vizag and Kochi will be converted into SEZs immediately. It was further announced that 100 per cent foreign direct investment (FDI) would be allowed in all products in SEZs.SEZs would be treated as if they are outside the customs territory of the country. The units would be able to import capital goods and raw materials duty free. The movement of goods to and From SEZs would be unrestricted. The Government in due course would announce a fiscal incentive package in SEZs.

It is noteworthy that SEZs have played a crucial role in boosting China's export and presently the country derives 40 per cent of its exports from such zones. However, Chinese SEZs are based on contract labor system (hire and fire policy) The Commerce Minister while announcing the Exim Policy categorically rule out any changes in labor laws. Moreover, there is no system of reservation of items for small- scale industries in China. It is unclear if the Government of India would allow the production of reserved items for small industries in the SEZs. Still further, there are various infrastructure bottlenecks like power shortage, lack of transport facilities and of course procedural delays, hence, the success if SEZs in India is a moot question.

Sector-specific Packages:The Export-Import Policy 2000-2001 announced sector - specific packaged for seven core areas to boost export, viz. gems and jewellery. Pharmaceuticals, agrochemicals, biotechnology, silk, leather and garments.For the gems and jewellery exporters, the Government announced a diamond-dollar account (DDA) scheme. Under the scheme, export proceeds can be retained in a dollar account and the exporters can use funds in this account for import of rough diamonds.For agro-chemicals, biotechnology and pharma units (considered as knowledge-intensive), the Government has allowed duty-free import of laboratory equipment, chemicals and reagents up to 1 per cent of the FOB value of exports. Similarly, the Government increased duty-free import of trimmings, embellishments and other items from 2 to 3 per cent of total exportvalues.

Involvement of State Government in Export Promotion :Since the States forgo taxes (mainly sales tax) on exports, they have little incentive to promote exports. The 2000-2001 Export-Import Policy announced financial incentives to states based on their export performance. An incentive scheme with an initial outlay of Rs. 250 crores to secure states involvement in the national export promotion activities such as infrastructure development. The Commerce and Industry Minister said that he would request the States to treat all units exporting more than 50 per cent of their turnover as public utility services. This would enable them to keep their foreign commitment on delivery schedules.Furthermore, the Minister observed that he recent spectacular growth of software exports was, apart from India's knowledge in high-tech, due to hands off policy of the Government towards this sector. A similar approach to hardware electronics is called for.

Import Liberalization :The Export-Import Policy 2000-2001 lifted quantitative restriction on 714 commonly used items (agricultural products and consumer durables that can now be freely imported. Thus, commodities like meat; milk powder, coffee, tea, fish, pickles, cigars and cigarettes, televisions, radios, tape recorders, footwear and umbrellas can be

imported freely from April 1, 2000. However, most of these items will attract peak rate of basic import duty of 35 per cent which when increased with surcharged and special customs duty will add up to a total of 44 percent in import duties. Further more, countervailing duty equivalent to domestic excise duty on the product being imported will enhance the 44 per cent.The lifting of licensing and quota restrictions on 714 import items was in line with India's WTO obligations. The Government promised to abolish licensing and quota curbs on the remaining 715 items (such as liquor, cars etc) in April 2001.Many critics of the new policy fear that removal of licensing and quota restrictions would to surge in imports of these items, hurting the domestic industry. However, it is noteworthy that import restrictions are being the phases out since 1996 but no extraordinary growth has occurred in the import of freed items. The Commerce Minister maintained that anti-dumping and anti-subsidy tariffs and other safeguards would be used if there were a sudden surge in imports, causing injury to the domestic industry.

Export-Import Policy, 2001-2002The Union Commerce and Industry Minister unveiled on March 31, 2001, the Export- Import Policy for the year 2001 -2002.

A. Removal of Quantitative Restrictions:The process of removal of import restrictions, which began in 1991, was completed in a phased manner by the Export-Import Policy 2001 -2002 with the removal of restrictions on the remaining 715 items. This was in tune with the commitments made to the WTO. Out of these 715 items 342 were textile product, 147 were agricultural products and 226 were other manufactured products.However, import of agricultural products like wheat, rice, maize, copra and coconut oil was placed in the category of State Trading. The nominated State Trading Enterprise will conduct the import of these commodities solely as per commercial considerations. Similarly, import of petroleum products including petrol, diesel and ATF was placed in the category of State Trading. In all 27 out of 715 items taken off the quantitative restrictions list were put under the state trading category.The minister was confident that the India market will not be swamped by import brands of commonly used articles. To prevent dumping, Government will take recourse to anti dumping duties and other non-tariff barriers. Arrangements have been made to track, collate and analyses a\data on 300 sensitive items, which mainly comprise farm goods, and items produced by small-scale sector.

B. Agricultural Export Zones:With a view to boost agricultural exports and provide remunerative returns to the farming community, the Export-Import Policy proposed the setting up of agricultural export zones. Three such zones are proposed to be set up in Himachal Pradesh. Jammu and Kashmir (to promote export of apples) and Maharashtra Government will make efforts to provide improved access to the produce/products of the agriculture and allied

sectors in the foreign market. State Governments have been asked to identify product specific agricultural export zones for development for export of specific products from a geographically contiguous area.

Export-Import Policy, 2002-2007

Special Economic Zones (SEZs): Offshore Banking Units (SBUs) shall be permitted ii SEZs. RBI is working out detailed guidelines. This should help some of our cities emerge a financial nerve centers of Asia. Units in SEZ would be permitted to undertake hedging ( commodity price risks, provided such transactions are undertaken by the units on stand alone basis. This will impart security to the returns of the unit.It has also been decided to permit External Commercial Borrowing (ECBs) for tenure of less than three years in SEZs. The detailed guidelines will be working out by RBI. This will provide opportunities for accessing working capital loan for these units at internationally competitive rates.

Agriculture: Export restrictions like registration and packaging requirements are being removed on Butter, Wheat and Wheat products, Coarse Grains, Groundnut Oil and Cashew to Russia. Quantitative and packaging restrictions on wheat and its products, Butter, Pulses, grain and flour of Barley, Maize, Bajra, Ragi and Jowar have already been removed on 5th March 2002.Restrictions on export of all cultivated (other than wild) varieties of seed, except Jute and Onion, removed.To promote export of agro and agro-based products, 20 Agri export zones have been notified.In order to promote diversification of agriculture, transport subsidy shall be available for export of fruits, vegetables, floriculture, poultry and dairy products. The details shall be worked out in three-months.3% special DEPB rate for primary & amp; processed foods exported in retail packaging of 1 kg or less.

