Trade policy (Indian Context)

Title slide

[AN ANALYSIS IN INDIAN CONTEXT]28 February 2014Trade PolicyTRADE POLICYPrepared by-Swapnil SoniDoMS, IIScCourse- Public Policy

Instructor-Prof. Anjula Gurtoo

#

1

IndexForeign TradeIntroductionCitationIndian HistoryTrade PolicyIntroductionObjectivesNeedDisadvantagesMinistry of Commerce & IndustriesEvolution Department of Commerce28 February 2014Trade PolicyForeign Exchange Management ActIntroductionEvolutionFeaturesComparison with FERAForeign Trade Policy 2009-2014IntroductionSchemesSpecial Economic ZoneForeign Trade Statistics (India)Criticism to Trade PolicyLatest Development in Foreign Trade PolicyReferences

#2

Foreign Trade- IntroductionDiversity across the world in terms of :GeographyDemographyEach country has not enough competency to produce all kinds of goods & services to fulfill the needEach country has some geographical & demographical advantages for some specific productionSolution to meet demand & development- exploitCompetitive AdvantageCountries trade with each other to exchange commodities or services that may not be viable to produce. This exchange of values to meet domestic demand & development is calledForeign Trade28 February 2014Trade Policy

#CitationIndia : IT professionals at cheaper rateChina: Industrial skilled labor at cheaper rateResult- India evolved to be one of the top choices for outsourcing for US & UK clientsChina emerged out to be a manufacturing hub of the world28 February 2014Trade Policy

Foreign Trade- Citation

#Foreign Trade Indian HistoryAround 100BCExport: Cotton, ivory, mallow cloth, muslin, precious and semi-precious gems (diamond, pearls), silk, spices, and curatives like black pepper, nard, long pepperImport:Wines from Italy, copper, tin, lead, coral, topaz, sweet clover, flint, glass, antimony, gold and silver coins, and performers for kings(Source: Periplus of the Erythraean Sea by an anonymous sailor from Alexandria)

Around 1500ADIn 1498 Portuguese explorer Vasco da Gama landed in Calicut (Kozhikode, Kerala) as the first European to ever sail to India. The tremendous profit made during this trip made the Portuguese eager for more trade with India and attracted other European navigators and tradesmen.While returning to Portugal in 1501 with pepper, ginger, cinnamon, cardamom, nutmeg, mace, and cloves. The profits made from this trip were huge.

28 February 2014Trade Policy

#

Trade Policy- IntroductionShortcomings of Foreign Trade

Trade Deficit Current Account Deficit Survival of Domestic companiesDependency for goods & servicesDumping

SolutionRules and regulations that are intended to change international trade flows, particularly to restrict imports. Every nation has some form of trade policy in place, with public officials formulating the policy which they think would be most appropriate for their country. Their aim is to boost the nations international trade.


India (2011-12)Trade Deficit 10.2% of GDPUS$ 78.2 billionCurrent Account Deficit 4.2% of GDPUS$ 189.8 billion

ExportImportOriginated from:Second Five Year Plan in 1955 by appointment of Prime Minister Jawaharlal Nehru based on Mahalanobis strategy

#Trade Policy elements

Trade Restrictions

Organizations

28 February 2014Trade PolicyTrade Policy- IntroductionImportExportBalance of tradeComparative advantageTrade law, pactExport subsidiesTrade creationTrade diversionExport orientationImport substitutionTrade facilitationTrade routeDomestic tradeTax, tariff and tradeTrade finance

TariffsImport quotasImport licensesEmbargoCountervailing dutiesCustoms dutiesTechnical barriersExchange rate controlsAnti-dumping dutiesVoluntary export restraints

World Trade OrganizationWorld Customs OrganizationInternational Monetary FundPreferential trading areaCustoms unionEconomic unionCustoms and monetary unionEconomic and monetary unionFiscal unionMonetary union

#

Appreciate trade with other nationsProtect domestic market prevailing in the countryIncrease the export of particular product which will help in expanding domestic marketEncourage the imports of capital goods for speeding up the economic development of the countryPrevent the imports of particular goods for giving protection to infant industriesRestrict the imports of goods which create unfavourable balance of paymentsControl the export or import of goods and services for achieving the desired rate of exchangeEnter into trade agreements with foreign nations for stabilizing the foreign trade28 February 2014Trade PolicyTrade Policy- Objectives

#Why Trade policies

National Defence theory

No nation would afford to be dependent on other exporter nation at the time of conflicts

Infant industry theory

New domestic industries should be protected from foreign competition for so long so that they will have a chance to develop

Antidumping theory

Dumping is allowed, foreign producers will temporarily cut prices and drive domestic firms out of the market. Then they will use their monopoly to exploit consumers.

