International Business: Unit 3

Unit – 3: Import Substitution and Export Promotion

Export Promotion Incentives

Details of various trade promotion measures and schemes available to business firms to facilitate their export and import operations are announced by the government in its export-import (EXIM) policy. Major trade promotion measures (especially those related to exports) are as follows:

(i) Duty drawback scheme: Since goods meant for exports are not consumed domestically, these are not subjected to payment of various excise and customs duties. Any such duties paid on export goods are, therefore, refunded to exporters on production of proof of exports of these goods to the concerned authorities. Such refunds are called duty draw backs. Some major duty draw backs include refund of excise duties paid on goods meant for exports, refund of customs duties paid on raw materials and machines imported for export production. The latter is also called customs drawback.

(ii) Export manufacturing under bond scheme: This facility entitles firms to produce goods without Usance draft: It is a type of bill of exchange wherein the drawer of the bill of exchange instructs the bank to hand over the relevant documents to the importer only against acceptance of the bill of exchange. Import general manifest. Import general manifest is a document that contains the details of the imported good. It is the document on the basis of which unloading of cargo takes place. Dock challan: Dock charges are to be paid when all the formalities of the customs are completed. While paying the dock dues, the importer or his clearing agent specifies the amount of dock dues in a challan or form which is known as dock challan.  The firms desirous of availing such facility have to give an undertaking (i.e., bond) that they are manufacturing goods for export purposes and will export such products on their production.

(iii) Exemption from payment of sales taxes: Goods meant for export purposes are not subject to sales tax. Even for a long time, income derived from export operations had been exempt from payment of income tax. Now this benefit of exemption from income tax is available only to 100 per cent Export Oriented Units (100 per cent EOUs) and units set up in Export Processing Zones (EPZs)/Special Economic Zones (SEZs) for select years.

(iv) Advance licence scheme: It is a scheme under which an exporter is allowed duty free supply of domestic as well as imported inputs required for the manufacture of export goods. As such the exporter is not required to pay customs duty on goods imported for use in the manufacture of export goods. The advance licences are available to both the types of exporters— those who export on a regular basis and also to those who export on an adhoc basis. The regular exporters can avail such licences against their production programmes. The firms exporting intermittently can also obtain these licences against specific export orders.

(v) Export Promotion Capital Goods Scheme (EPCG): The main objective of this scheme is to encourage the import of capital goods for export production. This scheme allows export firms to import capital goods at negligible or lower rates of customs duties subject to actual user condition and fulfillment of specified export obligations. If the said conditions are fulfilled by the manufacturers, then they can import the capital goods either at zero or concessional rate of import duty. Supporting manufacturers and service providers are also eligible to import capital goods under this scheme. This scheme is especially beneficial to the industrial units interested in modernisation and upgradation of their existing plant and machinery. Now service export firms can also avail of this facility for importing items such as computer software systems required for developing softwares for purposes of exports.

(vi) Scheme of recognising export firms as export house, trading house and superstar trading house: With an objective to promote established exporters and assist them in marketing their products in international markets, the government grants the status of Export House, Trading House, Star Trading House to select export firms. This status is granted to a firm on its achieving a prescribed average export of performance in past select years. Besides attaining a minimum of past average export performance, such export firms have to also fulfill other conditions as laid down in the import-export policy.

Various categories of export houses have been recognised with a view to building marketing infrastructure and expertise required for export promotion. These houses are given national recognition for export promotion. They are required to operate as highly professional and dynamic institutions and act as an important instrument of export growth.

(vii) Export of Services: In order to boost the export of services, various categories of service houses have been recognised. These houses are recognised on the basis of the export performance of the service providers. They are referred to as Service Export House, International Service Export House, International Star Service Export House based on their export performance.

(viii) Export finance: Exporters require finance for the manufacture of goods. Finance is also needed after the shipment of the goods because it may take sometime to receive payment from the importers. Therefore, two types of export finances are made available to the exporters by authorised banks. They are termed as pre-shipment finance or packaging credit and postshipment finance. Under the preshipment finance, finance is provided to an exporter for financing the purchase, processing, manufacturing or packaging of goods for export purpose. Under the post-shipment finance scheme, finance is provided to the exporter from the date of extending the credit after the shipment of goods to the export country. The finance is available at concessional rates of interest to the exporters.

