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1
 I.B.O.-3
India’s Foreign Trade
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the
Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance
of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100%
accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample
answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment.
As these solutions and answers are prepared by the private Teacher/Tutor so the chances of error or mistake cannot be

g
denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/

n
Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact

i
information, data and solution. Student should must read and refer the official study material provided by the university.

Attempt all the questions.

a d
e
Q. 1. Discuss ‘Balance of payment Accounting’ in the context of India. Explain main items in the balance

R
of payments. What policy measures were taken to improve the situation of the balance of payments?
Ans. Balance of Payment Accounting: In balance of payments accounting, the balance of payments should be

e
zero because every transaction is two-sided with debits balancing credits. However, in practice, the balance of

in ks
payments will rarely be equal to zero. This is due to, among other things, a country’s central bank (RBI in India’s

transactions. l
case) doing transactions that are not part of the balance of payment, or even lack of statistical data to record all

n oo
Balance of payments is classified as:
O b
r -
1. Balance of payment on current account, and

o
f E
2. Balance of payment on capital account.

d
1. BOP on Current Account: The balance of payment on current account records the current position of the

b
u a n
country in the transfer of goods, services, and merchandise as well as invisible items, donations, unilateral transfers,
etc. A current account is like an income and expenditure account. Surplus or deficit in current account is transferred

H
to the capital account, which is like a balance sheet and thus balances itself in the overall picture.

e
2. BOP on Capital Account: Balance of payments on capital account shows the country’s financial position in

h
the global context. It covers accumulated foreign exchange reserves, foreign assets and liabilities and the bearing of

T
current transactions on international financial positions. The changes in foreign exchange reserves effected by cur-
rent account transactions are part of the capital account. This helps in finding out the exact foreign exchange reserve
of the country on a given date. The capital account offers relief to deteriorating balance of payment positions. Its
favourable effect is directly related to the availability of net capital transfers, i.e. gross inflow of capital minus
payment by way of amortization. Capital account thus reflects changes in foreign assets and liabilities of a country
and directly shows its creditor/debtor position. Net changes in current account are reflected by a relevant opposite
change in the capital accounts altering the foreign assets and liabilities position of the country. Table 3.1 shows a
wide range of items of balance of payment.

2
 Table 3.1
Main Items in the Balance of Payments
Item Definition
A. Current Account (1+2)
(a)Merchandise exports Sales of goods abroad
(b) Merchandise imports Purchase of foreign goods
1. Trade balance (a – b) Goods trade balance
2. Invisibles (a+b+c+d)
(a)Non-factor Services (i) Sales of services, e.g. insurance, software plus spending of foreign
visitors (tourists)
(ii) Purchase of foreign services
(b)Investment Income (i) Dividends, interest etc. received from abroad
(ii) Payment of dividends, interest etc.

n g
i
(c)Private transfers Net private payments, e.g., remittance from workers abroad.

(d)Official Transfers-Grants Net official payments, e.g., overseas aid.

a d
Item
B. Capital Account (1+2+3+4)
Re Definition

e
1. Foreign Investment

in ks
(a) Direct Investment Net direct investment in plant and machinery etc.

l
(b) Portfolio Investment Net purchases/sales of shares, bonds, etc.

n oo
O b
2. Other flows Sum of other items, including delayed export receipts and E&O.

r -
3. Commission. and other borrowings Official borrowing and lending.

o
4. Non-resident deposits (net)
C. Reserves and monetary gold
f E
b d
CRUCIAL POLICY MEASURES

u a n
The package of reforms initiated many policy measures. Two such policy measures brought significant changes

H
in the balance of payment situation in India. These policy measures are discussed in what follows.
Foreign Exchange Policy: Since early seventies India had adopted flexible exchange rates system. The guid-

h e
ing principle for monetary authorities was to allow the exchange rate to move in alignment with macro economic
fundamentals. However, in general, countries prefer to limit exchange rate movement within the ceiling of move-

T
ments that affect the fundamentals.
India had large capital inflows soon after the adoption of the market based exchange rate system in 1993. The
inflows surpassed the current account deficits and excess supply conditions prevailed in the foreign exchange mar-
ket. This posed a new challenge for the government in devising monetary and exchange rate policies.
In such a state of affairs, a flexible exchange rate regime (i.e. allowing the nominal rate appreciate with large
capital inflows) has the merits of insulating domestic economy from the inflows and containing inflation on account
of an advantageous switchover from exchange rate to domestic prices. However, these gains have to be evaluated
against the cost of weakening of external competitiveness. It certainly amounts to sacrifice of the external balance

3
objective. Instead, if the aim is to prevent real appreciation of exchange rate and protect external competitiveness,
there are four options or a mixture thereof available. They are:
1. The central bank (RBI in case of India) intervenes in the foreign exchange market and then sterilizes the
incremental liquidity generated. It thus keeps the monetary spreading out under check. This process has, however,
quasi-fiscal costs associated with it and it also has the problem of inflating real interest rates which may tempt
further capital inflows.
2. Trade restrictions are relaxed to permit capital flows supplement domestic saving. This has the potential of
promoting economic growth. However, utmost care must be taken to ensure that it is the investment that increases
and not the consumption. Otherwise, the debt servicing may go out of hand and become unsustainable.
The authorities can relax restrictions on capital outflows. The advantage will be of better portfolio diversifica-
tion for domestic residents as well as increased efficiency of the overall financial system. Often it develops further
confidence thereby leading to bigger inflows.

g
3. The authorities can also reintroduce restrictions to control the swiftness of inflows. The restrictions could be

n
i
in the form of increasing reserve requirements on non-resident deposits, tightening of norms for entities accessing

d
global markets for private capital, higher withholding taxes on interest payments overseas, tapering prudential stan-

a
dards on external loans, and insisting on end-use clauses.