28 February 2014Trade PolicyTrade Policy- Need

#Disadvantages

Increased Cost to ConsumersTrade barriers artificially raise the price of imported products

Increased Costs to Domestic SuppliersTrade barriers artificially raise prices on foreign commodities, making it less profitable to buy from other countries

Less CompetitionTrade barriers lessen foreign competition, leading to fewer product choices for consumers thereby paving the way for firms for gaining monopoly market power28 February 2014Trade PolicyTrade Policy- Disadvantages

India (Rs/10gm) 30017.0

Perfect competitionMonopoly

#Ministry of Commerce & Industries - Evolution YearMilestones1921Department of Commerce was formed1943Designated as Department of Industry & Civil Supply1947Re-deisgnated as Ministry of Commerce under charge of cabinet ministers1951Re-deisgnated as Ministry of Commerce & Industry1956Bifurcation: 1) Ministry of Commerce & Consumer Industry2) Ministry of Heavy Industry1958Formation of 3 departments:CommerceIndustryCompany Law

1962Heavy Industry was taken away from MCI1969Re-deisgnated as Ministry of Foreign Trade & Supply but later Supply was taken away1973Re-deisgnated as Ministry of Commerce & Industry


#YearMilestones1999Formation of 3 Divisions:Department of CommerceDepartment of Industrial PolicyDepartment of Supply2000Department of Supply was abolished and left with Department of Industrial Policy & Promotion (Intellectual Property)Department of CommerceForeign Trade DivisionExport Trade Division

28 February 2014Trade PolicyMinistry of Commerce & Industries - Evolution

Minister of State Commerce and Industry

Constituency : Visakhapatnam

Education: Bachelor of Arts from the South Indian Educational Trust and Women College (Chennai)Minister of Commerce and Industry

Founder member of the Congress Party's students wing the NSUI

Former Minister of State in the Ministry of External Affairs

Anand SharmaDaggubati PurandeswariLeadership

#Subjects under Administrative ControlInternational TradeInternational Trade and Commercial Policy including tariff and non-tariff barriers. International Agencies connected with Trade Policy (eg. UNCTAD, ESCAP, ECA, ECLA, EEC, EFTA, GATT/WTO, ITC and CFC)Foreign Trade (Goods & Services)All matters relating to foreign trade. Import and Export Trade Policy and Control State TradingProjects & Equipment Corporation of India Limited (PEC)India Trade Promotion Organization and its subsidiariesMinerals and Metals Trading Corporation and its subsidiaries.Production, distribution (for domestic consumption and exports) and development of plantation crops, tea, coffee, rubber, spices, tobacco and cashew. Management of Certain ServicesCadre Management of Indian Trade, Supply & Inspection Service and all matters pertaining to training, career planning and manpower planning for the serviceSpecial Economic ZonesAll matters relating to development, operation and maintenance of special economic zones and units in special economic zones, including export and import policy, fiscal regime, investment policy, other economic policy and regulatory framework28 February 2014Trade PolicyMinistry of Commerce & Industries- Department of Commerce

#Subjects under Administrative Control (continued..)Export Products and Industries and Trade FacilitationGems and Jewellery. Matters relating to Export Promotion Board, Board of Trade and International Trade Advisory Committee.Matters relating to concerned Export Promotion Councils/Export Promotion Organizations.Indian Institute of Foreign Trade and Indian Institute of Packaging. Indian Diamond Institute and Footwear Design and Development Institute.Coordination for export infrastructure. Development and expansion of export production in relation to all commodities

Attached and Subordinate OfficesDirectorate General of Foreign Trade. Directorate General of Supplies and Disposals. Directorate General of Anti-Dumping and Allied Duties and related matters.Directorate General of Commercial Intelligence and Statistics

Statutory BodiesMarine Products Export Development Authority. Agricultural and Processed Food Products Export Development Authority28 February 2014Trade PolicyMinistry of Commerce & Industries- Department of Commerce

#Advisory Bodies

Board of Trade (BOT)

Set up on 5th may, 1989Reconstituted on 16th July, 2009 under the chairmanship of commerce & industry minister To examine the existing institutional framework for imports and exports and suggest practical measures for further streamlining to achieve the desired objectives

Inter State Trade Council

Set up on 24th June, 2005To trade facilitation and to create a framework for making States partners in Indias export effortThe Council is represented by Chief Ministers of the States or State Cabinet Ministers28 February 2014Trade PolicyMinistry of Commerce & Industries- Department of Commerce

#28 February 2014Trade PolicyPayment of Dividend and RoyaltyDistortion of Economic StructurePolitical InterferenceTechnology transfer not conducive to development