Small-scale Industry:With a view to encouraging further development of centers of economic and export excellence such as Tirupur for hosiery, woolen blanket in Panipat, woolen knitwear in Ludhiana, following benefits shall be available to small-scale sector:

i. Common service providers in these areas shall be entitled for facility of EPCG scheme.

ii. The recognized associations of units in these areas will be able to access the fund under the Market Access Initiative scheme for creating focused technological services and marketing abroad.

iii. Such areas will receive priority for assistance for identified critical infrastructure gaps from the scheme on Central Assistance to States.

iv. Entitlement for Export House status at Rs. 5 crore instead of Rs. 15 crore for others.

Leather :Duty free imports of trimmings and embellishments upto 3% of the FOB value hitherto confined to leather garments extended to all leather products.

Chemicals and Pharmaceuticals : All particles formulations to have 65% of DEFB rate of such pesticides. Free export of samples without any limit. Reimbursement of 50% of registration fees of equipment and other goods used abroad for more than one year.

Strategic Package for Status Holders :The status holders shall be eligible for the following new / special facilities.

i. License / Certificate / Permissions and Customs clearances for both import and exports on self-declaration basis.

ii. Fixation of Input-Output norms on priorityiii. Priority Finance for medium and long-term capital requirement as per conditions

notified by RBI.iv. Exemption from compulsory negotiation of documents through banks. The

remittance, however, would continue to be received though banking channels.v. 100% retention of foreign exchange in Exchange Earners Foreign Currency

(EEFC) account; andvi. Enhancement in normal repatriation period from 180 days to 360 days.

Diversification of Markets

Setting up of "Business Center" in Indian missions abroad for visiting Indian exporters/ businessmen. ITPO portal to host a permanent virtual exhibition of Indian export product.Focus LAC (Latin American Countries) was launched in November 1997 in order to accelerate our trade with Latin American countries. This has been a great success. To consolidate the gains of this programme, we are extending this up to March 2003.Focus Africa has also been launched. There is tremendous potential for trade with the Sub American African region. During 2000-01, India's trade with the Sub Saharan African region was US$ 1.8 billion. Out of this, our exports accounted for US$ 3.3 billion. And our import was US$ 1.5 billion. The first place phase of the Focus Africa programme shall include 7 countries namely. Nigeria, South Africa, Mauritius, Kenya, Ethiopia, Tanzania and Ghana. The exporters exporting to these markets shall be given Export House Status on export of Rs. 5 crore.Links with CIS countries to be revived. In the year 2000-01, our exports to these countries were to the extent of US$ 1082 million. In this group, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Ukraine and Azerbaijan to be in special focus in the first phase.

Q 8. Define BOP and explain the concept of surplus and deficit in BOP.

Ans. The balance of payments (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year.The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

Balance Of Payments is a systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements.

(2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Kindleberger's Definition

The Balance of Payment of a country is a systemic record of all economic transaction between residents of reporting country and residence of foreign countries during a given period of time. The transactions entered into BOP are of course international transactions constituting transfer of assets and liability, the creation or reduction of claims, or receipts and payment of funds, which takes place between residents of one country and residents of other countries.

In the above definition of Kindleberger(a) by term "Resident" means: Apart from those who actually reside in the country, tourists, diplomats, military personnel, temporary migratory workers and branches of domestic companies are regarded as residents of the countries from which they come rather than the country where they are.(b) by an economic transaction means : An exchange of value, an act in which there is transfer of title to an economic good, the rendering of an economic service or transfer of title to assets from one party to another. An international economic transaction involves such transfer of title or rendering of services from residents of one country to residents of another.

Balance Of Payments EquilibriumBy balance of payments equilibrium we mean a situation in which the sum of the goods balance and the capital movements balance is equal to zero. We have a surplus when

official reserves increase. We have a deficit when official reserves decrease. Equilibrium of the balance of payments is a long-run economic policy objective, in the sense that a country must seek on average to offset deficits it may run in some periods with surpluses from other periods. The pursuit of continuous surpluses is feasible in appearance, while persistent deficits are not, since they would eventually exhaust the country’s foreign reserves and make further net payments abroad impossible. An exception to this is when the country is itself the issuer of a reserve currency that is accepted without limits by the other country (for instance, under a Gold Exchange Standard in which the convertibility of the reserve currency is, for whatever reason, always credible).

Upon closer analysis, however, running a constant surplus is not feasible either, since it implies a persistent deficit for the other country, which is not technically possible in general, as we have said. Therefore, when we speak of ‘persistent surpluses’, we mean a country that runs a balance of payments surplus for a long but not infinite period.

A surplus is certainly preferable to a deficit, but it may be awkward for two reasons:

a. it implies deficits for other countries, which may be important when a country’s international stance is markedly cooperative (although this is quite rare)

b. it may give rise to domestic inflationary pressures; recall that a balance of payments surplus is a source of monetary base: if it proves difficult to sterilise through other sources, monetary base may expand fast enough to generate inflation.

A country may also seek to limit, if not eliminate, balance of payments surpluses for another reason. In reality, if it wants to increase the world market shares of national firms it can try, on the one hand, to achieve a surplus on goods movements and, on the other, to pursue a deficit on capital movements (especially in terms of direct investment). The deficit on capital movements will thus at least in part offset positive goods movements balances.Balance of payments equilibrium is a long-run objective. In the short term, the aim may be different. Depending on the circumstances, the variety of objectives can include: reducing the deficit, balancing international transactions or running a surplus. A surplus on capital movements corresponds to borrowing by the country. The debt will have to be repaid at maturity and interest must be paid in the meantime. This requires the country to have access to sufficient resources in the future, which must translate into positive net exports. The resources could come from the investment of foreign capital. However, servicing the debt (interest and principal) introduces a rigidity into the balance of payments that may make it difficult to achieve balance in the presence, for example, of a fall in world demand.

Q 9. Analyze the trend of India's BOP since Independence.