e
Clearly, an open capital account not only limits the independence of authorities in the conduct of exchange rate

R
policy but also exposes the economy to international fluctuations and shocks. Any plan of aiming at an exchange rate

e
or the money stock may be counterbalanced by unexpected inflows, which affect the nominal exchange rate as well.

in ks
The free floating exchange rate is certain to increase volatility and cause constant misalignments which could knock

l
off balance the financial system, thereby eroding the reducibility of an independent monetary policy. Obviously,

n oo
there has to be consistency with the economic fundamentals, and therefore it may become necessary to allow short-
term nominal appreciation when there is excess supply, but the authorities must be geared up for aggressive interfer-

O b
ence, backed by likewise aggressive sterilization to shield the money objective. Long-term measures to preserve

r -
external competitiveness may include increasing fiscal concessions, softer export credit etc. These have to be con-

o
f E
stantly weighed against the possible losses due to higher debt servicing burden in the event of depreciation. This

d
way, the exchange rate regime has to play an active role in the conduct of exchange rate policy.

b n
Convertibility–In August 1994, India opted for current account convertibility (CAC). CAC is also applicable

u a
to foreign investors (both direct and portfolio), non-resident depositors and resident corporate contraction of exter-

H
nal commercial borrowings (ECB). Controls, however, exist on resident individuals and corporate bodies to send

e
capital abroad as also on inflows and outflows of capital associated with banks and non-bank financial entities.

h
International experience with CAC has shown that, more often, liberalization of the capital account attracts large

T
capital inflows. Such inflows can lead to real appreciation in the exchange rate and erode the effectiveness of
domestic monetary policy. In addition, open capital account inflicts monstrous pressure on the financial system and
brings out its weaknesses into sharper focus. Any move to Capital Account Convertibility asks for a very strong
discipline from the financial system and warrants early removal of infirmities in the system.
As defined by the Committee on Capital Account, Capital Account Convertibility (CAC) refers to the freedom
to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.
The Committee realized that there could be certain weaknesses in the system and that the entrenchment of precondi-
tions can be had only after a period of time. The Committee therefore called for a phased implementation of CAC
over a three year period i.e. phase I (1997-98), Phase II (1998-99) and Phase III (1999-2000). The implementation

4
of measures meant for each phase was based on a careful and constant monitoring of certain precondition signposts
and also certain important attendant variables. These variables were identified from the lessons of the international
experiences and the specifics of Indian situations. The Committee suggested that fiscal consolidation; a mandated
inflation target and strengthening of financial system should be considered as the vital precondition signposts for
CAC in India.
To organize the financial system for CAC, the committee made many suggestions. All suggestions aimed at
creating a level playing field among various participants in the financial system. They sought to remove market
segmentation and extend uniform treatment to resident and non-resident liabilities, to introduce more stringent
capital adequacy standards and prudential standards for effective supervisory systems and give greater autonomy to
banks and financial institutions. The Committee recognized that even after finishing the third phase; capital controls
on a number of items would be necessary. It therefore advised that at the end of three year phasing, there should be
a stock taking of the progress on the preconditions/ signpost as well as the impact of the measures suggested by the

g
Committee. CAC is a thus a continuous activity and more measures can be undertaken in the light of the experience

n
i
acquired.

d
Q. 2. Describe various export promotion measures adopted in India. Explain the regulatory mechanism

a
in export promotion.

e
Ans. Export Promotion Measures in India: In last 15 years, Government of India has introduced several

R
measures to improve export performance of the country. These export promotion measures broadly include export
assistance and incentives contained in the Export- Import policy; promotional and publicity campaigns undertaken

e
relating to the export efforts and support facilities created including infrastructure development and improving

in ks
market capabilities to boost exports.

l
Important export promotion measures taken by government over the years are:

n oo
1. Export Processing Zones (EPZs): Export Processing Zones (EPZs) have been set up at seven places as

O b
special enclaves, separated from the Domestic Tariff Areas by fiscal barriers. These are provided with a globally

r -
competitive duty-free environment to make export production possible at low costs. This enables the EPZs to be

o E
competitive in both quality and price in the world markets. The seven EPZs are located at Kandla (Gujarat), Santa

f
Cruz (Mumbai), Falta (West Bengal), Noida (UP), Kochi (Kerala), Chennai (Tamil Nadu), and Vishakhapattnam

b d
(Andhra Pradesh). The Santa Cruz Electronics Export Processing Zone (SEEPZ) is meant exclusively for export of

u a n
electronic goods and gem and jewellery items. All other zones are multi-product zones.

H
2. 100% Export-Oriented Units (EOUs): Hundred per cent export-oriented units scheme is complementary
to the EPZ scheme. Under the scheme an industrial unit offers for export its entire production excluding the rejects

h e
and items otherwise specifically allowed to be sold in the Domestic Tariff Areas (DTAs). Unlike the EPZs the 100%
EOUs can be set up anywhere in the country subject to some location criteria. The location is decided after considering

T
factors like nearness to source of raw materials and port of export, hinterland facilities, availability of technological
skills, existence of an industrial park and availability of larger area of land if required for the project.
3. Major Facilities to 100% EOUs/EPZs
Automatic approvals granted within 15 days to all proposals satisfying specified conditions. In other cases
also, Board of Approvals takes only 45 days for its decision.
No import license is needed to import capital goods, raw materials, consumables, etc.
Units in these areas are exempted from payment of customs duty on capital goods, raw materials, consumables,
etc.

