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Trade policy (Indian Context)


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Foreign Trade Policy, Ministry of Commerce & Industry

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Trade policy (Indian Context)

  1. 1. TRADE POLICY [AN ANALYSIS IN INDIAN CONTEXT] Course- Public Policy Instructor- Prof. Anjula Gurtoo Trade Policy Prepared bySwapnil Soni DoMS, IISc 28 February 2014
  2. 2. Index  Foreign Trade  Foreign Exchange Management Act   Introduction  Citation  Evolution   Introduction Indian History  Features  Comparison with FERA Trade Policy   Objectives  Introduction  Need  Schemes   Introduction Disadvantages  Special Economic Zone  Ministry of Commerce & Industries Foreign Trade Policy 2009-2014  Foreign Trade Statistics (India)  Evolution  Criticism to Trade Policy  Department of Commerce  Latest Development in Foreign Trade Policy  Trade Policy 2 References 28 February 2014
  3. 3. Foreign Trade- Introduction  Diversity across the world in terms of :   Geography Demography Each country has not enough competency to produce all kinds of goods & services to fulfill the need  Each country has some geographical & demographical advantages for some specific production  Solution to meet demand & development- exploit Competitive Advantage  Countries 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 called Foreign Trade  Trade Policy 3 28 February 2014
  4. 4. Foreign Trade- Citation Citation  India : IT professionals at cheaper rate  China: Industrial skilled labor at cheaper rate Result India evolved to be one of the top choices for outsourcing for US & UK clients  China emerged out to be a manufacturing hub of the world Trade Policy 4 28 February 2014
  5. 5. Foreign Trade –Indian History Around 100BC  Export: Cotton, ivory, mallow cloth, muslin, precious and semi-precious gems (diamond, pearls), silk, spices, and curatives like black pepper, nard, long pepper  Import: 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 1500AD  In 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. Trade Policy 5 28 February 2014
  6. 6. Trade Policy- Introduction Shortcomings of Foreign Trade India (2011-12) Trade Deficit US$ 78.2 billion Current Account Deficit Export 10.2% of GDP 4.2% of GDP US$ 189.8 billion Import      Trade Deficit Current Account Deficit Survival of Domestic companies Dependency for goods & services Dumping Originated from: Second Five Year Plan in 1955 by appointment of Prime Minister Jawaharlal Nehru based on Mahalanobis strategy Solution  Rules 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 nation‟s international trade. Trade Policy 6 28 February 2014
  7. 7. Trade Policy- Introduction  Trade Policy elements Import Balance of trade Comparative advantage Trade law, pact Export subsidies Trade creation Trade diversion Export orientation Import substitution Trade facilitation  Export Trade route Domestic trade Tax, tariff and trade Trade finance Trade Restrictions Tariffs Import licenses Embargo Countervailing duties Customs duties  Import quotas Technical barriers Exchange rate controls Anti-dumping duties Voluntary export restraints World Trade Organization World Customs Organization International Monetary Fund Preferential trading area Customs union Economic union Customs and monetary union Economic and monetary union Fiscal union Monetary union Organizations Trade Policy 7 28 February 2014
  8. 8. Trade Policy- Objectives  Appreciate trade with other nations  Protect domestic market prevailing in the country  Increase the export of particular product which will help in expanding domestic      market Encourage the imports of capital goods for speeding up the economic development of the country Prevent the imports of particular goods for giving protection to infant industries Restrict the imports of goods which create unfavourable balance of payments Control the export or import of goods and services for achieving the desired rate of exchange Enter into trade agreements with foreign nations for stabilizing the foreign trade Trade Policy 8 28 February 2014
  9. 9. Trade Policy- Need 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. Trade Policy 9 28 February 2014
  10. 10. Trade Policy- Disadvantages Disadvantages India (Rs/10gm) 30017.0  Increased Cost to Consumers Trade barriers artificially raise the price of imported products  Increased Costs to Domestic Suppliers Trade barriers artificially raise prices on foreign commodities, making it less profitable to buy from other countries Perfect competition  Monopoly Less Competition Trade barriers lessen foreign competition, leading to fewer product choices for consumers thereby paving the way for firms for gaining monopoly market power Trade Policy 10 28 February 2014