Ans. At the time of independence, higher imports and capital outflows, led by partition, resulted in significant deficit in the balance of payments necessitating running down of the accumulated sterling balances. As the country embarked upon the planned development in the fifties, rapid industrialization of the country through development of basic and heavy industries guided the industrial and trade policies during the First (1951-56) and the Second (1956-61) Five-Year Plans. 'Import substitution' was recognized as the appropriate strategy for rapid industrialization. Export pessimism permeated the policy stance throughout the early decades of our Planning. This thinking was based on the four premises, which were considered appropriate at that time.

First, it was believed that only after industrialization had proceeded some way that increased production would be reflected in larger export earnings.

Secondly, it was argued that given the large domestic market, exports need not be an engine of growth.

Thirdly, growth in external demand for India's products was likely to be inelastic because of the traditional nature of our exports.

Finally, there was what was known as the Prebisch-Singer argument that primary commodity exports face a secular deterioration in the terms of trade. Accordingly, exports were regarded as a residual, a vent-for-surplus on those occasions when such surpluses were available.

The inward looking industrialization strategy during the first three Plans resulted in higher rate of industrial growth. However, the signs of strain in the balance of payments were clearly visible in the Second Plan (see Table 1 attached for trends in India's current account). As the import demand surged on account of development of heavy industries, current account deficit (CAD) in the Second Plan surged to 2.3 per cent of GDP. The difficulties in financing fast growing imports with stagnant exports put considerable strain on reserves as import cover of reserves (or foreign currency assets) plunged to barely two months’ by the terminal year of the Second Plan. In the Third Plan, improvedexport performance and slowdown in import demand led to some improvement in CAD and at the same time the financing requirements were met through stepping up of official assistance.

The Third Plan reflected the first signs of rethinking in the policy strategy by dedicating itself to ‘self sustaining growth’, which required ‘domestic saving to progressively meet the demand of investment and for the balance of payment gap to be bridged over’. While it envisaged that normal capital flows will continue, it set out the early indications of the concept of self reliance by foreseeing a steady reduction in the reliance on special foreign aid programmes and dispensing with them after a period of time.

A more liberal view of self reliance evolved over the Third Plan with a shift in stress from 'import substitution' to policy emphasis on 'efficient substitution of imports'. However, in reality, until the end of the 1970s, exports were primarily regarded as a source of foreign exchange rather than an efficient means of resource allocation. Though the devaluation of 1966 brought to the fore the problems associated with the overvalued exchange rate, it did not bring immediate desired improvement in the balance of payments position. In fact, CAD-GDP ratio widened to 2.0 per cent during the Annual Plans (1966-69).

Unlike the export pessimism of the earlier Plans, the Fourth Plan (1969-74) visualized an aggressive approach to export growth for achieving self reliance. As a consequence, trade policy became the primary instrument for achieving a more dynamic concept of self reliance than what was prevalent in the earlier decades.

However, it was in the Fifth Plan (1974-79) that self reliance was recognized as an explicit objective. In the Fifth Plan, invisibles surfaced as an important element of the current account with policy attention on tourism and shipping. Discovering the remittances from Indian workers as a new source of meeting the growing financing needs, the period witnessed new confidence in the external sector and prepared the ground work for take off to the exchange rate regime based on a basket arrangement initiated since 1975. The fact remains that the phase till the 1970s represented the era of the dominance of external assistance as a financing instrument in balance of payments.The second oil price shock was the precursor of another phase of strain on India's balance of payments. However, emergence of rising invisible surplus in India's balance of payments helped neutralize the widening trade deficit.

Notwithstanding this, the CAD averaged 1.5 per cent of the GDP in the Sixth Plan. Against the backdrop of second oil shock, the decade of the 1980s brought the balance of payments position to the forefront of the macroeconomic management. The Sixth Plan (1980-85) emphasized the strengthening of the impulses of modernization for the achievement of both economic and technological self reliance. The Seventh Plan (1985-90) noted the conditions under which the concept of self-reliance was defined earlier, particularly in the preceding Plan. It conceptualized self-reliance not merely in terms of reduced dependence on aid but also in terms of building up domestic capabilities and reducing import dependence in strategic materials. Achievement of technological competence through liberal imports of technology was also envisaged. Alongside, the winds of change were added by the recommendations of a number of committees set up during the late 1970s and the 1980s.

Some critical developments in India's balance of payments gathered momentum in the second half of the 1980s (i.e., Seventh Plan, 1985-90) that made the management of India's balance of payments the most challenging task. The Plan targeted to achieve a high growth rate and recognized that the management of balance of payments was

critically dependent on a sizable improvement in earnings from exports and from invisibles. It conceptualized self reliance not merely in terms of reduced dependence on aid but also in terms of building up domestic capabilities and reducing import dependence in strategic materials. However, several developments that put severe pressure on the balance of payments position during the Plan need attention.

1. First, the CAD assumed a structural character in the 1980s. With underlying expansion in economic activities, exports and imports grew in tandem, keeping the trade deficit at a high level. The invisible balance also deteriorated sharply due to stagnation in worker's remittances and rising interest burden due to building up of external debt.

2. Second, with flows of external assistance falling short of the financing need, recourse to costly sources of finance in the form of external commercial borrowings (ECB), especially short term debt and non-resident deposits, became relatively large.

3. Third, persistence of high fiscal deficit averaging 8.7 per cent of GDP (Centre and States) in the latter half of the 1980s, which could be only partly financed by the private sector surplus, thus, became a cause of deteriorating CAD.

4. Fourth, higher reliance on monetary financing of deficits also led to rise in inflation to double digit in the early 1990s, adversely affecting the relative price competitiveness of India's exports. Some possible misalignment of exchange rate, thus, resulted in loss of export competitiveness of exports and bias towards imports.

The rising financing requirements described above required not only higher recourse to external debt but also draw down of reserves, which declined to US $ 4 billion by end-March 1990 from US $ 7.4 billion at end-March 1980.

The weaknesses in the Indian economy were exposed by the Gulf crisis of 1990 and ensuing developments. The current account deficit rose to 3.1 per cent of GDP in 1990-91. Around the same time, credit rating of the country was lowered, restricting the country’s access to commercial borrowings and unwillingness on the part of normal banking channels to provide renewal of short-term credit to Indian banks abroad. As reserves kept on falling on expectations of an impending depreciation of Rupee, there was a temporary loss of confidence leading to a flight of Non Resident Indian (NRI) deposits.