5
 Exemption is also given from paying any excise duty on capital goods, raw materials, etc.
50% of production is allowed for sale in domestic markets at concessional rate of duty. However, clearance
from government is necessary to do so.
4. Export Promotion Industrial Parks Scheme (EPIP): This is a centrally sponsored scheme involving the
state governments in creating infrastructure facilities for export-oriented production.
5. Software Technology Parks (STPs) Scheme–Software Technology Parks (STPs) are 100% export oriented
projects catering to needs of software development exports. No export licence is required for import of equipment
into Technology Parks. All the imports are duty-free.
6. Electronics Hardware Technology Parks (EHTPs) Scheme: Under the Electronics Hardware Technology
Parks Scheme, the Central Government, a state government, public or private sector undertakings may set up such a
Park. An EHTP unit can import free of duty all types of goods including all capital equipment needed by it for its
production process.
7. Special Economic Zones (SEZs): To encourage free trade further government has also set up Special

g
Economic Zones. Such zones are specifically delineated duty-free enclaves and are deemed to be foreign lands for

n
i
the purposes of trade operations and duties and tariffs. Goods going into the SEZ areas are treated as deemed

d
exports. Goods coming from the SEZ area into DAT are treated as imported goods.

a
8. Export Houses, Trading Houses and Star Trading Houses: Under this scheme registered exporters with a

e
good record of export performance over many years are granted status of Export/Trading Houses/Star Trading

R
Houses/Super Star Trading Houses. The recognition is subject to satisfying minimum annual average export
performance in terms of FOB value or net foreign exchange earnings on physical exports prescribed in the Export-

e
Import (EXIM) Policy.

in ks
The objective of the scheme is to give national recognition to established exporters and larger export houses

l
and stimulate them to greater export achievements.

n oo
These status-holder houses are granted following facilities:

O b
(a) Duty Entitlement Pass Books

r -
(b) Advance licences for physical export, intermediate supplies and deemed exports.

o
(c) Automatic licence.

f E
(d) Legal undertaking by government on their behalf, if required.

d
9. Diamond, Gem and Jewellery Export Promotion Scheme: Exporters of gems and jewellery are allowed

b n
to import their inputs using Replenishment Licence and Diamond Imprested Licence issued by the licensing authority.

u a
Exporters of gold/platinum jewellery and other articles can import necessary inputs like gold, silver, platinum,

H
mounting, finding, rough gems, precious and semi-precious stones, synthetic stones and unprocessed pearls, etc.

e
without any problem.
10. Export of Services: To boost the export of services, several facilities have been declared to service

T h
exporters. They are eligible for recognition as Service Export House, International Service Export House,
International Star Service Export House and International Super Star Service Export House on reaching prescribed
export performances. They are then allowed several attractive benefits under the EXIM policy.
11. Facilities for Deemed Exporters: Deemed exports are those transactions in which goods supplied do not
leave the country and the supplier in India receives payment for the goods by the foreign buyer in foreign exchange.
Such deemed exports are eligible for following benefits in respect of manufacture and supply of goods qualifying
as deemed exports:
(i) Advanced licence for intermediate supply/deemed export
(ii) Deemed export drawback
(iii) Refund of terminal excise duty.

6
 12. Export Promotion Capital Goods Scheme: Under this scheme new capital goods including computer
software systems are allowed to be imported. Capital goods including jigs, fixtures, dies, moulds and spares up to
20% of the CIF value of the capital goods can be imported at 5% customs duty. The import is subject to an export
obligation equivalent to five times the CIF value of capital goods on FOB basis or four times the CIF value of capital
goods on NFE basis to be fulfilled over a period of eight years. Import of capital goods is then subject to actual user
condition till the export obligation is met.
13. Duty Exemption/Remission Scheme: The Duty Exemption Scheme enables import of inputs required for
export production. An advance licence is issued for duty-free import of inputs subject to actual user condition. The
exemption covers payment of basic customs duty, surcharge, additional customs, anti- dumping duty and safeguard
duty, if any. Advance licence can be issued for physical exports, intermediate supply and also deemed exports.
Duty Remission Scheme consists of Duty Free Replenishment Certificate and Duty Entitlement Pass Book
Scheme. It allows drawback on import duties paid on inputs, which have been used in the export product.

g
14. Export Finance: Export finance and credit are made available to exporters for producing and selling goods

n
to overseas buyers on credit. The pre-shipment finance is meant for financing the purchase, processing, manufacturing,

i
and packing of goods as defined by RBI. The post-shipment finance/credit is offered to an exporter from the date of

d
shipment of goods to the date of realization of export bills. Both pre-shipment and post-shipment credits are also

a
available in foreign currency. Under deferred payment terms, credit is even allowed beyond the prescribed date of

e
realization of export proceeds.

R
Export-Import (EXIM) Bank of India is the principal financial institution responsible for both financing and
promoting India’s export trade. Its major functions are:

e
(i) Providing deferred payment credit for exports.

in ks
(ii) Providing guarantees to exporters, if so needed.

l
(iii) Financing overseas joint ventures and turn key projects executed by Indian companies.

n oo
15. Duty Drawback Scheme: Under the Duty Drawback Scheme exporters get back all customs and excise

O b
duties paid on raw materials, components and spares including packaging material, imported or indigenous used in

r -
export products.

o E
16. Tax Relief: Export sales are exempt from payment of sales tax. Excise duty is also not payable on export

f
goods. If paid, it is refunded. Also, profits made in exports including software exports are totally exempt from

b d
income tax. Foreign exchange earnings under other heads as specified in the EXIM Policy also get income tax relief.

u a n
17. Brand Promotions and Quality Awareness: The Central Government has set up a committee to identify

H
branded products to actively promote their exports. Under the scheme, exporters of the brands recognized by the
committee would be allowed to enjoy many benefits as per the EXIM policy.

e
The government aims at encouraging manufacturers and exporters in matching globally recognised standards

h
of quality for their products. It has therefore launched a nationwide programme on quality awareness and to popularise

T
the concept of total quality management.
18. Market Development Assistance (MDA): This scheme was originally known as the Market Development
Fund and was introduced in 1963. Its main objective is to stimulate exports and diversify the pattern of export trade.
The scheme offers valuable assistances in the marketing of wide range of Indian commodities abroad.
The MDA tries to help exporters in following various ways:
(i) Market research, commodity research, area surveys and product research.
(ii) Product promotion and commodity development.
(iii) Publicity and dissemination of information about the export products in foreign countries.
(iv) Participation in Trade Fairs and Exhibitions.

