Role of Banks in Foreign
Trade
Banking section plays important role in international business.
Today almost all major banks have offices in major cities around the world.
Many banks have formed collaboration with banks in other countries to better
serve their international business community. Banks form a bond of trust
between buying and selling transactions in international market. For individual
banks offer services like foreign exchange, traveler’s check, electronics
transfer. For businesses bank plays a role of trusty agent by offering services
like ‘Documentary Collection’ and ‘Letter of Credit’. Significance of
commercial banks in international trade are outlined below:
(a) Creating trust
between international buyers and sellers by issuing letter of credit: One
of the problems of international business houses doing business internationally
is lack of trust. With the help financial devices commercial banks are able for
a bond of trust between international buyers and sellers. In commercial methods
like ‘Commercial Collection’ and ‘Letter of Credit’ banks act as agents to
handle payments as well as relevant documents. Letter of Credit is most wide
acceptable and used method of doing international transactions. Some banks and
government agencies offer export credit insurance to businesses. In some cases,
exporter has to forgo a letter of credit, in such cases banks offer export
credit insurance.
(b) Advising Bank: After the bank of the buyer
approves the issuance of the letter of credit, the issued letter of credit is
sent to the advising bank who establishes the authenticity of the instrument
and informs the beneficiary of receipt.
(c) Final Payment: After all of the terms and conditions for
shipment and quality standards have been checked via the presentation of proper
documentation, the issuing bank pays the seller for the goods.
(d) Foreign exchange services:
Foreign exchange market is another area where international commercial banks
play vital role. Foreign exchange market serves two main functions, convert the
currency of one country into the currency of another and provide some insurance
against foreign exchange risk. Multinational corporations constantly need
various currencies for their operations and to hedge against foreign exchange
risk. International banks provide foreign exchange services to their commercial
business clients to complete their business transactions. These banks act as a
broker between commercial customer and foreign exchanges around the world.
International businesses receive payments in foreign currencies for their export,
the income it receives from foreign investments and income received from
licensing agreements with foreign firms. International business use foreign
exchange market to pay foreign firms for its products and services and when it
makes direct investment in foreign country. International banks play major
roles in these transactions.
(e) Short term and
long term finance to the international trader: Many commercial banks offers
short as well as long term loan financing to international businesses. Many
countries have form banks backed by government funding to provide funds for
exporters and importers. In India, Export-Import bank, an independent agency of
the Indian government, provides financial aid to facilitate export and import
of goods.
(f) Catalysts in
international trade: Banking sector plays vital role of catalysts in
international market. Due to technology advances in banking sector, communication
gap and delays in international business have really narrow down a lot.
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.
EXIM policy refers to the policy measures adopted by a country with
reference to its exports and imports. Such a policy become particularly
important in a country like India, where the import and export of items plays a
crucial role not just in balancing budgetary targets, but also in the over all
economic development of the country.
The principal objectives of the policy
are:
Ø To
facilitate sustained growth in exports of the country so as to achieve larger
percentage share in the global merchandise trade.
Ø To
provide domestic consumers with good quality goods and services at
internationally competitive prices as well as creating a level playing field
for the domestic producers.
Ø To
stimulate sustained economic growth by providing access to essential raw
materials, intermediates, components, consumables and capital goods required
for augmenting production and providing services.
Ø To
enhance the technological strength and efficiency of Indian agriculture,
industry and services, thereby improving their competitiveness to meet the
requirements of the global markets.
Ø To
generate new employment opportunities and to encourage the attainment of
internationally accepted standards of quality.
Ø To establish the framework for
globalization.
Ø To promote the productivity
competitiveness of Indian Industry.
Ø To augment export by facilitating access
to raw material, intermediate, components, consumables and capital goods from
the international market.
Ø To promote internationally competitive
import substitution and self-reliance.
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.
Features of
EXIM Policy (2009 – 2014)
The new
Foreign Trade Policy (FTP) takes an integrated view of the overall development
of India’s foreign trade and goes beyond the traditional focus on pure exports.