The severity of the balance of payments crisis in the early 1990s could be gauged from the fact that India’s foreign currency assets depleted rapidly from US $ 3.1 billion in August 1990 to US $ 975 million on July 12, 1991. I must admit that I entered the policy circuit in Ministry of Finance, Government of India during this period. As a result of the crisis, a conscious decision was taken to honour all debt obligations without seeking any rescheduling and several steps were taken to tide over the crisis.

The steps undertaken towards this objective included, among others, pledging our gold reserves, tightening of non-essential imports, accessing credit from the IMF and other multilateral and bilateral donors.

After the Gulf crisis in 1991, the broad framework for reforms in the external sector was laid out in the Report of the High Level Committee on Balance of Payments, popularly known as Rangarajan Committee, as it was chaired by Dr. C. Rangarajan, former Governor of the Reserve Bank of India and currently Chairman of the Economic Advisory Council to the Prime Minister. After downward adjustment of the exchange rate in July 1991, following the recommendations of this Committee to move towards the market-determined exchange rate, we adopted the Liberalized Exchange Rate Management System (LERMS) in March 1992 involving dual exchange rate system in the interim period. The LERMS was essentially a transitional mechanism and a downward adjustment in the official exchange rate took place in early December 1992 and ultimate convergence of the dual rates was made effective from March 1, 1993, leading to the introduction of a market-determined exchange rate regime. (See Table 6 for Movements of Indian rupee from 1993-94 to 2005-06). The unification ofthe exchange rate of the Indian rupee was an important step towards current account convertibility, which was finally achieved in August 1994 by accepting Article VIII of the Articles of Agreement of the IMF. Capital account liberalization started as a part of wide-ranging reforms beginning in the early 1990s. The Rangarajan Committee recommended, internalize, liberalization of current account transactions leading to current account convertibility; need to contain current account deficit withinlimits; compositional shift in capital flows away from debt to non-debt creating flows; strict regulation of external commercial borrowings, especially short-term debt; discouraging volatile elements of flows from non-resident Indians; gradual liberalization of outflows; and dis-intermediation of Government in the flow of external assistance.

A credible macroeconomic, structural and stabilization programme encompassing trade, industry, foreign investment, exchange rate, public finance and the financial sector was put in place creating an environment conducive for the expansion of trade and investment. It was recognized that trade policies, exchange rate policies and industrial policies should form part of an integrated policy framework if the aim was to improve the overall productivity, competitiveness and efficiency of the economic system, in general, and the external sector, in particular.

With the onset of structural reforms in 1991-92, accompanied initially by severe import compression measures and determined efforts to encourage repatriation of capital, there was a turnaround in the second half of 1991-92. Over the next two years (1993-95), mainly due to foreign investment flows, robust export growth and better invisible performance, the balance of payments situation turned comfortable and reserves surged by US $ 14 billion. A combination of prudent and unique policies for stabilisation and structural change ensured that the crisis did not translate into generalized financial

instability. In the 1990s, the lessons drawn from managing the crisis led to external sector policies that emphasised the competitiveness of exports of both goods and services, a realistic and market-based exchange rate regime, external debt consolidation and a policy preference for non-debt creating capital flows. These policies ensured that the current account deficit remained around one per cent of gross domestic product (GDP) and was comfortably financed even as the degree of openness of the economy rose significantly relative to the preceding decades and capital flows began to dominate the balance of payments.

Since the mid-1990s, the management of the capital account with emphasis on risk averseness has assumed importance in the overall framework of macro economic decision making processes. While the capital account has to continue to perform its conventional role of meeting the economy’s external financing needs, the massive movement of capital through globally integrated financial markets imposes new constraints on the content and goals of policy. The pace and sequencing of liberalizationof capital account in India has been gradual in response to domestic developments, especially in the monetary and financial sector, and the evolving international financial architecture.

In recent years the capital account has been dominated by flows in the form of portfolio investments including GDR issues, foreign direct investments and to a lesser extent, commercial borrowings and non-resident deposits, while traditionally, external aid was the only major component of the capital account. The compositional shifts in the capital account have been consistent with the policy framework, imparting stability to the balance of payments. In the recent past, there has been significant liberalization on the outflows on account of individuals, corporates and mutual funds recently, consequent upon, among other things, comfortable level of foreign exchange reserves and greater two way movement in exchange rate of the rupee. This is reflected in the increasing global operations of Indian corporates in search of global synergies and domain knowledge. Transfer of technology and skill, sharing of results of R&D, access to wider global markets, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments.With significant opening up of the capital account, particularly on inflows, there were sustained foreign capital inflows since 1993-94. The net foreign assets of the Reserve Bank have also increased warranting open market operations involving sale of Government of India securities from the Reserve Bank’s portfolio and repo transactions - in order to offset the liquidity created by the purchases of foreign currency from the market; though use of cash reserve ratio is not uncommon. A Market Stabilisation Scheme (MSS) was introduced in April 2004 wherein Government of India datedsecurities/Treasury Bills are issued to absorb liquidity. Proceeds of the MSS are immobilised in a separate identifiable cash account maintained and operated by the

Reserve Bank, which is used only for redemption and/or buyback of MSS securities.

Importance of retaining external competitiveness and stability: In the present milieu, the issues that acquire considerable importance from the perspective of continued strengths in balance of payments are:

1. First, the focus of external sector policy will have to continue to be on maintaining competitiveness in terms of expansion of our trade in goods and services on a sustained basis. At the aggregate level, competitiveness can be assessed in terms of trade-GDP ratio, export growth of both goods andservices, and their price competitiveness. Improvements in infrastructure assume critical importance for maintaining and improving our competitiveness. We can no longer view external sector competitiveness in isolation from domestic economy.

2. Second, the realised product competitiveness is embedded in the shifts in the commodity composition of India's trade. India’s export base (i.e., the commodity and country composition) is far more diversified now than it used to be in the early 1990s. Rising import intensity of exports is another sign of Indian industry bracing up to higher level of competition. The preponderance of imports of capital goods in import basket of India points to industrial capacity expansion with emphasis on quality of products for domestic consumption as well as exports. The world is moving forward very fast and

hence productivity, increases in India have to equal and exceed that of the best producer in the world. The benchmark for our competitiveness in future is not our past but the emerging best in the field globally.

