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.