  11. 11. Ministry of Commerce & Industries - Evolution Year Milestones 1921 „Department of Commerce‟ was formed 1943 Designated as „Department of Industry & Civil Supply‟ 1947 Re-deisgnated as „Ministry of Commerce‟ under charge of cabinet ministers 1951 Re-deisgnated as „Ministry of Commerce & Industry‟ 1956 Bifurcation: 1) Ministry of Commerce & Consumer Industry 2) Ministry of Heavy Industry 1958 Formation of 3 departments: 1) Commerce 2) Industry 3) Company Law 1962 Heavy Industry was taken away from MCI 1969 Re-deisgnated as „Ministry of Foreign Trade & Supply‟ but later „Supply‟ was taken away 1973 Re-deisgnated as „Ministry of Commerce & Industry‟ Trade Policy 11 28 February 2014
  12. 12. Ministry of Commerce & Industries - Evolution Year Milestones 1999 Formation of 3 Divisions: 1) Department of Commerce 2) Department of Industrial Policy 3) Department of Supply 2000 Department of Supply was abolished and left with 1) Department of Industrial Policy & Promotion (Intellectual Property) 2) Department of Commerce A. Foreign Trade Division B. Export Trade Division Leadership Minister of Commerce and Industry Minister of State Commerce and Industry Founder member of the Congress Party's students wing the NSUI Constituency : Visakhapatnam Former Minister of State in the Ministry of External Affairs Education: Bachelor of Arts from the South Indian Educational Trust and Women College (Chennai) Daggubati Purandeswari Anand Sharma Trade Policy 12 28 February 2014
  13. 13. Ministry of Commerce & Industries- Department of Commerce Subjects under Administrative Control  International Trade    Foreign Trade (Goods & Services)       Projects & Equipment Corporation of India Limited (PEC) India Trade Promotion Organization and its subsidiaries Minerals 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 Services   All matters relating to foreign trade. Import and Export Trade Policy and Control State Trading   International 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) Cadre Management of Indian Trade, Supply & Inspection Service and all matters pertaining to training, career planning and manpower planning for the service Special Economic Zones  All 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 framework Trade Policy 13 28 February 2014
  14. 14. Ministry of Commerce & Industries- Department of Commerce Subjects under Administrative Control (continued..)  Export Products and Industries and Trade Facilitation         Attached and Subordinate Offices      Gems 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 Directorate 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 Bodies   Marine Products Export Development Authority. Agricultural and Processed Food Products Export Development Authority Trade Policy 14 28 February 2014
  15. 15. Ministry of Commerce & Industries- Department of Commerce Advisory Bodies  Board of Trade (BOT)     Set up on 5th may, 1989 Reconstituted 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, 2005 To trade facilitation and to create a framework for making States partners in India‟s export effort The Council is represented by Chief Ministers of the States or State Cabinet Ministers Trade Policy 15 28 February 2014
  16. 16. Foreign Exchange Management Act-Evolution MNCs controlled 53.7% of the assets of large sector in India till the end of decade of seventies MNCs 14 more companies had extremely heavy loans and equity capital and therefore were virtually foreign controlled western foreign capital dominated the country‟s big business and controlled the apex of India‟s industrial pyramid in the mid sixties Enactment of FERA in 1973 FERA 1973 Payment of Dividend and Royalty All foreign companies or branches to convert as • Indian companies with minimum 60% local equity • Foreign equity share to 40% or less Distortion of Economic Structure Political Interference Technology transfer not conducive to development FEMA 1999 “It is no longer appropriate to deify foreign exchange as something special and maintain a burdensome and highly regulated structure around this deity” - Union Budget 1998-99 Liberalization 1991 Govt. adopted FEMA where the emphasis is on „management‟ rather than „regulation‟ Trade Policy 16 28 February 2014
  17. 17. Foreign Exchange Management Act- Features 1999 “An 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.” Features  Replacing the Foreign Exchange Regulation Act (FERA), 1973  The deals in Foreign Exchange were to be „managed‟ instead of „regulated‟  Compatible with the pro-liberalisation policies of the Government of India  Enabled 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 RBI  Necessary to keep adequate amount of foreign exc from Import Substitution to Export Promotion  Brought with it the Prevention of Money Laundering Act of 2002, which came into effect from 1 July 2005 Trade Policy 17 28 February 2014