3. Third, progressive reductions in peak tariff rates on imports have provided Indian industry access to new technology and inputs. The positive developments in the external sector enable a further rationalisation of tariffs with a view moving to a single, uniform rate on imports and further simplifying procedures in line with best global practices. The current external environment, including the level of the foreign exchange reserves, enables such a move to be made with minimal downside risks.

4. Fourth, in the current international context, movements in national current account balances are increasingly being recognised as manifestations of the global imbalances. The empirical evidence indicates that even current account deficits, which appear optimising from an inter-temporal perspective or are on account of private sector imbalances, run the risk of sharp reversals. Hence, the need to keep current account deficits within manageable limits – an approach followed by India in its external sector management since the early 1990s. In this regard, It is necessary to recognise the significance of approach to the Eleventh Five Year Plan 'towards faster and more inclusive growth' adopted by the National Development Council last week (9th December, 2006). It is gratifying to note that the average CAD-GDP ratio indicated is 2.8 per cent for the target growth rate of 9 per cent, thus ensuring continued comfortable level of current account deficit, as we move forward.

5. Fifth, the current account deficit being the mirror image of the absorptive capacity of the economy should truly reflect the interplay of productive activities and the domestic absorption. Looking at the current account deficits from the angle of macroeconomic management, one should really view the current account, which, represents the demand and supply of goods and services and reflect the domestic fundamentals of growth and employment. Keeping these issues in mind, current account deficit (CAD) has to be viewed in two ways: (i) a conventional measure including all current account flows, and (ii) an adjusted measure of CAD, where workers' remittances are excluded from the current account as these represent broadly the exogenous component not driven essentially by the current pace of domestic activities and employment. The current account deficit, in a conventional sense, remained at a moderate level during last three Plans. However, an adjusted measure of CAD indicates that rapid expansion in domestic economic activities in the recent years has been reflected in higher absorption through external sector. In this light, the indicative CAD over the eleventh Five-Year Plan reflects significantly higher absorptive capacity than what the CAD to GDP ratios indicate.

6. Sixth, the policies for FDI are critical since relative to portfolio flows they are less volatile. While the emphasis is on dismantling of regulatory entry barriers, it is necessary to ensure that they are not portfolio flows in the garb of FDI. It must be recognized that overall investment climate must be improved so that both domestic and foreign investors are attracted. In the final analysis, well over ninety per cent of our investment has to be funded by domestic saving. Hence, generalized improvements in investment climate are crucial and FDI flows will also be enabled by such an environment. Overall, consistency in legal framework within the country and in line with international standards modified to suit our needs, and accompanying State level reforms would be useful in this regard. Overall, flexibilities are essential for supply and demand responses to price signals, which are critical for improving investment climate and more generally, for an open economy that best serves the national interest.

7. Finally, the gross volume of capital account transactions has been rising at a rapid pace, with bi-directional flows. Capital flows are managed from the viewpoint of avoiding adverse impact on primary liquidity growth and inflationary pressures. Capital flows are to be seen in the context of supply response of the economy and vulnerabilities or potential for shocks. A key issue in managing the capital account is credibility and consistency in macroeconomic policies and the building up of safety nets in a gradually diminishing manner to provide comfort to the markets during the period of transition from an emerging market to an evolved market. This also underscores the importance of continuing prudential regulations over financial intermediaries in respect of their foreign exchange exposures and transactions, which are quite distinct from capital controls.

Q 10. Write in brief about the FDI in India.

Ans. Foreign Direct Investment (FDI) inflows to developing countries are estimated to have gone up to U.S.$ 149 billion in 1997 from U.S.$ 130 billion in 1996. India’s share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. On the other hand, India’s share in net portfolio investment flows to the developing countries declined to 5.1 per cent in 1997 after increasing to 8.7 per cent in 1996. FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment (Table 6.9). Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in 1997- 98, portfolio investment declined from U.S.$ 3,312 million in 1996-97 to U.S.$ 1,828 million in 1997- 98. This decline in portfolio investment is mainly attributable to the contagion from the East Asian crisis, which adversely affected capital flows to all emerging markets. International developments continue to affect capital flows into India in 1998-99 as well. The provisional estimate of total foreign investment at U.S.$ 880 million during April-December, 1998 was sharply lower compared to the inflow of U.S.$ 4253 million during the corresponding period in the previous year. Although FDI flows were weaker, this overall decline in capital flows was mainly attributable to a net outflow in portfolio investment of U.S.$ 682 million during April-December, 1998 as against an inflow of U.S.$ 1742 million during the same period in 1997. Trends in approvals and actual inflows of foreign direct investment are shown in Table 1 below.Mauritius, as in the previous two years, was the dominant source of FDI inflows in 1997- 98. U.S.A. and S. Korea were, respectively, the second and third largest sources of FDI. The striking feature was that S. Korea increased its flow of investment in India from a meagre U.S.$ 6.3 million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4 per cent share). On the sectoral side, although the engineering industry witnessed a decline in inflows in 1997-98, it remained an attractive area for FDI, being the second largest recipient after electronics & electrical equipment.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.

Foreign Direct Investment (FDI) is permitted as under the following forms

of investments. 1. Through financial collaborations. 2. Through joint ventures and technical collaborations. 3. Through capital markets via Euro issues. 4. Through private placements or preferential allotments.

Forbidden Territories: FDI is not permitted in the following industrial sectors:

1. Arms and ammunition. 2. Atomic Energy. 3. Railway Transport. 4. Coal and lignite. 5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds,

copper, zinc.

Foreign Investment through GDRs (Euro Issues) Foreign Investment through GDRs is treated as Foreign Direct Investment Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Use of GDRsThe proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

RestrictionsHowever, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving:

foreign equity up to 50% in 3 categories relating to mining activities (List 2). foreign equity up to 51% in 48 specified industries (List 3). foreign equity up to 74% in 9 categories (List 4). where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

Opening an office in IndiaOpening an office in India for the aforesaid incorporates assessing the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental, and tax advice as needed, choosing legal and capital structure, selecting a location, obtaining personnel, developing a product marketing strategy and more.

