Foreign Trade Policy, Ministry of Commerce & Industry

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. 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
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References
28 February 2014

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

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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
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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.
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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.
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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
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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
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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.
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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
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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‟
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28 February 2014

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
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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
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28 February 2014

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
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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
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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‟
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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
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28 February 2014

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
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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
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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
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28 February 2014

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
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28 February 2014

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
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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: http://commerce.nic.in/publications/anualreport_chapter5-2010-11.asp
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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
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Mundra Port, gateway for cargo Kachchh, Gujarat
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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
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26. Foreign Trade Statistics
Increased Import
Peak- US $ 490 b during 2012-13
Trade Policy
Source: http://dgft.gov.in/
26
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27. Foreign Trade Statistics
Decreased Export
Peak- US $ 306 b during 2011-12
Trade Policy
Source: http://dgft.gov.in/
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28. Foreign Trade Statistics
Source: http://dgft.gov.in/
Trade Policy
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29. Foreign Trade Statistics
Source: http://dgft.gov.in/
Trade Policy
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30. Foreign Trade Statistics
Source: http://dgft.gov.in/
Trade Policy
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31. Foreign Trade Statistics
Import from China- US $38 b
Trade Policy
Source: http://dgft.gov.in/
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32. Foreign Trade Statistics
Export to USA- US $29 b
Trade Policy
Source: http://dgft.gov.in/
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28 February 2014

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
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34. Criticism to Trade Policy
Partial association between Growth & Trade Restriction (Tariff barrier)
Source: National Bureau of Economic Research
Trade Policy
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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
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28 February 2014

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
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28 February 2014

37. References
Websites







www. commerce.nic.in
www.dgft.gov.in
www.wto.org
www.wikipedia.org
www.indiabudget.nic.in
www.ifri.org
www.msme.gov.in
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)
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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