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DOES FOREIGN TRADE AFFECT THE ECONOMY OF OUR COUNTRY?
Author: P.Lavanya, B.A.,B.L.(Hons)., LLM., Ph.D from The Tamilnadu Dr. Ambedkar Law University, Chennai.
India’s economic structure today presents a distinctly different picture from what it was in 1991 when economic reforms started. In 1991 our foreign exchange reserves had depleted substantially. We then had just enough reserves to tide over the import requirements of three weeks. It was in this context that India gradually started dismantling its quantitative restrictions, partially liberalised its exchange rate and reduced the peak rate of customs duties. More importantly, this sector was overly dependent on western markets and, consequently, extremely vulnerable to even the smallest of developments there. The policy, fortunately, turns its attention to other sectors where India has inherent advantages – healthcare, education, R&D, logistics, professional services, entertainment, as well as services incidental to manufacturing. By extending benefits under EPCG on domestic procurements and offering them more products under MEIS, the policy further seeks to incentives the for the exports. The average duty on all products stands reduced from over 70% in 1991-92 to 12% in 2008-09. However, at the same time the whole world was rushing towards globalisation and integration. Had India not joined the race, the economic scenario could have worsened. The only recourse left to India was to increase its exports to tide over the ever-increasing imports. We were aiming to gain a considerable proportion of international business and make our presence felt on the international front.
As we can see, e-commerce plays a very significant role in today’s trade the Government announced various export promotion measures and incentives. Laws were framed to streamline the process of export and import. These laws ensured that our commitment to expansion of India’s trade remained firm. The laws and facilitations announced by the Government were not only related to export and import of goods and services but were also directed to upgradation of technology and integration of all the departments by using latest technologies available. According to some experts the focus in this FTP has been “Simplicity and Stability”. Accordingly, the policy on the one hand seeks to realign the multiple schemes with the objective of reducing complexities. On the other had it want to promote the increased use of technology to reduce the transaction cost and manual compliances.
Supporters have given their verdict for this new FTP, stating it as ‘progressive’, ‘path breaking’ and ‘development friendly’ as exports of books, handicraft, handlooms, toys, textiles, defence and ecommerce platforms would be easier and faster. According to them, a big step is cleaning up the plethora of export promotion schemes andclubbing them under two schemes, one for goods (Merchandise Exports from India Scheme) and one for services (Services Exports from India Scheme).The duty scrips under these schemes come without conditions and can be freely transferred. One significant announcement in the policy is that it will move away from relying largely on subsidies and sops. Critics however point out that, this is prompted by World Trade Organization (WTO) requirements that export promotion subsidies should be phased out, but according to some experts there are ways of getting around it and other countries are doing it all the time. There has been talk of boosting services exports for quite a few years now, but information technology and information technology-enabled services (IT/ITES) dominated the basket. The share of this segment in the overall export basket is 50 percent and 90 percent in the services export basket.
According to the Commerce Minister Nirmala Sitaraman, It's a focused policy, one in which exports through Make in India is underlined by looking at sectors that give greater employment and have high-tech value addition. That is because the intention is to join the global value chain and above all, the environment part, where you are looking at eco-friendly systems and producing wealth out of waste. So, the priority areas are technology-driven, labour-intensive-driven and environment-driven. You are also looking at traditional markets, emerging markets and diversifying into new markets.
HOW EXIM POLICY AFFECTS THE ECONOMY OF OUR COUNTRY?
The important disadvantages of foreign trade are listed below,
Impediment in the Development of Home Industries: Foreign trade has an adverse effect on the development of home industries. It poses a threat to the survival of infant industries at home. Due to foreign competition and unrestricted imports the upcoming industries in the country may collapse.
Economic Dependence: The underdeveloped countries have to depend upon the developed ones for their economic development. Such reliance often-leads to economic exploitation. For, instance most of the underdeveloped countries in Africa and Asia have been exploited by European countries.
Political Dependence: Foreign trade often encourages subjugation and slavery. It impairs economic independence which endangers political dependence. For example, the Britishers came to India as traders and ultimately ruled over India for a very long time.