2. The FIPB Route:Processing of non-automatic approval casesFIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Total foreign investment and FDI:Total foreign investment in IFY 1997-98 was estimated at $4.8 billion in 1997-98, compared to $6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated $3.1 billion, up from $2.7 billion in1996-97. The government is likely to double FDI inflows within two years. Foreign portfolio investment by foreign institutional investors was significantly lower at $752 million for fiscal 1997-98, down compared to $1.9 billion in1996-97, partly reflecting the effect of the recent crisis in Asia.

Foreign institutional investors: Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998. The outflow, prompted by the economic and currency crisis in Asia and some volatility in the Indian rupee, was modest compared to the roughly $9 billion which has been invested in India by FIIs since 1992.

FII investments: FII net investment declined to $1.5 billion for IFY 1997-98, compared to $2.2 billion in 1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of the rupee and relatively attractive valuations on Indian stock markets.

Large outflows of capital: Large outflows began again in May 1998, following India's nuclear tests and volatility in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in June that FIIs would be allowed to hedge their incremental investments in Indian markets after June11, 1998.

Q 11. Give brief account of the major problems of India's Export sector.

Ans. An important reason for the poor export performance of India has been the absence of an integrated view of the development potentials and objectives and a long-term strategy based on such an integrated approach. Needless to say, absence of a proper environmental analysis and definite objectives and policy directions are crux of the problems. Had there been a realistic assessment of the overall effect of modernization and economically efficient development of a sector on export earnings, employment, income generation, etc., the development of several sectors would not have been made to suffer by such policies are reservation for small scale sector, import controls, size and growth restrictions, etc. A proper understanding of the multiple benefits of development of a sector would lead to formulation of comprehensive and integrated development plans for the realization of multiple benefits. Such an integrated development strategy would avoid wasteful fragmentation of development efforts and distortions and would give more respectability to export development because of the realization and appreciation of the other socio-economic benefits. For example, an understanding of the effects of value added exports on employment and income generation as well as higher foreign exchange earnings would lead to due attention to the development of such exports. However, such as comprehensive and integrated view of development benefits was not always present under Indian planning.

Problem Recognition and Action LagsA major hurdle in India's progress in many fields has been lag in problem/need recognition and the lag in proper action even after the recognition of the need for action.Innovativeness is, undoubtedly, one of the very important factors that effect position in a competitive situation. One of the major failures of India has been in this respect. Success through pioneering innovation had hardly been a part of the Indian export strategy. The maximum we have aimed at has been to follow the trend and even in this we often lag very much behind. Not keeping pace with the trends, has led to the loss of India's market position in several traditional exports and to the unsatisfactory performance of several non-traditionals. The tardiness in the progress of value added exports is a reflection of this fact.Value added exports help better utilization of domestic resources and maximize export earnings. There is a lot of scope for increasing our export earnings from spices and certain' other agricultural products, marine products, leather, etc., through value addition. Our failure to market many products in consumer packs, under our brand names, to foreign consumers has caused huge loss of foreign exchange. Several products, unprocessed, semi .processed or processed, exported from India in bulk are processed or repacked by foreign firms, mostly in developed countries, and sold in consumer packs under their brand names. It establish a hold over the foreign market and to get better prices for our products, we must have an effective strategy to get over this problem of our faceless presence in the foreign market.

The Task Force on Spices has observed that Indian has been very traditional in its approach to export of spices. With the progress of time and development of the industry and improved standard of living, India as the largest spice producing country in the world failed to ensure that the benefits of modern development are the extented to the field of spices. Similarly, although India has been regarded as the world leader in tea, in product research and formulation we have played virtually no role-instant tea bags, tea drinks have all been developed abroad by the consuming countries.

Technological FactorsTechnological problems have had serious effect on India's exports. The Tandon Committee and Alexander Committee have referred to the adverse impact of technological backwardness on India's exports through poor quality, low productivity, high cost, etc.

High CostIndia is often at a disadvantage vis-a vis competing countries because, its costs of production, hence export prices , are higher than those in competing countries, not only because of the higher prices of importable and non traded inputs or because of time and cost over runs implicit in managerial inefficiency, but also because much lower level of productivity, all of which stem from the aforesaid problems.

Technological factors and low productively also contribute to the high cost of production in India. It has been pointed out that productivity in resource use "in a large number of export industries is still very low compared to the levels observed in many other developing countries. Analysis of productivity measured as value added per unit of labour for select sectoral categories and select countries reveals that productively levels in India are far behind those in many developed and developing countries. Even with regard to productivity of traditional exports, our productivity performance is not satisfactory. The growth rate of productivity in India is also lower than that in many other countries. Further, the advantage of the economies of scale and ability of bulk supplies are not available to the Indian exporters.

Poor Quality ImageIndia has poor quality abroad. Despite the measures taken under the Exports (Quality Control and Inspection) Act and other laws our exports continue to suffer because of the quality problem.Poor quality or inadequacy of inputs, technology and facilities affect the quality. On several instances, carelessness or lack of commitment on the part of the exporters are also responsible. Adulteration and duping are also not absent. There is a general impression that a proper export culture is lacking in India.

UnreliabilityBesides quality, Indian exporters have been regard as unreliable on certain other factors.Indian exporters have been regarded as unreliable also because of their inability to provide prompt after sales service.

Supply ProblemsA serious drawback of the Indian export sector is its inability to provide continues and smooth supply in adequate quantities in respect of several products .The problem is that "much of the exporting is the result of the residual approach rather than conscious effort of producing for export. The tendency for exporting what we produce rather than producing for export still continues to characterize the export behaviour."

Faceless PresenceAlthough India is an important supplier of several commodities in foreign markets, her presence in these markets is faceless in the sense that the consumers do not know that these commodities are Indian. Major export items of India like seafoods, leather manufactures, spices, etc., have, in many cases, a faceless presence in foreign markets. Although these exports may undergo further processing or repacking in many cases, in several cases the Indian exports are sold in the foreign markets in the same condition as they are exported, but under foreign brand name-sometimes it fetches as much higher price than the same product with an Indian name.

This is indeed a vicious circle. The poor quality-image of Indian products many a time apparent than real, makes it difficult to sell under Indian brand names. The faceless presence, on the other hand, perpetuated the problem. In fact, most bulk importers of Indian goods want this situation to be perpetuated as this enables them to hold control over the market while the exporters, being at the mercy of the foreign traders, lose bargaining power.The failure of Indian to keep pace with the market dynamics has also contributed to the perpetuation of this situation. For example, the failure of India to offer spices in consumer packs and in product forms that the consumers want, provided an opportunity for foreign traders to import spices in bulk and resell them in suitable forms, and thus keeping the market under their control.The faceless presence is also the result of the failure of the exporters and export promotion agencies in India to build up an image for Indian goods abroad.