7
 (v) Sending trade delegations and study teams abroad.
(vi) Establishment of market assistance offices in countries abroad.
(vii) Grants-in-aid to Export Promotion Councils and other approved organizations for development of exports
and promotion of foreign trade and
(viii) Sponsoring any other scheme designed to generally promote markets for Indian commodities in the overseas
markets.
19. Crucial Balancing Investment Scheme: This novel scheme envisages balancing capital investments for
relieving bottlenecks in infrastructure for export production and conveyance. Its primary aim is to boost exports through
export facilitation and removal of impediments to exports. Its particular emphasis is on doing away with infrastructure
bottlenecks.
The scheme provides funding support to proposals that will remove any bottlenecks at ports, roads, and airports,
export centres etc. Some of such approved proposals include establishment of an international land port at Petrapole

g
in West Bengal; truck terminus at Bongaoan and strengthening and widening of Bongaoan-Panchpota Road in West

n
Bengal; power system improvement at Moradabad in Uttar Pradesh, and infrastructure facilities at Aroor, Alappuzha
for marine industry in Kerala.

di
20. Electronic Data Interchange: Government has identified use of Electronic Data Interchange (EDI) as high

e a
priority in trade facilitation. Following specific steps have been taken to encourage use of EDI in the country:
(i) Creation of the institutional set up for EDI through establishments of EDI Council, India EDIFACT

R
Committee and EDI Working Group.

e
(ii) As a nodal agency, Federation of Indian Export Organizations (FIEO) has been given the task of promoting

in ks
EDI in the private sector.

l
(iii) Alignment of Trade Documents and Trade Process in India in respect of International Trade has been

n oo
undertaken.
(iv) The Regional Adviser UN/ESCAP, at the request of Ministry of Commerce, prepared framework for
introduction of EDI in India.
O b
r -
(v) Implementation of EDI in key departments/organizations connected with international trade such as customs,

fo E
ports, DGFT, airport authorities, etc. is being carefully done.
(vi) Government periodically holds major international EDI events to highlight the capabilities of Electronic
Commerce.
b n d
u a
21. States Cell: The States Cell at Centre is a nodal agency, which interacts with the states/union territories on

H
export matters concerning their areas. The Cell directly involves various state governments in country’s export
efforts. At the suggestion of the Ministry of Commerce most of the state governments have now set-up apex level

h e
organizations under the chairmanship of the Chief Minister or Chief Secretary to consider, sort out and solve problems
faced by exporters in the respective states. Cells have also have been created in state secretariats to look after the

T
export work. The state governments have also nominated Nodal Officers (Niryat Bandhus) for export promotion
work.
CRUCIAL POLICY MEASURES
The package of reforms initiated many policy measures. Two such policy measures brought significant changes
in the balance of payment situation in India. These policy measures are discussed in what follows.
Foreign Exchange Policy
Since early seventies India had adopted flexible exchange rates system. The guiding principle for monetary
authorities was to allow the exchange rate to move in alignment with macro economic fundamentals. However, in
general, countries prefer to limit exchange rate movement within the ceiling of movements that affect the fundamentals.

8
 India had large capital inflows soon after the adoption of the market based exchange rate system in 1993. The
inflows surpassed the current account deficits and excess supply conditions prevailed in the foreign exchange market.
This posed a new challenge for the government in devising monetary and exchange rate policies.
In such a state of affairs, a flexible exchange rate regime (i.e. allowing the nominal rate appreciate with large
capital inflows) has the merits of insulating domestic economy from the inflows and containing inflation on account
of an advantageous switchover from exchange rate to domestic prices. However, these gains have to be evaluated
against the cost of weakening of external competitiveness. It certainly amounts to sacrifice of the external balance
objective. Instead, if the aim is to prevent real appreciation of exchange rate and protect external competitiveness,
there are four options or a mixture thereof available. They are:
1. The central bank (RBI in case of India) intervenes in the foreign exchange market and then sterilizes the
incremental liquidity generated. It thus keeps the monetary spreading out under check. This process has, however,
quasi-fiscal costs associated with it and it also has the problem of inflating real interest rates which may tempt
further capital inflows.

n g
i
2. Trade restrictions are relaxed to permit capital flows supplement domestic saving. This has the potential of

d
promoting economic growth. However, utmost care must be taken to ensure that it is the investment that increases

a
and not the consumption. Otherwise, the debt servicing may go out of hand and become unsustainable.

e
The authorities can relax restrictions on capital outflows. The advantage will be of better portfolio diversification

R
for domestic residents as well as increased efficiency of the overall financial system. Often it develops further

e
confidence thereby leading to bigger inflows.

in ks
3. The authorities can also reintroduce restrictions to control the swiftness of inflows. The restrictions could be

l
in the form of increasing reserve requirements on non-resident deposits, tightening of norms for entities accessing

n oo
global markets for private capital, higher withholding taxes on interest payments overseas, tapering prudential standards
on external loans, and insisting on end-use clauses.