(ix) Export Processing Zones (EPZs): Export Processing Zones are industrial estates, which form enclaves from the Domestic Tariff Areas (DTA). These are usually situated near seaports or airports. They are intended to provide an internationally competitive duty free environment for export production at low cost. This enables the products of EPZs to be competitive, both qualitywise and price-wise, in the international markets. These zones have been set up at various places in India which include: Kandla (Gujarat), Santa Cruz (Mumbai), Falta (West Bengal), Noida (Uttar Pradesh), Cochin (Kerala), Chennai (Tamil Nadu), and Vishakapatnam (Andhra Pradesh). Santa Cruz zone is exclusively meant for electronic goods and gem and jewellery items. All other EPZs deal with multifarious items. Recently the EPZs have been converted to Special Economic Zones (SEZs) which are more advanced form of export processing zones. These SEZs are free from all rules and regulations governing imports and exports units except relating to labour and banking Government has also permitted development of EPZs by private, state or joint sector. The inter-ministerial committee on private EPZs has already cleared proposals for setting up of private EPZs in Mumbai, Surat and Kanchipuram.

(x) 100 per cent Export Oriented Units (100 per cent EOUs): The 100 per cent Export Oriented Units scheme, introduced in early 1981, is complementary to the EPZ scheme. It adopts the same production regime, but offers a wider option in location with reference to factors like source of raw materials, ports, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. EOUs have been established with a view to generating additional production capacity for exports by providing an appropriate policy framework, flexibility of operations and incentives.

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. 

Role of EXIM Bank

The Export-Import (EXIM) Bank of India is the principal financial institution in India for coordinating the working of institutions engaged in financing export and import trade. It is a statutory corporation wholly owned by the Government of India. It was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India. Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament “THE EXPORT-IMPORT BANK OF INDIA ACT, 1981” for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for co-ordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade and for matters connected therewith or incidental thereto.

Exim Bank has two broad business streams:

i) The traditional export finance typical of export credit agencies around the world

ii) Financing of export oriented units (export capability creation), which are non-traditional for export credit agencies.

Since inception, Exim Bank has been the principal financial institution in the country for financing project exports and exports on deferred credit terms. As per Memorandum of PEM (MEMORANDUM OF INSTRUCTIONS ON PROJECT EXPORTS AND SERVICE EXPORTS) of Reserve Bank of India, the following constitute project exports:

Exim Bank extends funded and non-funded facilities for overseas turnkey projects, civil construction contracts, technical and consultancy service contracts as well as supplies. Turnkey Projects are those which involve supply of equipment along with related services, like design, detailed engineering, civil construction, erection and commissioning of plants and power transmission & distribution

Construction Projects involve civil works, steel structural works, as well as associated supply of construction material and equipment for various infrastructure projects.

Technical and Consultancy Service contracts, involving provision of know-how, skills, personnel and training are categorized as consultancy projects. Typical examples of services contracts are: project implementation services, management contracts, supervision of erection of plants, CAD/ CAM solutions in software exports, finance and accounting systems.

Supplies: Supply contracts involve primarily export of capital goods and industrial manufactures. Typical examples of supply contracts are: supply of stainless steel slabs and ferro-chrome manufacturing equipments, diesel generators, pumps and compressors.

Exim Bank, under powers delegated vide the PEM, provides post-award clearance for project export contracts valued upto USD 100 million. Project export contracts valued above USD 100 million need to be provided post-award clearance by the inter-institutional Working Group.

In the case of very large value projects, officials of Ministry of Finance, Ministry of Commerce and Industry and Ministry of External Affairs, Government of India, are invited to participate in the Working Group Meetings.  In order to obtain immediate clarifications for speedy clearance of proposals by the Working Group, the exporters concerned and their bankers are also associated with the meetings.

With the same objective, participation of the main sub-suppliers, sub-contractors or other associates and their bankers in such meetings is also encouraged, particularly in respect of proposals for high value contracts.  Exim Bank also plays the role of a financier and provides funded and non-funded support for project export contracts of Indian Entities.