Infrastructure Bottleneck"Infrastructure shortages such as energy shortages, inadequate and unreliable transport and communication facilities hinder growth in exports. Power shortages and breakdowns disrupt production schedules, increase costs and adversely affect timely shipment.

The continental size of the country necessitates that the inland haulage of export cargo as also its shipment at ports is done efficiently and at a reasonable cost. Exports also suffer for the want of efficient and economic communication facilities. Indeed, with advancements in communication and computer technologies, there very complexion of international trading has changed with more and more of cargo documentation and banking transactions getting into the electronic media. The Indian exporter, however, has to communicate through the inefficient and relatively outdated telecommunication network."

Improving the transportation system, including the expansion and modernization of the port facilities, rationalization of the charges, improving the procedural system, etc., are very much essential for the development of the export sector. However, the administrative lethargy continues to plague the Indian scenario causing heavy damage to export development.Structural Weakness

A major handicap of the Indian export sector is its structural weakness. Two of the important factors responsible for this, viz. low efficiency and productivity in resource use and poor technology have already been described. Another very important factor is the absence of a systems approach to the process of management, marketing, information, planning and decision making.

It is important to note that "India's exports do not pick up in periods of boom conditions in the world economy to the same extent as the exports of many other competitors. On the other hand, India is quick to pick up sluggishness in exports in response to sluggishness in the world trade much more quickly than other exporters. This asymmetry in the response of the export activity to world market conditions is a reflection of structural weakness of the export sector as a whole."

Uncertainties, Procedural Complexities and Institutional Rigidities

One of the defects of our trade policy regime has been the uncertainly about future policies, incentive scheme, etc.The procedural complexities of the Indian trade regime have been indisputably acknowledged. The government appointed Committee on Import-Export Policies and Procedures which made a number of recommendations for improving the regime.Although several measures have been taken recently, still much remains to be done in this respect. There is a general feeling that not only that there are too many controls and overlapping of policies but also "the principle of Indian policy is to elaborate rules (and exceptions ) to them, which are not only detailed and specified, but also subject to wide discretion." These are indicative of the structural weakness of the institutional system in India.There have been reports of loss of exports worth hundreds of the crores of rupees due to the problem of interdepartmental coordination. All these happen in a country which is said to be giving exports one of the high national priorities and which is facing serious foreign exchange problems.

Inadequacy of Trade Information SystemAn efficient Trade Information System is essential for success in the dynamic global market. But, our marketing infrastructure as well as marketing techniques are neither effective nor efficient. We do not have any machinery to keep prompt track of business

information overseas. As done by JETRO in Japan, KOTRA in Korea, CETDC in Hong Kong and STDB in Singapore with a wide network of offices abroad. These organizations have evolved an efficient system which help them to get information pertaining to tenders and the like, much before these are released officially. In India, we get these information, at times, after the expiry date. India has, no doubt, a plethora of organizations - governmental, semi-governmental as also non-governmental - engaged in this task in one way or other. Yet we do not have an easy access to market intelligence and information.

Q 12. Short Notes (any five)

a) Free Trade Policy

b) Protection Policy

c) Tea

d) Capital goods and Consumer durables

e) Projects and Services

f) SAARC

g) Asian Development Bank

h) IMF

i) Current Account

j) Capital Account

k) EOUs and EPZs

l) Export and Trade House.

Ans. Short Notes

c) TeaTea has been an important item of India's exports for many decades. Its contribution, particularly in the initial stages of export development when the total number if items exported from the country was limited, had been of far-reaching significance. Even now,

tea exports are significant among plantations and agricultural exports. Tea industry's capacity to increase exports substantially in terms of volume has been threatened by steady spurt in domestic consumption. Hence there is a limited scope for increasing the volume of exports. But the demand for exports of packaged tea, tea bags and instant tea in importing countries is increasing. It is because of these reasons; Government of India is laying emphasis on marketing of tea in value-added form for increasing the foreign exchange earnings.Export of Indian tea had received a setback in the Common wealth of Independent States (CIS) due to disintegration of erstwhile Soviet Union and for political reasons. Tea exports are facing competition from Sri Lanka and East/West Africa. New Entrant African tea has an edge over India tea by virtue of its younger bush profile and lower freight due to its proximity to western markets.

Table 12 : Production, Consumption and Export of Tea (Million Kg.)

Year Production Consumption Export1995-96 761 567 1671996-97 787 585 1691997-98 836 602 2111998-99 855 620 2061999-00 835 638 1922000-01 848 658 204

Tea prices rose sharply in 1997 despite higher production. The price rise was ascribed to higher export demand due to failure of Kenya's tea crop and increase in domestic consumption. Export of tea rose to 211.76 million kgs. Valued at Rs. 1954.91 crores in 1997-98 from 169.04 million kg. Valued at Rs. 1301.46 crores in 1996-97 (Table 11 above) the share of tea exports stood at Rs. 1890 crores for 2000-2001.

SAARC

South Asian Association for Regional Cooperation (SAARC) is the largest regional organization in the world, covering approximately 1.47 billion people. SAARC is an

economic and political organization of seven countries in Southern Asia. The organization was established on December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan.

SAARC Objectives: Objectives of SAARC include promotion of socio-economic developments within SAARC countries and also develop a productive relationship with regional and international organizations. Based on this, objectives can be categorized as under:

1. To promote the welfare of the people of South Asia and to improve their quality of life.

2. To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potentials.

3. To promote and strengthen collective self-reliance among the countries of South Asia.

4. To contribute to mutual trust, understanding and appreciation of each other's problems.

5. To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields.

6. To strengthen cooperation with other developing countries.

7. To strengthen cooperation among themselves in inter-national forums on, matters of common interest.

8. To cooperate with international and regional organization with similar aims and purposes.

SAARC Principles: The principles for SAARC were spelled out at the time of its establishment and these require firm commitment by all the SAARC countries. The cooperation among SAARC countries cannot be a substitute for bilateral and multi-lateral cooperation but shall complement them. Further, such cooperation shall not be inconsistent with bilateral and multi-lateral obligation.