This would be clear from the following statement in the policy document,
“Trade is not an end in itself, but a means to economic growth and rational
development. The primary purpose is not the mere earning of foreign exchange,
but the stimulation of greater economic activity.” The
government unveiled a mix of procedural measures and fiscal incentives to trade
with non- traditional destinations to bolster export order books drying out in
two top regional markets-the US and the European Union.
New emerging markets have been given a
special focus to enable exports to be competitive. Incentive schemes are being
rationalised to identify leading products which would catalyse the next phase
of export growth.
The government plans to introduce a
nation-wide uniform GST from next year that would subsume the complex web of
indirect taxes imposed by state governments. The introduction of zero duty
capital goods scheme will add to expansion and modernization of production base
at a time when investment is drying up in export industries.
Other important features of the
policy include:
(i) $ 200 billion or Rs 98,000 crore is the
export target for 2010-11.
(ii) 100% growth of India’s export of goods
and services by 2014.
(iii) 15% growth target for next two years;
25% thereafter.
(iv) 3.28% targeted India’s share of global
trade by 2020 double from the current 1.64%.
(v) Jaipur, Srinagar Anantnag, Kanpur, Dewas
and Ambur identified as towns of export excellence.
(vi) 26 new markets added to focus market
scheme.
(vii) Provision for state-run banks to
provide dollar credits.
(viii) Duty entitlement passbook scheme
extended till Dec. 2010. Etc.
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.
Special Economic Zone-
Introduction
Special Economic Zone (SEZ) is a geographical
region that has economic laws that are more liberal than a country's typical
economic laws. The category 'SEZ' covers a broad range of more specific zone
types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free
Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others.
Usually the goal of an SEZ structure is to increase foreign investment.
One of the earliest and the most famous Special
Economic Zones were founded by the government of the People's Republic of China
under Deng Xiaoping in the early 1980s. The most successful Special Economic
Zone in China, Shenzhen, has developed from a small village into a city with a
population over 10 million within 20 years. Following the Chinese examples,
Special Economic Zones have been established in several countries, including
Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland,
Russia, and Ukraine.
SEZ AT INDIA
India was one of the first in Asia to recognize
the effectiveness of the Export Processing Zone (EPZ) model in promoting
exports, with Asia's first EPZ set up in Kandla in 1965. With a view to
overcome the shortcomings experienced on account of the multiplicity of
controls and clearances; absence of world-class infrastructure, and an unstable
fiscal regime and with a view to attract larger foreign investments in India,
the Special Economic Zones (SEZs) Policy was announced in April 2000.
This policy intended to make SEZs an engine for
economic growth supported by quality infrastructure complemented by an
attractive fiscal package, both at the Centre and the State level, with the
minimum possible regulations.
To instill confidence in investors and signal the
Government's commitment to a stable SEZ policy regime and with a view to impart
stability to the SEZ regime thereby generating greater economic activity and
employment through the establishment of SEZs, a comprehensive draft SEZ Bill
prepared after extensive discussions. The Special
Economic Zones Act, 2005, was passed by Parliament in May, 2005.
The main objectives of the SEZ Act are:
(a) Generation of additional economic activity
(b) Promotion of exports of goods and services;
(c) Promotion of investment from domestic and
foreign sources;
(d) Creation of employment opportunities;
(e) Development of infrastructure facilities;
It is expected that this will trigger a
large flow of foreign and domestic investment in SEZs, in infrastructure and
productive capacity, leading to generation of additional economic activity and
creation of employment opportunities.
OBJECTIVES OF SEZ AT INDIA
a)
Generation of
additional economic activity across all the states
b)
Promotion of
exports of goods and services across all Indian sates according to their
indigenous capabilities
c)
Promotion of
investment from domestic and foreign sources
d)
Creation of
employment opportunities across India
e)
Development
of world class infrastructural facilities in these units
f)
Simplified
procedures for development, operation, and maintenance of the Special Economic
Zones and for setting up units and conducting such business activities
g)
Single window
clearance cell for the establishment of Special Economic Zone
h)
Single window
clearance cell within each and every Special Economic Zones
i)
Single window
clearance cell relating to formal requirements of Central as well as all State
Governments.
j)
Easy and
simplified compliance procedures and documentations with stress on self
certification.