Mis-utilization of Natural resources: Excessive exports may exhaust the natural resources of a country in a shorter span of time than it would have been otherwise. This will cause economic downfall of the country in the long run.
Import of Harmful Goods: Import of spurious drugs, Luxury articles, etc. adversely affects the economy and well being of the people.
Storage of Goods: Sometimes the essential commodities required in a country and in short supply are also exported to earn foreign exchange. This results in shortage of these goods at home and cause inflation. For example, India has been exporting sugar to earn foreign exchange; hence the exalting prices of sugar in the country
Danger to Internal Peace: Foreign trade gives an opportunity to foreign agents to settle down in the country which ultimately endangers its internal peace.
World Wars: Foreign trade breeds rivalries amongst nations due to competition in the foreign markets. This may event fully lead to wars and disturbs world peace.
Hardships in times of wars: Foreign trade promotes lopsided development of a country as only those goods which have comparative cost advantage are produced in a country. During wars or when good relations do not prevail between nations, many hardships may follow.
IMPACT ON EFFICIENCY AND GROWTH
Optimal use of natural resources: Foreign trade helps each country to make optimum use of its natural resources. Each country can concentrate on production of those goods for which its resources are best suited. Wastage of resources is avoided.
Availability of all type of goods: It enables a country to obtain goods, which it cannot produce or which it is not producing due to higher costs, by importing from other countries at lower costs.
Specialisation: Foreign trade leads to specialization and encourages production of different good in different countries. Goods can be produced at comparatively low cost due to advantages of division of labour.
Advantages of large-scale production: Due to foreign trade, goods are produced not only for home consumption but for exports to other countries also. Nations of the world can dispose of goods which they have in surplus in the foreign markets. This leads to production at large- scale and the advantages of large-scale production can be obtained by all the countries of the world.
Stability in prices: Foreign trade irons out wild, fluctuations in prices. It equalizes the prices of goods throughout the world (ignoring cost of transportation etc.).
Exchange of technical know-how and establishment of new industries: Underdeveloped countries can establish and develop new industries with the machinery equipment and technical know-how imported from developed countries. This helps in the development of these countries and the economy of the world at large.
Increase in efficiency: Due to the foreign competition the producers in a country attempt to produce better quality of goods and at the minimum possible cost. This increases the efficiency and benefits the consumers all over the world.
Development of the means of transport and communications: Foreign trade requires the best means of transport and communication. For the advantages of foreign trade development in the means of transport and communication is also made possible.
International co-operation and understanding: The people of different countries come in contact with each other. Commercial intercourse amongst nations of the world encourages exchange of ideas and culture. It creates co-operation, understanding and cordial relations amongst various nations
Ability to face natural calamities: Natural calamities such as drought, floods, famine, earthquake etc., affect the production of a country adversely. Deficiency in the supply of goods at the times of such natural calamities can be met by imports from other countries.
Other advantages: Foreign trade helps in many other ways such as benefits to consumers, international peace and better standard of living.
ECONOMIC (TRADE) REFORMS IN INDIA
In order to understand the evolution of the Foreign trade policy (EXIM policy) over time we need to understand the larger framework and evolution of Macroeconomic policy in India before and after the liberalisation in the 90’s. The subsequent trade policies were developed keeping in view this larger framework and in sequence to it.
In the early eighties, the Government of India appointed a special EXIM Policy Committee to review the government previous export import policies. The committee was later on approved by the Government of India. Mr. V. P. Singh, the then Commerce Minister and announced the EXIM Policy on April, 1985. Initially the EXIM Policy was introduced for the period of three years with main objective to boost the export business in India.
Now, let us understand the history and evolution of foreign trade policy in India we need to understand it under different phases of Policy in Practice: Trends in Foreign Trade Policy 1950 -1990: India entered into planned development era in 1950’s and at that time Import Substitution was a major element of India’s trade and industrial policy. In 1950 India’s share in the total world trade was 1.78% which reduced to 0.6% in 1995. During 2003-04 India’s share in the global trade was 0.8%, in 2005 it was 1.0%.
