Monday, May 22, 2017

International Business Notes: Unit 2

Unit – 2: Foreign Trade Policy and Exchange Control
Export – Import Policy or Foreign Trade Policy
No country is self-sufficient in the world today.  Therefore, every country has to import goods and to pay for imports it has to export goods to other countries.  The ideal situation would be if every country specialized in the production of those goods in which it has a comparative cost advantage.  But in addition to comparative cost several other factors including political considerations have played an important part in determining the pattern of imports and exports. To protect domestic industries, many countries in the past had imposed heavy tariffs to restrict imports. 
India's Foreign Trade Policy also known as Export Import Policy (EXIM) in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position. Foreign Trade Policy is prepared and announced by the Central Government (Ministry of Commerce). Foreign Trade Policy or EXIM Policy is a set of guidelines and instructions established by the DGFT (Directorate General of Foreign Trade) in matters related to the import and export of goods in India.
The foreign trade policy, has offered more incentives to exporters to help them tide over the effects of a likely demand slump in their major markets such as the US and Europe. Foreign trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries.
EXIM Policy Governing Body

EXIM Policy or Foreign Trade Policy is a set of guidelines and instructions established by the Directorate General of Foreign Trade in matters related to the import and export of goods in India. The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM Policy of the Indian Government and is regulated by the Foreign Trade Development and Regulation Act, 1992.
The EXIM Policy is updated every year on the 31st of March and the modifications, improvements and new schemes became effective from 1st April of every year. All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister of Commerce and Industry.  Union Minister of Commerce and Industry co-ordinates with the Ministry of Finance, the Directorate General of Foreign Trade and network of DGFT Regional Offices.
DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to EXIM Policy. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act has replaced the earlier law known as the imports and Exports (Control) Act 1947.
Indian EXIM Policy contains various policy related decisions taken by the government in the sphere of Foreign Trade, i.e., with respect to imports and exports from the country and more especially export promotion measures, policies and procedures related thereto.
Objectives Of The FTP (EXIM) Policy: The main objectives are:
a)      To accelerate the economy from low level of economic activities to high level of economic activities by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities.
b)      To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,' consumables and capital goods required for augmenting production.
c)       To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness.
d)      To generate employment.
e)      Opportunities and encourage the attainment of internationally accepted standards of quality.
f)       To provide quality consumer products at reasonable prices
In the light of the above mentioned objectives , there are two  broad aspects of the FTP(EXIM) Policy; the import policy which is concerned with regulation and management of imports and the export policy which is concerned with exports not only promotion but also regulation. The main objective of the Government's EXIM Policy is to promote exports to the maximum extent. Exports should be promoted in such a manner that the economy of the country is not affected by unregulated exportable items specially needed within the country. Export control is, therefore, exercised in respect of a limited number of items whose supply position demands that their exports should be regulated in the larger interests of the country.
Export- Import (EXIM) Policy 2002-07 
In order to maintain the balance of payments and to avoid trade deficit the government of India has announced a trade policy for imports and exports. After every five years the government of India reviews the import and export policy in view of the changing international economic situation.  The policy relates to promotion of exports and regulation of imports so as to promote economic growth and overcome trade deficit. Accordingly, the export-and import policies (EXIM Policy) were announced by the government first in 1985 and then in 1988 which was again revised in 1990.  All these policies made necessary provision for extension of import liberalisation measures.  All these policies made necessary provision for import of capital goods and raw materials for industrialization, utilisation and liberalisation of REP (Registered Exporters Policy) licenses, liberal import of technology and policy for export and trading houses.  The government announced its new EXIM policy for 2002-2007 which is mainly a continuation of the EXIM policy of 1997-2002. The new export-import policy for 2002-2007 aims at pushing up growth of exports to 12 per cent a year as compared to about 1.56 per cent achieved during the financial year 2001-2002.  