O b
Clearly, an open capital account not only limits the independence of authorities in the conduct of exchange rate

r -
policy but also exposes the economy to international fluctuations and shocks. Any plan of aiming at an exchange rate

o
f E
or the money stock may be counterbalanced by unexpected inflows, which affect the nominal exchange rate as well.

d
The free floating exchange rate is certain to increase volatility and cause constant misalignments which could knock

b n
off balance the financial system, thereby eroding the reducibility of an independent monetary policy. Obviously,

u a
there has to be consistency with the economic fundamentals, and therefore it may become necessary to allow short-

H
term nominal appreciation when there is excess supply, but the authorities must be geared up for aggressive interference,

e
backed by likewise aggressive sterilization to shield the money objective. Long-term measures to preserve external

h
competitiveness may include increasing fiscal concessions, softer export credit etc. These have to be constantly

T
weighed against the possible losses due to higher debt servicing burden in the event of depreciation. This way, the
exchange rate regime has to play an active role in the conduct of exchange rate policy.
Convertibility
In August 1994, India opted for current account convertibility (CAC). CAC is also applicable to foreign investors
(both direct and portfolio), non-resident depositors and resident corporate contraction of external commercial
borrowings (ECB). Controls, however, exist on resident individuals and corporate bodies to send capital abroad as
also on inflows and outflows of capital associated with banks and non-bank financial entities. International experience
with CAC has shown that, more often, liberalization of the capital account attracts large capital inflows. Such
inflows can lead to real appreciation in the exchange rate and erode the effectiveness of domestic monetary policy.

9
In addition, open capital account inflicts monstrous pressure on the financial system and brings out its weaknesses
into sharper focus. Any move to Capital Account Convertibility asks for a very strong discipline from the financial
system and warrants early removal of infirmities in the system.
As defined by the Committee on Capital Account, Capital Account Convertibility (CAC) refers to the freedom
to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.
The Committee realized that there could be certain weaknesses in the system and that the entrenchment of preconditions
can be had only after a period of time. The Committee therefore called for a phased implementation of CAC over a
three year period i.e. phase I (1997-98), Phase II (1998-99) and Phase III (1999-2000). The implementation of
measures meant for each phase was based on a careful and constant monitoring of certain precondition signposts and
also certain important attendant variables. These variables were identified from the lessons of the international
experiences and the specifics of Indian situations. The Committee suggested that fiscal consolidation; a mandated
inflation target and strengthening of financial system should be considered as the vital precondition signposts for
CAC in India.

n g
i
To organize the financial system for CAC, the committee made many suggestions. All suggestions aimed at

d
creating a level playing field among various participants in the financial system. They sought to remove market

a
segmentation and extend uniform treatment to resident and non-resident liabilities, to introduce more stringent

e
capital adequacy standards and prudential standards for effective supervisory systems and give greater autonomy to

R
banks and financial institutions. The Committee recognized that even after finishing the third phase; capital controls

e
on a number of items would be necessary. It therefore advised that at the end of three year phasing, there should be

in ks
a stock taking of the progress on the preconditions/ signpost as well as the impact of the measures suggested by the

l
Committee. CAC is a thus a continuous activity and more measures can be undertaken in the light of the experience

n oo
acquired.
Q. 3. Discuss composition of the agricultural exports from India. What is the role of WTO in the agricultural
exports?
O b
r -
Ans. COMPOSITION OF AGRICULTURAL EXPORTS

o
f E
With India’s one billion population there is no dearth for domestic demand for almost all the agricultural

d
products. Exports, however, are regularly done to ensure continued presence in world markets. Satisfying domestic

b n
demand and still tapping export channels is an integral element of India’s export strategy for agricultural products.

u a
Table 15.2 shows export figures for India’s agricultural products.

H
Table 15.2

e
India’s Export of Agricultural Products

h
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

T
All Commodities 22213.01 26337.50 31841.87 33497.97 35048.67 33210.97 37644.39
Agricultural and
allied products 4023.10 4227.28 6120.01 6868.50 6634.20 6033.11 5504.60
Basmati rice 337.98 275.67 254.69 351.74 454.10 446.03 401.10
Cashew 332.90 396.51 369.97 362.41 377.13 386.76 566.44
Cashew nut shell liquid 0.92 0.78 0.43 0.78 1.93 0.98 0.50
Castor oil 92.13 140.58 222.31 176.84 155.21 159.72 245.37
Coffee 173.76 335.43 449.98 402.20 456.93 410.63 315.17

10
 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000
Cotton raw including waste 208.15 44.52 60.94 443.90 221.41 49.17 18.64
Floriculture products 6.00 9.82 18.01 17.87 23.37 25.18 20.94
Fresh fruits 60.13 68.92 68.90 74.58 63.29 66.59
Fresh vegetables 131.96 79.00 89.04 94.27 84.31 65.12 81.63
Fruits/Vegetable seeds 7.32 12.32 11.86 14.41 15.35 15.55
Groundnuts 54.34 32.28 58.62 91.86 152.56 33.19 42.34
Guargum meal 44.85 45.50 68.02 100.40 146.82 172.93 189.85
Marine products 812.70 1126.68 1012.31 1129.86 1208.72 1038.15 1181.55
Meat preparations 109.72 128.30 187.73 199.86 217.77 187.29 180.44
Misc. processed items 40.90 35.87 161.81 215.41 68.85 60.62 62.39