The PC Alexander Committee (1978) was the first committee to review and recommend on Import –Export Policies and Procedures. This committee recommended the simplification of the Import Licensing procedure and provided a framework involving a shift in the emphasis from “control to development”. In 1980 Tandon Committee gave recommendations on export strategies in eighties.
In the Export Import policy of 1978-79, for the first time in India’s History decentralization of some licensing functions took place and the powers of regional licensing authorities was enhanced. Export Oriented Units were set up under the EOU scheme introduced in early 1981. The export and Import Bank of India (website) was set up in 1982 to take over the operations of international finance wing of the IDBI. Other major objectives was to provide financial assistance to exporters and importers.
In the Trade Policy of 1985-88 some measures were taken based upon the recommendation of Abid Husain Committee 1984. This committee envisaged “Growth Led Exports, rather than Export Led Growth”. The recommendation of this committee stressed upon the need for harmonizing the foreign trade policies with other domestic policies. This committee recommended announcement of foreign trade policies for longer terms.
The export import pass book scheme was introduced in 1985 as per recommendation of Abid Hussain Committee. In 1985 Vishvanathpratap Singh Government developed a 3 yearexim policy.Tax Reform Committee chaired by Raja J. Chelliah suggested minimizing the role of quantitative restrictions and reducing the tariff rates substantially. Export Processing Zones were set up to push up exports. They are now SEZ.
MAIN FEATURES OF TRADE POLICIES- ERA OF REFORMS
As discussed the massive trade liberalisation measures adopted after 1991 mark a major departure from the relatively protectionist trade policies pursued in earlier years. Accordingly, Substantial simplification and liberalisation has been carried out in the reform period. Foreign Trade Policy (FTP) or Export Import Policy (EXIM) is believed to be an important step towards the economic reforms of India. In order to liberalize imports and boost exports, the Government of India for the first time introduced the Indian EXIM Policy on April I, 1992.
In the light of the reform policy objectives successive governments have been taking various trade reforms. Successive annual Union Budgets have also extended a number of tax benefits and exemptions to the exporters. These include reduction in the peak rate of customs duty to 15 per cent; significant reduction in duty rates for critical inputs for the Information Technology sector, which is an important export sector; grant of concessions for building infrastructure by way of 10-years tax holiday to the developers of SEZs; Facilities and tax benefits to exporters of goods and merchandise; reduction in the customs duty on specified equipment for ports and airports to 10 per cent to encourage the development of world class infrastructure facilities, etc. A number of tax benefits have also been announced for the three integral parts of the ‘convergence revolution’ the Information Technology sector, the Telecommunication sector, and the Entertainment industry.
In order to bring stability and continuity, the Export Import Policy was made for the duration of 5 years. However, the Central government reserves the right in public interest to make any amendments to the trade Policy in exercise of the powers conferred by Section-5 of the Act. Such amendment shall be made by means of a Notification published in the Gazette of India.
Prior to 2004, the Foreign Trade Policy was called EXIM Policy. Each FTP will be having objectives and set guidelines to achieve those objectives. After the introduction of liberalisation in Indian economy, 1992-97 policy was the first EXIM Policy which aimed to dismantle the protectionist and regulatory policy towards a globally oriented economy.
GOVERNMENT INITIATIVES IN IMPORTS AND EXPORTS
To encourage exports, the Government of India has offered a number of incentives. The export-import policy announced by the government every year specifies the details of export assistance and incentives. Some of the important incentives are given below:
Import Replenishment (REP) Licenses Under this scheme, the exporters are allowed to import raw materials and components used in the manufacture of export products. The policy contains a list of items of import for which REPs are to be granted. Deemed exporters are also granted REP license. Deemed exports mean, producers who supply the inputs to final exporters. They are considered as indirect exporters and are eligible for certain export benefits. Certain supplies of import substitution are also termed as deemed exports. They qualify for grant of REP but not other benefits. In India, When there was an import restriction earlier, the Import Replenishment licenses were sold at a premium. Now, with liberalization of imports, the scheme is no longer attractive. The holder of REP license is permitted to import canalized items, capital goods, samples and tools.