THE SALIENT FEATURES OF THE FIRST SEZ POLICY OF
INDIA
a)
Exemption
from duties on all imports for project development
b)
Exemption
from excise / VAT on domestic sourcing of capital goods for project development
c)
Freedom to
develop township in to the SEZ with residential areas, markets, play grounds,
clubs and recreation centers without any restrictions
on foreign ownership
d)
Income tax
holidays on business income
e)
Exemption
from import duty, VAT and other Taxes
f)
10% FDI
allowed through the automatic route for all manufacturing activities
g)
Procedural
ease and efficiency for speedy approvals, clearances and customs procedures and
dispute resolution
h)
Simplification
of procedures and self-certification in the labor acts
i)
Artificial
harbor and handling bulk containers made operational throughout the year
j)
Houses both
domestic and international air terminals to facilitate transit, to and fro from
major domestic and international destinations
k)
Well
connected with network of public transport, local railways and cabs
l)
Pollution
free environment with proper drainage and sewage system
m)
In-house
Customs clearance facilities
n)
Abundant
supply of technically skilled manpower
o)
Abundant
supply of semi-skilled labor across all industry vertical
p)
Easy access
to airport and local Railway Station
q)
10-year tax
holiday in a block of the first 20 years
r)
Full
authority to provide services such as water, electricity, security, restaurants
and recreational facilities within the zone on purely commercial basis
Key Advantages
of SEZ Units in India
Ø 10-year tax holiday in
a block of the first 20 years
Ø Exemption from duties
on all imports for project development
Ø Exemption from excise /
VAT on domestic sourcing of capital goods for project development
Ø No foreign ownership
restrictions in developing zone infrastructure and no restrictions on
repatriation
Ø Freedom to develop
township in to the SEZ with residential areas, markets, play grounds, clubs and
recreation centers without any restrictions on foreign ownership
Ø Income tax holidays on
business income
Ø Exemption from import
duty, VAT and other Taxes
Ø 10% FDI allowed through
the automatic route for all manufacturing activities
Ø Procedural ease and
efficiency for speedy approvals, clearances and customs procedures and dispute
resolution
Ø Simplification of
procedures and self-certification in the labor acts
Ø Artificial harbor and
handling bulk containers made operational through out the year
Ø Houses both domestic
and international air terminals to facilitate transit, to and fro from major
domestic and international destinations
Ø Has host of Public and
Private Bank chains to offer financial assistance for business houses
Ø A vibrant industrial
city with abundant supply of skilled manpower, covering the entire spectrum of
industrial and business expertise
Ø Well connected with
network of public transport, local railways and cabs
Ø Pollution free
environment with proper drainage and sewage system
Ø In-house Customs
clearance facilities
Disadvantages of SEZ
Ø Revenue losses because of the various tax
exemptions and incentives.
Ø Many traders are interested in SEZ, so that
they can acquire at cheap rates and create a land bank for themselves.
Ø The number of units applying for setting up
EOU's is not commensurate to the number of applications for setting up SEZ's
leading to a belief that this project may not match up to expectations.
Export Oriented Units (EOU)
The EOU scheme
was introduced in the year 1980 vide Ministry of Commerce resolution dated 31st
December 1980. The purpose of the scheme was basically to boost exports by
creating additional production capacity. The EOU scheme is, at present,
governed by the provisions of Export and Import (EXIM) Policy, 1997-2002. Under
this scheme, the units undertaking to export their entire production of goods
are allowed to be set up. The EOUs can export all products except prohibited
items of exports in ITC (HS).
Under the EOU
scheme, the units are allowed to import or procure locally without payment of
duty all types of goods including capital goods, raw materials, components,
packing materials, consumables, spares and various other specified categories
of equipments including material handling equipments, required for export
production or in connection therewith. However, the goods prohibited for import
are not permitted. In the case of EOUs engaged in agriculture, animal
husbandry, floriculture, horticulture, pisciculture, viticulture, poultry,
sericulture and granite quarrying, only specified categories of goods mentioned
in the relevant notification have been permitted to be imported duty-free.
Benefits under
EOU Scheme
Ø Units are exempted from payment of Income Tax
Ø All the imports to units are customs duty
free.
Ø Exemption from Central Excise Duty for the
procurement of Capital Goods and Raw Materials from domestic market.