g
Non-Basmati rice 71.8 108.47 1113.00 542.63 454.03 1046.54 316.41

i n
Oil meals 740.10 572.74 703.18 985.41 925.44 461.43 370.43

d
Other cereals 10.81 8.93 5.08 13.71 3.39 2.06 1.88

a
Poultry and Dairy products 15.56 17.59 34.90 31.80 23.04 22.76

e
Processed fruits and Juices 49.55 53.98 61.25 59.05 73.51 69.12 113.29

R
Processed vegetables 25.21 42.74 32.93 31.39 39.75 38.17
Pulses 23.43 28.80 39.47 37.10 97.22 33.00 93.56
Sesame and Niger seeds 23.41 45.15
e
77.02 77.61 81.51 78.07 85.88

in ks
Shellac 20.85 14.93 18.78 14.75 15.65 15.52 18.85
Spices
Spirit and Beverages
181.18
14.65
195.04
14.86 l
n oo
237.58
13.37
338.92
56.75
379.76
19.83
387.96
16.80
393.23
16.21
Sugar and Molasses 56.71 19.80
O b 151.62 303.89 68.68 5.81 8.74

r -
Molasses 61.20 2.82 1.68 6.25
Sugar
Tea 337.31
fo
310.76 E 350.63
242.68
292.38
65.85
505.47
4.13
538.23
2.49
407.99
Tobacco manufactured 29.60
b n
22.50
d 20.40 27.15 41.15 45.03 44.55
Tobacco unmanufactured 117.28
u a
58.66 113.38 186.21 247.17 136.00 184.87

H
Wheat 0.07 13.49 109.81 196.91 0.11 0.32

h e
Trends in Exports of Tea and Coffee
The trends in exports of tea and coffee in recent years are as follows:

T
1. Tea: Plantation crops have a crucial role in India’s agricultural exports. Of these, tea plays a valuable role in
the national economy. It not only earns considerable foreign exchange for the country from exports, but also generates
large revenue for the country’s exchequer by way of cess, sales tax, agricultural income tax etc. Tea industry provides
jobs to about 1 million people directly in the plantations and to an equal number of persons in its ancillary industries.
In 1993-94, the export of tea was $337.3 million. It rose to $407.99 million in 1999-2000. Government has set
up the Tea Board to look after the development, research and promotion of Indian tea. It has five offices abroad at
London, Hamburg (Germany), New York, Dubai and Moscow. To make high quality tea from Darjeeling, Assam and
Nilgiris popular worldwide, the Tea Board regularly carries out publicity campaigns in potential markets. An example
of such promotion is the tea brand Nargis aggressively pushed in markets of Iran, Russia, etc.

11
 2. Coffee: Coffee is another important and long-established item of India’s agricultural exports. The export of
coffee was $173.76 million in 1993-94. It increased to $456.93 million in 1999-2000.
In the meantime, there have been a number of significant changes in the marketing of coffee. The Central
Government has allowed Free Sale Quota to all coffee growers irrespective of the size of their holdings.
Like the Tea Board there is a Coffee Board to look after promotion of coffee as a beverage in the domestic as
well as global markets. Its activities include expansion, quality control, research, and external and internal publicity
for coffee. Under the 8th Plan, the Coffee Board sponsored a project on Development of Value Added Coffee Products
and Decaffeinating of Coffee to the CFTRI, Mysore.
The project was a great success. It has produced some interesting results as follows:
1. Technologies have been developed for preparation of flavoured, roasted and ground coffee and flavoured
soluble coffee.

g
2. New packaging and storage techniques for the roasted and ground coffee, flavoured roasted and ground

n
coffee and flavoured soluble coffee, have been introduced. These improve the shelf life of all types of
coffee.
3. Technology for preparation of coffee bags has been now standardized.
di
4. One kg and five kg capacity coffee extractors have been developed.

e a
5. The process for decaffeinating of coffee using three solubles viz. ethyl acetate, water/aqueous sugar solution
and super critical CO has been standardized.
R
e
15.6.2 Foodgrains

in ks
Foodgrains form a fair chunk of India’s agro exports.

l
Trends for some of these items are detailed below:

n oo
1. Rice: Rice is the most prominent item in India’s foodgrain exports. As much as 80 per cent of the total

O b
foodgrains export is of rice. Global trade in rice is dominated by long grain white rice and Thai brown rice. The main

r -
players are Thailand, USA and Vietnam.

fo E
The export of Indian basmati rice was $337.98 million in 1993-94. It came down to $254.69 in 1005-96, but
increased to $454.10 million in the year 1997-98. It again declined to $401.10 million in 1999-2000.

b d
Rice is a freely exportable item with no quantitative or price restrictions. Non-basmati rice is mainly exported

n
u a
to Bangladesh, Indonesia, Iran, Philippines and countries in Sub-Saharan North Africa. Basmati rice is mostly sold

H
to Saudi Arabia, Kuwait, UAE, UK and USA.

e
2. Wheat: Export of wheat is allowed, but is subject to quantitative ceilings and Minimum Export Price (MEP)

h
as notified by the DGFT from time to time. The export of wheat was barely $0.07 milliom in1993-94. It rose to

T
$196.91 million in 1996-97. However, the trend was not sustained and the export was a dismal $0.32 million in
1998-99.
3. Coarse Grains: Coarse grains include Jowar, Bajra, Maize, Ragi, small millet and Barley. Under the EXIM
policy export of coarse grains is permitted subject to quantitative ceilings as imposed by the DGFT from time to
time.
15.6.3 Other Food Products
1. Meat and Meat Products: Meat is exported both in fresh and frozen forms. Sheep and goat meats are
generally exported in fresh forms. Buffalo meat is mostly sold abroad as frozen. Beef (meat of cow) is absolutely
banned for export.