  18. 18. Foreign Exchange Management Act- comparison with FERA FERA Vs FEMA- a comparison Parameters FERA FEMA Scope Anything and everything that has to do any thing with foreign exchange was controlled Only specified acts relating to foreign exchange are regulated Aim Prevent misuse of foreign exchange Facilitate trade Enactment 81 sections 49 sections Prohibitions Indians taking employment abroad, employment of foreign technicians in India etc No such restrictions Emphasis Foreign Exchange & Trade Regulation Foreign Exchange & Trade Management Trade Policy 18 28 February 2014
  19. 19. Foreign Trade Policy- Introduction “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 2009-14 Objectives •To 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 market Trade Policy 19 28 February 2014
  20. 20. Foreign Trade Policy- Schemes 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 Trade Policy 20 28 February 2014
  21. 21. Foreign Trade Policy- Announcements Announcements for FPS, FMS, MLFPS  26 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 Trade Policy 21 28 February 2014
  22. 22. Foreign Trade Policy- Special Economic Zone 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 exports Asia's first EPZ was set up in Kandla, Gujarat in 1965 With a view to attract larger foreign investment in India, the Special Economic Zones (SEZs) Policy was announced in April 2000 Income 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 SEZ  Generation of additional economic activity  Promotion of exports of goods and services  Promotion of investment from domestic and foreign sources  Creation of employment opportunities  Development of infrastructure facilities Trade Policy 22 28 February 2014
  23. 23. Foreign Trade Policy- Special Economic Zone Formal Approvals Notified SEZ Operational SEZ 109 74 32 Chandigarh 2 2 1 Chattisgarh 2 0 0 Delhi 3 0 0 Dadra & Nagar Haveli 4 2 0 Goa 7 3 0 Gujarat 46 29 13 Haryana 45 34 3 Himachal Pradesh 0 0 0 Jharkhand 1 1 0 Karnataka 56 36 20 Kerala 28 17 7 Madhya Pradesh 14 6 1 Maharashtra 105 63 16 Nagaland 2 1 0 Orissa 11 6 1 Pondicherry 1 0 0 Punjab 8 2 0 Rajasthan 8 8 3 Tamil Nadu 70 57 22 Uttar Pradesh 33 20 6 Uttarankhand 3 2 0 West Bengal 22 11 5 580 374 130 State Andhra Pradesh Total Trade Policy (As on 31.12.2010) Source: 23 28 February 2014
  24. 24. Foreign 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 Trade Policy 24 Mundra Port, gateway for cargo Kachchh, Gujarat 28 February 2014
  25. 25. Foreign Trade Policy- Special Economic Zone Sector wise Formal Approval of SEZ •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. Trade Policy 25 28 February 2014
  26. 26. Foreign Trade Statistics Increased Import Peak- US $ 490 b during 2012-13 Trade Policy Source: 26 28 February 2014
  27. 27. Foreign Trade Statistics Decreased Export Peak- US $ 306 b during 2011-12 Trade Policy Source: 27 28 February 2014
  28. 28. Foreign Trade Statistics Source: Trade Policy 28 28 February 2014
  29. 29. Foreign Trade Statistics Source: Trade Policy 29 28 February 2014
  30. 30. Foreign Trade Statistics Source: Trade Policy 30 28 February 2014
  31. 31. Foreign Trade Statistics Import from China- US $38 b Trade Policy Source: 31 28 February 2014
  32. 32. Foreign Trade Statistics Export to USA- US $29 b Trade Policy Source: 32 28 February 2014
  33. 33. Criticism to Trade Policy Do 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 Trade Policy 33 28 February 2014
  34. 34. Criticism to Trade Policy Partial association between Growth & Trade Restriction (Tariff barrier) Source: National Bureau of Economic Research Trade Policy 34 28 February 2014
  35. 35. Criticism to Trade Policy Partial association between Growth & Trade Restriction (Non-Tariff barrier) Source: National Bureau of Economic Research Inference: Trade Policy thwarting the Growth Trade Policy 35 28 February 2014
  36. 36. Latest Development in Foreign Trade Policy Announcement Highlights of Annual Supplement 2013-14 to The Foreign Trade Policy 2009-14 By Date 18th April, 2013 Place  Minister for Commerce, Industry & Textiles Shri Anand Sharma Vigyan Bhawan, New Delhi Minimum Land Area Requirement by half           For Multi product SEZ from 1000 to 500 hectares For Sector-specific SEZ from existing 100 to 50 hectares Zero Duty Export Promotion Capital Goods (EPCG) Scheme Reduced (by 10%) EO (Export Obligation) for Domestic Sourcing of Capital Goods Reduced EO (by 25%) for units in the State of Jammu & Kashmir Widening 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 Data Ease of Documentation and procedural simplification Trade Policy 36 28 February 2014
  37. 37. References Websites        www. Research Papers  Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence By Francisco Rodriguez  Evaluation of trade policy in India By Vijay L.K. Books  Managerial Economics By Peterson & Lowis Tools used  Microsoft Encarta (Encyclopedia for offline references) Trade Policy 37 28 February 2014
  38. 38. Thank 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] Trade Policy 28 February 2014