Ø Units are entitled to sell the product in
local market upto 50% of the products exported in value terms.
Ø 100% of foreign equity is permissible.
Ø Reimbursement of Central Sales Tax pad on
domestic purchases.
Ø Full Freedom for sub-contracting.
Ø Exemption from the payment of Electricity
duty.
Ø EOU unit can be set up at any of over 300
places all over India
Ø The unit can import capital goods, raw
materials, consumables, packing material, spares etc. without payment of
customs duty. Similarly, these can be procured indigenously without payment of
excise duty. Second hand capital goods can also be imported.
Ø They have to achieve positive NFE (Net Foreign
Exchange Earnings).
Ø Minimum investment in plant and machinery and
building is Rs 100 lakhs for EOU. This should be before commencement of
commercial production.
Ø Fast Track Clearance Scheme (FTCS) for
clearances of imported consignments for EOU.
Ø Generally, all final production should be
exported, except rejects upto prescribed limit.
Ø Sale within India should be on payment of
excise duty. The duty which will be equal to normal customs duty which would be
payable on such goods, if imported. However, in certain cases, excise duty
payable will be only 50%/30% of normal customs duty payable on such goods if
imported into India.
Ø Sub-contracting of production outside on job
work basis is permissible after obtaining necessary permission on annual basis.
Ø Job work for exports is permitted.
Ø Samples can be sold / given free within
prescribed limit.
Ø Unutilized raw material can be disposed of on
payment of applicable duties.
Ø The unit can exit (de-bond) with permission of
Development Commissioner, on payment of applicable duties.
Ø Central Sales Tax (CST) paid on purchases is
refundable (but not local tax).
Ø Prescribed percentage of foreign exchange
earnings can be retained in EEFC account in foreign exchange.
Ø 100% foreign equity is permissible, except in
a few cases.
Ø Supplies made to EOU by Indian supplier are
‘deemed exports’ and supplier is entitled to benefits of ‘deemed export’.
Ø Restrictions under Companies Act on managerial
remuneration are not applicable.
Ø No restrictions on External Commercial
Borrowings.
Export Processing Zones (EPZ)
Export Processing Zones in India was
set up by the government of India with the aim to initiate infrastructural
development and tax holidays in various industrial sectors in the country. EPZ
has incessantly accelerated the economic growth of the country by ensuring a
flourishing export production. The export processing zones in India came into
existence soon after the political independence, when India proclaimed the
first Industrial Policy Revolution in the year 1948. It was from then that the
actual industrial growth begun in India, which resulted in the constitution of
the export processing zones later. Export promotion has always been the chief
concern of the government of India and it strictly follows the ISI policy while
carrying out all its activities.
The main reasons
behind setting up the EPZ in India have been listed as under:
Ø Ensuring better infrastructural facilities in
the industrial units that were set up in the export processing zones in India
Ø Introducing the privilege of tax holidays
Ø Establishing 100 percent export-oriented
system in the EPZ in India
Ø EPZ in India are entirely devoid of all kinds
of duties, levies, and taxes
Ø Implementing tax holidays in the importing of
goods like capital goods, raw materials, and consumer goods as well.
Ø The units in export processing zones follow
the automatic route set by the government of India which offers 100 percent
foreign direct investment in the zone
Ø The rules set by the government of India are
executed and implemented by the development commissioner of the respective
export processing zones in India
Ø Some of the significant features of the Export
Processing Zones in India have been enumerated as under:
Ø The activities that are carried out in the EPZ
in India are not liable to be licensed apart from the IT enabled sectors
Ø The units set up in the export processing
zones in India can select their desired locations by following certain
parameters as prescribed by the state governments
Ø The export processing zones in India
religiously follows the active export-import policy
Ø The units in EPZ in India are totally custom
bonded
Ø The proposals for the units in Export
processing zones in India are entitled to follow the automatic route for
approval as enforced by the state governments
Ø The proposals which do not fall under the
procedure of automatic route system are governed or approved by the FIPB
Ø The activities in EPZ in India belonging to
the Domestic Tariff Area sector are converted into Export oriented units to
meet the parameters set for the export production by the government
Ø 100 percent FDI is granted to these zones.