In addition to project exports, Exim Bank also extends fund-based and non-fund-based facilities to deemed export contracts as defined in Foreign Trade Policy of GOI, e.g., secured under funding from Multilateral Funding Agencies like the World Bank, Asian Development Bank, etc.; Contracts secured under International Competitive Bidding; Contracts under which payments are received in foreign  currency. Contracts in India categorized as Deemed Exports in the Foreign Trade Policy of India.

From the above discussion we can say that, the main role of Exim bank in foreign trade is to give credit facilities. Exim Bank extends Lines of Credit (LOC) to overseas financial institutions, regional development banks, sovereign governments and other entities overseas, to enable buyers in those countries, to import goods and services from India on deferred credit terms. The Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. LOC is a financing mechanism that provides a safe mode of non-recourse financing option to Indian exporters, especially to SMEs, and serves as an effective market entry tool. Exim Bank extends LOC, on its own, as well as, at the behest of Government of India.

Export Credit Guarantee Corporation of India Limited (ECGC)

Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. ECGC provides a range of credit risk insurance covers to exporters against loss in export of goods and services, and also offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them. Exporters have a lot to benefit from ECGC as it provides:

Deferred Payment Scheme and Export under it

A deferred payment is an arrangement in which a debt does not have to be repaid until sometime in the future. The debt might be created when a person imported a good or service. The use of deferred payment plans is one of the more common sales and marketing tools used by companies. Essentially, the underlying concept is that importer can buy now and pay later. When an importer is unable to pay for the purchase right away but has a reasonable expectation of being able to provide payment in full by a certain date in the future, a deferred payment plan makes sense for both the consumer and the seller. Some companies offer these plans only to preferred customers, but others offer them to everyone.

In case of a foreign trade deferred payment means payment made by a buyer at a specified or determinable future date stipulated in the letter of credit or documentary collection, providing that the documents are found to be in order. An example is 60 days after date of transport document or invoice date. No draft is called for under this type of payment. It is important to remember that a buyer will have credit/collateral/cash tied up until payment is made; and if a deferred payment is made through a letter of credit, it is guaranteed to a seller just as if it were made immediately. The risk increases for a seller if the remitting bank is located in a risky country.

EXPORTS UNDER DEFERRED PAYMENTS: All export proceeds must be surrendered to an authorised dealer within 180 days from the date of shipment. Exporters are required to obtain permission from the Reserve Bank through authorised dealers in the event of non-realisation of export proceeds within the prescribed period. However, realising the special needs of exports of engineering goods and projects, Reserve Bank has formulated special schemes permitting deferred credit arrangements. This will enable realisation of export proceeds over a period exceeding six months. Hence, contracts for export of goods and services against payment to be secured partly or fully beyond 180 days are treated as deferred payment exports. The Credit Word is termed as deferred payment term credit. For financing under deferred credit system a single point approval mechanism within a three tier system operates.

This system includes:

i) Commercial banks who are authorised dealers in foreign exchange in India, can provide in principle clearance for contracts valued upto Rs.25 crores. They can avail refinance from EXIM bank.

ii) EXIM bank is empowered to give clearances for contracts of value of above Rs.25 crores and upto Rs. 100 crores.

iii) A working group considers proposals of contracts of value beyond Rs. 100 crores. The working group consists of representatives of all the above institutions to provide single window clearance.

Deferred credit facility is normally allowed only for export of engineering goods, turnkey projects involving rendering of services like designing, civil construction and erection and commissioning of plant or factory along with supply of machinery, equipment and materials. Project exports eligible for export finance are as follows:

i) Turnkey Projects: These projects involve supply of equipment along with related services like design, detailed engineering, civil construction, erection and commissioning of plants, etc.

ii) Construction projects involve civil works, steel structural works as well as associated supply of construction materials and equipment.

iii) Technical and consultancy service contracts involve provision of personnel, furnishing of knowhow, skills, operation and maintenance services and management contracts.

These services include:

a) Engineering services contracts involve supply of services such as design, erecting, commissioning or supervision of erector and commissioning.

b) Consultancy services contracts involve preparation of feasibility studies, project reports, preparation of designs and advice to the project authority on specifications for plants and equipments.