Enactment of FERA in 1973

FERA 1973All foreign companies or branches to convert as Indian companies with minimum 60% local equity Foreign equity share to 40% or less

Liberalization 1991It is no longer appropriate to deify foreign exchange as something special and maintain a burdensome and highly regulated structure around this deity- Union Budget 1998-99Foreign Exchange Management Act-Evolution

FEMA 1999Govt. adopted FEMA where the emphasis is on management rather than regulation

MNCsMNCs controlled 53.7% of the assets of large sector in India till the end of decade of seventies14 more companies had extremely heavy loans and equity capital and therefore were virtually foreign controlledwestern foreign capital dominated the countrys big business and controlled the apex of Indias industrial pyramid in the mid sixties

#Foreign Exchange Management Act- FeaturesAn Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

FeaturesReplacing the Foreign Exchange Regulation Act (FERA), 1973The deals in Foreign Exchange were to be managed instead of regulatedCompatible with the pro-liberalisation policies of the Government of IndiaEnabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO)Exporters are needed to furnish their export details to RBINecessary to keep adequate amount of foreign exc from Import Substitution to Export PromotionBrought with it the Prevention of Money Laundering Act of 2002, which came into effect from 1 July 200528 February 2014Trade Policy

1999

#28 February 2014Trade PolicyForeign Exchange Management Act- comparison with FERA

FERA Vs FEMA- a comparisonParametersFERA FEMA ScopeAnything and everything that has to do any thing with foreign exchange was controlledOnly specified acts relating to foreign exchange are regulatedAimPrevent misuse of foreign exchangeFacilitate tradeEnactment 81 sections 49 sections ProhibitionsIndians taking employment abroad, employment of foreign technicians in India etcNo such restrictionsEmphasisForeign Exchange & Trade RegulationForeign Exchange & Trade Management

#Foreign Trade Policy- Introduction28 February 2014Trade Policy

These are difficult times and we have set an ambitious goal for ourselves. I am sure that the industry and the Government, working in tandem, will be able to ensure that the Indian exports become globally competitive and that we are able to achieve the target, which we have set for ourselves.

(Anand Sharma)The Foreign trade Policy, announced on August 28, 2009 is an integrated policy for the period 2009-14To arrest and reverse declining trend of exports

To achieve an annual growth of 15% for the first 2 years till March 2011 with an annual export target of us $ 200 Billion

To achieve an annual growth of 25% during the remaining period of the policy 3 years.

By 2014 to double India's export of goods and services from the present level of 1.64% of the global export marketObjectives

#Schemes Export promotion on capital Goods (EPCG)Allows import of capital goods for pre & post production Facilitate up gradation of plant &machinery, inputs of spares up to 100% of value of exports Promote high value in exports, export obligation of 50% is removed

Focus Product scheme (FPS)Provides license for export product which have high employment potential in rural & urban areas with a view of infrastructural facility (Agriculture, handicraft export)

Focus Market Scheme (FMS):Offsetting high freight cost & distribution faced in assessing foreign markets Market Linked Focus Product Scheme (MLFPS):Expanding products in identified markets (Mango export to US)

Vishesh Krishi & Gram Udyog Yojna (VKGUY): To boost Agriculture & rural exports re-credit is given at 2% special additional duty

28 February 2014Trade PolicyForeign Trade Policy- Schemes

#Announcements for FPS, FMS, MLFPS26 new markets added in this scheme. Incentives under FMS raised from 2.5 % to 3 % Incentive available under FPS raised from 1.25% to 2%. Products included in the scope of benefits under FPS FPS benefit extended for export of green products 'and some products from the North East MLFPS expanded by inclusion of products like pharmaceuticals, textile fabrics, rubber products, glass products, auto components, motor cars, bicycle A common simplified application form has been introduced to apply for the benefits under FPS, FMS, MLFPS and VKGUY Financial Assistance provided for a range of export promotional activities implemented by EPC, & Trade Promotion organization Market study & survey Setting up showcases Participation in trade fairs Displays in international Dept. Stores Publicity & Campaigns, Brand Promotion

28 February 2014Trade PolicyForeign Trade Policy- Announcements

#Export Oriented Unit (EOU)/Special Economic Zone (SEZ)

India was one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exportsAsia's first EPZ was set up in Kandla, Gujarat in 1965With a view to attract larger foreign investment in India, the Special Economic Zones (SEZs) Policy was announced in April 2000Income Tax exemption to 100% EOUs and to STPI (software Technology park unit) under Section 10B and 10A of Income Tax Act, has been already extended for the financial year 2010-11 in the Budget 2009-10.