12
 In 1993-94, export of meat and meat products was $109.72 million. It increased to $217.77 million in 1997-98,
but reduced to $180.44 million in 1999-2000. The markets for meat and allied products are Malaysia, UAE, Philippines,
Saudi Arabia, Iran, etc. The quality of meat exported from India is always criticized as very poor. Main reasons for
the criticism are:
(i) Unhygienic condition of Indian slaughter houses.
(ii) Common occurrence of Rinderpest/foot and mouth diseases among Indian animals.
2. Marine Products: Marine products are an important food item of our agro-exports next only to non-basmati
rice. With its vast coastal areas India does have excellent potential for expansion of marine products.
Traditionally, exporter of marine food products in block frozen form, India now increasingly exports value
added items like IQF (Individually Quick Frozen) cultured Shrimp, Battered Shrimp, Cooked Shrimp, fish fillet,
surmi, live fish etc. India has a coastal line of 8129 km and an Exclusive Economic Zone (EEZ) of 2.2 million sq. km.

g
The total brackish water available in the country is about 1.2 million hectors, which is available for developing

n
aquaculture.

di
India exports over 50 items under the category of marine products. The major ones of these are frozen shrimp,
frozen fish, frozen squid, frozen cuttle fish etc. The export of marine products increased from $812.70 million in

to Japan, USA, China and UAE, etc.

e a
1993-94 to $1208.72 million in 1997-98. Then it dropped to $1181.55 million in 1999-2000. Mainly the exports are

R
Marine Products Exports Development Authority (MPEDA) is the government agency responsible for

e
promoting the export of marine products. MPEDA puts into operation several plan schemes as given below:

in ks
(i) Export Production - captured fisheries.
(ii) Export Production - cultured fisheries.
l
n oo
(iv) Induction of new technologies and modernization of processing facilities.

O b
(v) Market promotion.

r -
Outside India, MPEDA has offices at New York and Tokyo. Its head office is at Kochi (Kerala).

fo E
Sea Turtle Protection: In mid-nineties USA banned entry to Indian shrimp and products derived from shrimp,
which it alleged were harvested with commercial fishing technology, that badly damages life of sea turtles.

b d
On October 6, 1996, the U.S. Court of International Trade ruled that shrimp harvested in the wild was not to be

n
u a
imported in the U.S. unless the harvesting nation gets certified as an approved sea turtle protection regime. The

H
ruling prohibited import of all shrimps from uncertified countries, except shrimp harvested from aquaculture.

e
In response Government of India immediately authorized MPEDA to countersign a certificate authenticated by

h
the exporters that the consignments of shrimp for exports to USA were sourced from aquaculture.

T
Ensuring Hygienic Standards: The most important challenge for the Indian exporters of marine products to
the EU countries and other important markets is to perk up the standards of processing plants and other activities of
production. Unless our products satisfy the stringent EU norms, we cannot hope for a sustained export business. For
this what is required is total adherence to quality and hygiene standards right from the point of raw material
procurement.
3. Tobacco: In our country, more than 60 lakh farmers and farm hands work in tobacco cultivation. Apart from
this, tobacco also provides substantial employment in different operations like curing, grading, processing and
manufacturing. Flue Cured Virginia (FCV) tobacco is mainly grown in Andhra Pradesh and Karnataka, and in some
areas of Maharashtra and Orissa.

13
 The export of tobacco manufactured went up from $29.60 million in 1993-94 to $44.55 in 1999-2000. The
export of raw tobacco increased from $117.28 million 1993-94 to $247.17 million in 1997-98. It was, however,
down to $184.87 million in 1999-2000. The export of tobacco unmanufactured is thus about four times more than
that of tobacco manufactured.
Governmoent promotes tobacco exports through following steps:
(i) It allows export to even those countries facing foreign exchange crisis on long-term credit terms.
(ii) Export of tobacco to Russia is permitted through the debt repayment route.
(iii) It regularly sponsors trade delegations to importing countries and actively participates in world trade fairs.
4. Spices: Since ancient times, India is on the forefront of producing and exporting spices. Major spices in the
world trade are pepper, capsicum, seed spices, cinnamon and cassia. Export of spices is freely allowed under the
current EXIM Policy.
Among all spices, pepper is undoubtedly the most important spice exported from India. Cardamom, chillies,

g
ginger, turmeric, seed spices, curry powder and spice oils and oleoresins are other major spices/spice products

n
i
exported. Export of all these spices shows an impressive growth in last two decades. In fact, in the nineties, it

d
increased from $181.18 million in 1993-94 to $393.23 million in 1999-2000.

a
The Spices Board helps exporters by implementing various schemes. Some such schemes are Brand Promotion,

e
Logo Promotion and Spices House Certificate. Indian spice industry is no a mere trade activity. It is now a full-

R
fledged consumer- oriented processing and production industry. Some Indian companies are even in joint ventures/

e
marketing tie-ups with multinational companies like McCormic, USA and Tone Brothers, USA under the 100 per

in ks
cent EOU Scheme. Exports of cashew kernels are also on the rise since 1993-94. The exports increased from

l
$332.90 million in 1993-94 to $566.42 million in 1999-2000.

n oo
Indonesia and Malaysia are the leading spice exporting countries of the world. Other major exporters are
Brazil, Nigeria, Tanzania, Mozambique and Kenya.

O b
5. Fresh fruits and Vegetables: India is the second largest producer of fruits and vegetables in the world.

r -
Major fruits exported by us are mangoes, grapes, bananas, and citrus fruits. There is also a new range of fruits

o
f E
introduced in global markets including strawberries, pomegranates, lychees and custard apples. The exports of

d
fresh fruits and vegetables were $146.45 million in 1994-95. It increased to $163.77 million in 1999-2000. However,

b n
the export of fresh fruits and vegetables has not seen much change over last decade.

u a
6. Processed Fruits and Vegetables: There exists a great potential for export of processed fruits and vegetables.