The main features of this export- import policy are given below:
a)      Concessions to exporters: To enable Indian companies to compete effectively in the competitive international markets and to give a boost to sagging exports various concessions had been given to the exporters in this new EXIM policy 2002-2007.  These concessions are:
i)        Exporters will now have 360 days to bring in their foreign exchange remittances as compared to the earlier limit of 180 days.
ii)       Exporters will be allowed to retain the entire amount held in their exchange earner foreign currency (EEFC) accounts.
iii)     Exporters will now get long-term loans at the prime lending rate for that tenure.
b)      Duty Entitlement Pass Book (DEPB) and Export Promotion Capital Goods (EPCG) Schemes: DEPB and EPCG are important tools of promoting exports.  These schemes have been made more flexible.  In the DEPB and EPCG schemes new initiatives have been granted to the cottage industries, handicrafts, chemicals and pharmaceuticals, textile and leather products.
c)       Strengthening Special Export Zones (SEZ): The new long-term EXIM policy has sought to enable Indian SEZs to be at par with its international rivals.  The EXIM policy has given a boost to the banking sector reforms by permitting Indian banks to set up overseas banking units in SEZs. 
d)      Soft options for computer hardware industry: The export import (EXIM) policy has put the Indian computer manufacturers at par with manufacturers in other parts of the world. Companies manufacturing or assembling computers in the country will be able to import both capital and raw materials at lower duty rates to sell in the domestic market.
As per the information technology agreement which is part of the world trade organisation zero duty the agreement on I. T. sector, 217 I. T. components would attract a zero duty by 2005.  Therefore, foreign companies can import these products into the country while Indian manufacturers who did the same had to meet export obligations on their imports.  Now, the new EXIM policy states that domestic sales will be considered as a fulfillment of the export obligation, thereby freeing the domestic manufacturers from exports completely.
Salient Features of Foreign Trade Policy 2009-14
1.       $ 200 billion or Rs 98,000 crore is the export target for 2010-11.
2.       100% growth of India’s export of goods and services by 2014.
3.       15% growth target for next two years; 25% thereafter.
4.       3.28% targeted India’s share of global trade by 2020 double from the current 1.64%.
5.       Jaipur, Srinagar Anantnag, Kanpur, Dewas and Ambur identified as towns of export excellence.
6.       26 new markets added to focus market scheme.
7.       Provision for state-run banks to provide dollar credits.
8.       Duty entitlement passbook scheme extended till Dec. 2010.
9.       Tax sops for export-oriented and software export units extended till March 2011.
10.   New directorate of trade remedy measures to be set up.
11.   Plan for diamond bourses.
12.   New facility to allow import of cut and polished diamonds for grading and certification.
13.   Export units allowed to sell 90% of goods in domestic market.
14.   Export oriented instant tea companies can sell up to 50% produce in domestic market.
15.   Single-window scheme for farm exports.
16.   Number of duty-free samples for exporters raised to 50 pieces.
17.   Value limits of personal carriage increased to $5 million (Rs 24.5 core) for participation in overseas exhibitions.
Salient Features of the present  Foreign Trade Policy 2015-2020
1.       Increase exports to $900 billion by 2019-20, from $466 billion in 2013-14
2.       Raise India's share in world exports from 2% to 3.5%.
3.       Merchandise Export from India Scheme (MEIS) and Service Exports from India Scheme (SEIS) launched.
4.       Higher level of rewards under MEIS for export items with High domestic content and value addition.
5.       Chapter-3 incentives extended to units located in SEZs.
6.       Export obligation under EPCG scheme reduced to 75% to Promote domestic capital goods manufacturing.
7.       FTP to be aligned to Make in India, Digital India and Skills India initiatives.
8.       Duty credit scrips made freely transferable and usable For payment of custom duty, excise duty and service tax.
9.       Export promotion mission to take on board state Governments
10.   Unlike annual reviews, FTP will be reviewed after two-and-Half years.
11.   Higher level of support for export of defence, farm Produce and eco-friendly products.
Meaning of Exchange Control
Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority. Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchange control authority have to be obtained for making payments in foreign exchange. It is generally necessary to implement the overall regulations with a host of detailed provisions designed to eliminate evasion. The allocation of foreign exchange is made by the exchange control authority, on the basis of national priorities. Though the exchange control is administered by a central authority like the central bank, the day-to-day business of buying and selling foreign exchange ill ordinarily handled by private exchange dealers, largely the exchange department of commercial banks. For example, in India there are authorised dealers and money changers, entitled to conduct foreign exchange business.