Objectives of SEZGeneration of additional economic activityPromotion of exports of goods and services Promotion of investment from domestic and foreign sourcesCreation of employment opportunitiesDevelopment of infrastructure facilities

28 February 2014Trade PolicyForeign Trade Policy- Special Economic Zone

#StateFormal ApprovalsNotified SEZOperational SEZAndhra Pradesh1097432Chandigarh221Chattisgarh200Delhi300Dadra & Nagar Haveli420Goa730Gujarat462913Haryana45343Himachal Pradesh000Jharkhand110Karnataka563620Kerala28177Madhya Pradesh1461Maharashtra1056316Nagaland210Orissa1161Pondicherry100Punjab820Rajasthan883Tamil Nadu705722Uttar Pradesh33206Uttarankhand320West Bengal22115Total 580374130


(As on 31.12.2010)Foreign Trade Policy- Special Economic Zone Source: http://commerce.nic.in/publications/anualreport_chapter5-2010-11.asp

#28 February 2014Trade PolicyForeign Trade Policy- Special Economic Zone

Hardware Manufacturing Facility, Mahindra World City in Tamil Nadu

Nokia SEZ Complex in Tamil Naidu

Apparel Manufacturing Facility, Mahindra World City in Tamil Nadu

Mundra Port, gateway for cargo Kachchh, Gujarat

#28 February 2014Trade Policy

Sector wise Formal Approval of SEZForeign Trade Policy- Special Economic Zone SEZs in India provide direct employment to over 6.44 lakh persons

The incremental employment generated by the SEZs in the short span of time since the SEZ Act came into force in February 2006, is of the order of 5.09 lakh persons.

#28 February 2014Trade PolicyForeign Trade Statistics

Source: http://dgft.gov.in/Peak- US $ 490 b during 2012-13Increased Import


Foreign Trade StatisticsPeak- US $ 306 b during 2011-12Source: http://dgft.gov.in/Decreased Export

#Foreign Trade Statistics28 February 2014Trade Policy

Source: http://dgft.gov.in/


Foreign Trade Statistics



Foreign Trade Statistics



Foreign Trade StatisticsImport from China- US $38 bSource: http://dgft.gov.in/


Foreign Trade StatisticsExport to USA- US $29 bSource: http://dgft.gov.in/

#Criticism to Trade PolicyDo countries with lower barriers to international trade experience faster economic progress?More open and outward oriented economies consistently outperform countries with restrictive trade and foreign investment regimes."Policies toward foreign trade are among the more important factors promoting economic growth and convergence in developing countries.According to the IMF 1997



Partial association between Growth & Trade Restriction (Tariff barrier)Criticism to Trade PolicySource: National Bureau of Economic Research

#28 February 2014Trade PolicyPartial association between Growth & Trade Restriction (Non-Tariff barrier)Criticism to Trade Policy

Source: National Bureau of Economic ResearchInference:Trade Policy thwarting the Growth

#Latest Development in Foreign Trade PolicyMinimum Land Area Requirement by half For Multi product SEZ from 1000 to 500 hectares For Sector-specific SEZ from existing 100 to 50 hectaresZero Duty Export Promotion Capital Goods (EPCG) SchemeReduced (by 10%) EO (Export Obligation) for Domestic Sourcing of Capital GoodsReduced EO (by 25%) for units in the State of Jammu & KashmirWidening of Interest Subvention Scheme (include 134 sub-sectors of engineering sectors)Market and Product Diversification (Norway & Venezuela added & now 175 no.s)Facility to close cases of default in Export Obligation (payment shall not exceed 2 times the duty saved amount on default in Export Obligation)Improvement in quality and timeliness of Foreign Trade DataEase of Documentation and procedural simplification

28 February 2014Trade PolicyAnnouncementHighlights of Annual Supplement 2013-14 to The Foreign Trade Policy 2009-14 ByMinister for Commerce, Industry & Textiles Shri Anand Sharma Date18th April, 2013 PlaceVigyan Bhawan, New Delhi

#28 February 2014Trade PolicyWebsiteswww. commerce.nic.inwww.dgft.gov.inwww.wto.orgwww.wikipedia.orgwww.indiabudget.nic.inwww.ifri.orgwww.msme.gov.in

Research PapersTrade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence By Francisco RodriguezEvaluation of trade policy in India By Vijay L.K.

BooksManagerial Economics By Peterson & Lowis

Tools usedMicrosoft Encarta (Encyclopedia for offline references)References

#28 February 2014Trade PolicyThank you!They said it.

Every man lives only by Exchage (Adam Smith)

Every nation must follow a certain policy: Commercial, Trade [Abdul Kalam]

Forign Trade should be Fair rather than Free [Lyn Nofziger]

#

38

Business

Trade policy (Indian Context)