Principles on which cooperation shall be based include respect to the following:

1) Sovereign Equality. 2) Territorial Integrity. 3) Political independence.

4) Non-interference in internal affairs of other states and mutual benefit.

Problems: There are number of problems which confront the SAARC:

1. Border disputes, ethic issues and religious, political outlook and affiliations etc. cause mutual distrust among some of the members of the association and these prevent emotional closeness and, as a consequence adversely affect to pursuit of cooperation.

2. One important problem that limits the scope of economic cooperation is that the economies of the member countries are similar rather dissimilar. In other words, complementarity, an important contributor to the success of economic integration, is limited.

3. As the member countries have emphasizing very much on the promotion of exports to the hard currency areas, domestic trade has been relatively neglected.

4. Some of the member countries are important exporters of same type of products and are, therefore, competitors in the foreign market. For example this is true of India and Bangladesh with respect to jute, and India and Sri Lanka with respect to tea. Similarly, textiles and clothing are very important export items of most of the members.

5. Due to the differences in the levels of developing and economic strength, there is a feeling that the relatively advanced member countries would be the major beneficiaries of the cooperation and the least developed among them may not benefit much. As a matter of fact, the least developed members could enormously benefit from others, particularly from India, if proper schemes of cooperation are pursed.

6. Due to foreign exchange problems, these countries, generally, tend to restrict imports and this comes in the way of domestic trade too. Further revenue considerations may discourage governments the abolition / reduction of tariffs even on domestic trade.

7. Underdevelopment of transport, communications, payment and clearing arrangements, institutional inadequacies etc., also hinders expansion of economic relations.

Potential Areas of Cooperation: There are many potential areas of cooperation Of SAARC such as :

i. Agriculturalii. Rural development

iii. Meteorologyiv. Telecommunicationsv. Scientific and technological cooperationvi. Health and population activitiesvii.Transportviii. Postal serviceix. Sport, arts and culturex. Control of drug traffickingxi. Women in development

g) The Asian Development Bank (ADB)

The Asian Development Bank (ADB) is a regional development bank established in 1966 to promote economic and social development in Asian and Pacific countries through loans and technical assistance. It is a multilateral development financial institution owned by 66 members, 47 from the region and 19 from other parts of the globe. ADB's vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens.The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the world's poor.The bank was founded as a regionally focused clone of the IBRD (World Bank), with the primary impetus coming from the US, Japan and Western European (especially Nordic and Germanic) governments. The bank has traditionally funded its lending activities by issuing supranational-rated bonds in the euromarkets. For many years the bank was the only Asia-ex Japan issuer of eurobonds. Although recent economic growth in many member countries have led to a change in emphasis to some degree, throughout most of its history the bank has operated on a project basis, specifically in the areas of infrastructure investment, agricultural development and loans to basic industries in member countries. Although by definition the bank is a lender to governments and government entities, it has also participated as a liquidity enhancer and best practice enabler in the private sectors of regional member countries. The primary human capital asset of the bank is its staff of professionals, encompassing academic and/or practical experts in the areas of agriculture, civil engineering, economics, public policy and finance. These professionals are drawn from all across the globe and given various incentives to relocate to Manila, including diplomatic status and tax-free incomes. It is conceivable that once all of Asia-

Pacific reaches a certain level of living standard the bank will be wound down or reconfigured to operate as a commercial enterprise.

h) International Monetary Fund ( IMF)

The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.

Functions of IMF

The functions of the International Monetary Fund are:

i. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

ii. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

iii. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

iv. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

v. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

vi. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The major objectives behind setting up the IMF were restoring Multinational trade and establishing a state of exchange rate. The funds resources primarily consists of

"Quotas"subscribed by the member countries. In simpler terms, the goals are, first, to facilitate the cooperation of countries on monetary policy, including providing the necessary resources for both consultation and the establishment of monetary policy in order to minimize the effects of international financial crises. Second, the IMF is supposed to assist the liberalization of international trade by helping countries increase their real incomes while lowering unemployment. Third, the IMF helps to stabilize exchange rates between countries. Especially after the global depression of the 1930s, it was considered vital to establish currencies that could hold their value, serve as mediums of international exchange, and resist any speculative attacks.

(i) Current Account

The current account covers all transactions involving flow of goods and services between the reporting country and rest of the world. Under the present IMF procedure, Exports and Imports of visible items of goods are to be valued at the customs frontier of the exporters country. Any difference that exists between the credits and debits of visible exports and imports is called a" Balance of Trade". If debits are greater than credits this is termed as "Unfavourable Balance of Trade". Though merchandise trade, accounts for the major part of the current account for most of the countries, the rest of the account known as 'Invisible account' also constitutes an important element. The Invisible account cover such services items like travel, transportation, insurance etc. and investment income and transfers (grants, gifts etc.) For many reasons, current account is regarded as most basic of all sub-accounts. Firstly because of its relative size compared with other sub-accounts. Secondly it contains all transactions that gives rise to or use up a country's National Income. Thirdly because even, long term capital movements, can be effected ultimately via movement of real goods and services.

(j) Capital Account

It covers debts and claims payable in money or constituting money. It contains all

changes in claims on or of a country owed by or owed to the rest of world. The capital account is concerned with changes in the claims of residents to overseas residents, and changes in the liabilities of residents to overseas residents. The changes in the bank balance held by residents in foreign banks and change in bank balance held by foreigners in domestic banks are held in capital account.The capital account may be subdivided into 'Long Term' and 'Short Term'. Long Term involved all movement of ownership instruments with a maturity of more than a year whereas Short term capital involves all movements of ownership instruments with less than one year maturity. Long term capital consists mainly of transactions in equities, loans, bonds, real estate whereas Short Term capital is mainly bank deposits, acceptances, drafts. Long term capital involves international transfer of purchasing power which provide the means of financing net flow of goods and services from the lending country to the rest of world. Short term capital movements can be regarded as induced (i.e. not autonomous) by

other BOP transactions in the sense that they operate so as to temporary fill in any gap between total receipts payments of other transactions.The capital account may also be divided into Official and Private accounts on the basis that private capital flows takes place in order to make a profit or to avoid loss whereas official capital flows may be induced response to changes that takes place elsewhere in BOPs.