Import – Export Pass Book Scheme This scheme enables, the Export House, Trading Houses and manufacturer — exporters having good track record of exports, to import duty free raw materials. The scheme has extended its coverage even to well-established manufacturers.
Duty Exemption Scheme Duty exemption scheme allows the duty free import of certain components, raw materials, consumables and spares for export production. It covers categories of advance license, blanket advance license and advance customs clearance permits. It provides benefits to indirect exporters. The license holder of this scheme is also eligible for REP license.
100% Export Oriented Units These units are exempted from import licensing formalities. They are allowed to import capital goods, raw materials, components, consumables and spares under the Open General License on the condition that their entire production should be exported and operations are carried out under customs bonded factory. A 100% export oriented unit can be set up in Free Trade Zones (FTZs), promoted by Government with infrastructure facilities. Examples are Madras Export Processing Zone (MEPZ), Santacruz Electronic Processing Zone (SEPZ), besides similar zones are in Kandla (Gujarat), Noida (Delhi), Cochin. Units in FTZ and 100% Export oriented units have been given special status. Under Income Tax Act, there is complete tax holiday for 5 years for these units. The EOU/EPZ scheme has been liberalized to include units which export 50% of their production for agriculture, aquaculture, horticulture, floriculture, animal husbandry, poultry and sericulture units. The taxation system spells out a number of benefits to small-scale industries. Various tax benefits are available to small business units, both at the Centre and State level. The Central government levies direct taxes, whereas indirect taxes are levied by the State government. State government provides benefits in sales tax, water tax, octroi duty and electricity tariff, etc.
Tax exemption on earnings The profits earned on export earnings are deducted by 50% for calculation of tax. It can be availed of by an individual or company. There are also deductions available for earnings in foreign exchange by approved hotels or travel agents. There is a provision of deduction in respect of expenditure incurred by the companies for promoting sales outside India
Exemption of Sales Tax There is an exemption from sales tax, excise duty and import duty for exports. Exemption of excise duty can be obtained by way of rebate or duty drawback. When the exports earning are negative, no duty drawback is paid on claims.
Cash assistance to exporters Cash assistance is given to enable exporters to compete in the international market. It is given as a percentage on the FOB value of exports. There is International Price Reimbursement Scheme. This scheme is designed to match the differences in the international prices of steel, aluminium, pig iron, etc.
Liberalized Exchange Rate Management System (LERMS) Under Liberalized Exchange Rate Management System, the Government allows partial convertibility of rupee for all the approved transactions. In this system, exporters of goods and services who receive remittances from abroad would be able to sell bulk of their foreign exchange receipts at market determined rates from the authorized dealers.
Export Promotion Capital Goods Scheme (EPCG) This scheme permits the import of capital goods at a concessional rate of customs duty, subject to export obligation to be fulfilled over a period of time. The scheme is applicable to service sector also. Second hand capital goods are allowed to be imported under certain conditions. The importer has to obtain the EPCG licence. The capital goods cannot be sold for 5 years. Small industries can import capital goods through National Small Industries Corporation of India Ltd (NSIC) and State Small Industries Corporation (SSIC). Application for imports of capital goods, raw materials, components and consumables should be routed through the DIC.
The year of 1991 was momentous, in the economy, in the history of India as it witnessed a successful transition of India from a controlled and slow-growing economy to a liberalized and open economy that has now found a country amongst the fastest growing economies in the world. When the Indian economy was opened to external competition, Indian industry was emerging much stronger to find its rightful entity not only in the domestic market but also in international market. The process of planned economic development in India began with the launching of First Five Year Plan in April, 1951. Today, the Government has the Eleventh Five Year Plan (2007-12) In short, over the last 65 years, India's Foreign Trade has undergone a complete change in terms of composition and direction. The Government of India introduced a series of reforms to liberalize and globalize the Indian economy Reform of Foreign Trade was a critical element in structural reform as well as economic reform. Today, the destination pattern of Indian Foreign Trade has remarkably changed, in the sense that the significance of developing countries as Foreign Trade has considerable increased. All EXIM polices or FTPs in India regard to liberalization and globalization of the Foreign Trade has witnessed very significant change.