Definition: Exchange control is a system in which the government of the country intervenes not only to maintain a rate of exchange which is quite different from what would have prevailed without such control and to require the home buyers and sellers of foreign currencies to dispose of their foreign funds in particular ways.
According to Crowther:
“When the Government of a country intervenes directly or indirectly in international payments and undertakes the authority of purchase and sale of foreign currencies it is called Foreign Exchange Control”.
Simply, Exchange Control means the control of the government in the purchase and sale of foreign currencies in order to restore the balance of payments equilibrium and disregard the market forces in the decision of monetary authority.
Objectives/Importance of Exchange Control are outlined below:
1)      To Conserve Foreign Exchange: The main objective of foreign exchange regulation in India, as laid dawn in the Foreign Exchange Regulation Act (FERA), 1973, is the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest of the national development. This is one of the important objectives .of foreign exchange regulation of many other countries too.
2)      To Check Capital Flight: Exchange control may be employed to prevent flight of capital from the country and to regulate the normal day-to-day capital movements. If adequately implemented and enforced, exchange control tends to be highly effective in curbing erratic outflows of capital.
3)      To Improve Balance of Payments: Exchange control is one of the measures available to improve the balance of payments position. This can be achieved by restricting imparts by means of exchange control.
4)      To make Possible Essential Imports: Due to the non-availability of or scarcity within the country, the developing countries generally have to import capital goods, know how and certain essential inputs and consumer goods. By giving priority to such imports in the allocation of foreign exchange, exchange control may ensure availability of foreign exchange for these imports.
5)      To Protect Domestic Industries: Exchange control may also be employed as a measure to protect domestic industries from foreign competition.
6)      To Check Recession-induced Exports into the Country: If foreign economies are undergoing recession when 'the domestic economy is free from it, the decline in prices of foreign goods, due to the recession, may encourage their exports into the country not yet affected by recession. Exchange control may be employed to check such recession-induced exports into the country.
7)      To regulate foreign companies: Exchange Control may also seek to regulate the business of foreign companies in the country. For instance, the FERA provided that non-residents, foreign national resident in India, companies (other than banking companies) incorporated abroad and having more than 40 per cent non-resident interest could not carry on in India, or establish a branch/office or other place of business in the country for carrying on any activity of a trading, commercial or industrial revenue, without the permission of the Reserve Bank of India.
8)      To regulate Export and Transfer of Securities: Exchange control may be employed also for the purpose of controlling the export and transfer of securities form the country. The FERA for instance, prohibited the sending or transferring of securities from the country to any place outside India, without the permission of the Reserve Bank of India.
9)      Facilitate Discrimination and Commercial Bargaining: Exchange control offers scope for discrimination between different countries. It would be used to accord exchange concessions, on a reciprocal basis, between different countries.
10)   Enable the Government to Repay Foreign Loans: The system of exchange control empowers the government to acquire foreign exchange from the residents of the country due to which it becomes easy for the government to repay foreign loans.
11)   To Freeze Foreign Investments and Prevent Repatriation of Funds: Exchange control may be used to freeze investments, including bank deposits, of foreigners in the home country and to prevent the repatriation of funds out of the country. This is sometimes done by hostile countries.
12)   To Obtain Revenue: Governments may use exchange control to obtain some revenue. The government agency can make profit out of the foreign exchange business by keeping certain margin between the average purchase price and the average selling price of the foreign exchange.


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