H
India has introduced in last two decades many new products in the world market. These include: tomato paste in bulk

e
aseptic packs, button mushrooms, freeze-dried and instant quick frozen fruits and vegetables and gherkins. The

h
export of processed fruits, juices and vegetables increased from $79.19 million in 1994-95 to $151.46 million in

T
1999-2000.
7. Floricultural Products: Floriculture is now an extremely alluring business in many countries of the world.
Flowers and plants are an integral part of human life. Apart from their aesthetic value, they are certainly functional in
improving the quality of human life. In our country, floriculture is traditionally an important industry. It now also holds
high potential for export.
The floriculture business comprises following segments:
(i) Florist trade of cut flowers and cut foliage, which may be fresh, dried, dyed, bleached, impregnated. Otherwise
the flowers may be presented in the form of garlands, bequest, floral baskets, floral ornaments and flower
decorations.

14
 (ii) Plant nursery for procreation and supply of live plants including those multiplied by tissue culture.
(iii) Bedding plant industry for supply of seeding and rooted cutting of flowers, like chrysanthemum, carnation,
gerbera, dahlia etc.
(iv) Production and sale of seeds and bulbs of flower crops including hybrid seeds.
(v) Flower perfumes particularly for essential oils, and attar concentrates, etc. These are used by cosmetic food
and flower industries as main inputs.
The main money-spinner is the florist trade of cut flowers, cut foliage and pot plants. The export of floricultural
products increased from $6.00 million in 1993-94 to $25.18 million in 1998-99. It, however, declined to $20.94
million in 1999-2000.
The government agency for promoting floriculture is APEDA. With the help of UNDP, it is putting on
stream a project for improving production and export of floricultural products. The project will publish production
manuals for major cut flowers produced in India, provide market information on a daily basis and also extend
complete technical guidance.

n g
i
Principal markets for floriculture products are Holland, USA, Germany, Japan and UK. These markets account

d
for 68 per cent of India’s total floriculture export.

a
WTO AND AGRICULTURAL EXPORTS

e
Uruguay is a small country in South America. It was here that for the first time agriculture became the issue of

R
market access negotiations. The talks were termed as the Uruguay Round. The Agricultural Agreement reached by

e
various countries at Uruguay involves border measures as well as reduction in domestic support. These measures are

in ks
bound to lead to higher global prices and drop in the global output for various agricultural products.

l
These resultants are to the advantage of India, because India’s agricultural exports are already price competi-

n oo
tive and should become more so as an outcome of Uruguay changes. Three significant aspects to be noted in this
context are:

O b
1. Impact of Uruguay Round Agreement on India’s Agricultural Exports.

r -
2. The increased market access now possible.

o
f E
3. The intellectual property protection for plants and seeds and sanitary and phytosanitary conditions. However, on

d
market access, the studies carried out so far have shown negative results. It is said that the liberalization corre-

b n
sponds to a demand side change, but India’s exports are basically supply-constrained.

u a
It is not easy to explicitly state in terms of value the benefits that India’s agricultural exports gain from the

H
Uruguay Round Agreement on Agriculture. One thing is clear, it is now absolutely necessary for India to go for

e
major reforms in the domestic agricultural sector. These reforms should start with dismantling of regulatory and

h
legislative hurdles that come in the way of agricultural modernization. The regulatory and legislative regime is

T
outmoded, outdated and dysfunctional. The reforms should cover all aspects of agriculture including production,
procurement, movement, transportation, agro-processing, storage, and marketing and credit cooperatives.
MEASURES TO IMPROVE AGRICULTURAL EXPORTS
Government is now extending financial assistance to eligible exporters for setting up various facilities needed
for improving their export of agricultural products. The government assistance is for facilitating the following:
1. Purchase of specialized quick transport vehicles with cold storage units for meat, horticulture and floricul-
ture sectors;
2. Setting up of pre-cooling facilities;

15
 3. Setting up of mechanized post-harvest handling facilities and sheds for grading, sorting, quality control and
packaging;
4. Establishing vapour heat treatment, fumigation, and screening machines, and
5. Erecting special cold stores at airports/seaports for export purposes.
Assistance for Test Marketing and Publicity
Financial assistance is also given for the following:
1. Supply of samples of products for test marketing;
2. Preparation of product literature, publicity material, films, etc.
3. Brand publicity through advertisements; and
4. Participation in international fairs/exhibitions.
Scheme for Packaging Development

g
This scheme is for development of international standard quality packaging. The assistance is for

n
1. Development of packaging standards and designs;

di
2. Using packaging developed by APEDA through Indian Institute of Packaging (IIP) or others along with

a
‘Produce of India’ label.

e
Scheme to Promote Quality and Quality Control

R
Government also extends assistance to promote quality and quality control under a special scheme. It is meant
for

e
1. Setting up quality control laboratories and strengthening of quality improving activities; and

in ks
2. Specialized consultancy services towards obtaining ISO 9000 or other recognized international quality

l
n oo
control systems and preparing quality control manuals.
Other Schemes of Assistance

O b
There is a special scheme for upgradation of meat plants. Financial assistance is given to public slaughter-

r -
houses and meat processing plants to achieve international standards of quality for their export products.

o
f E
Another scheme is to help in creating a pool of agricultural experts for the export segment. The assistance is

d
extended for organization building and human resources development and training.

b
u a n
There is also a special scheme to encourage agro- relevant research through research institutions that can
benefit both trade and industry.

H
Q. 4. Explain various components of the chemical goods. What are the responsibilities associated with

e
the chemical industries?

h
Ans. Major Sectors of Chemical Industry: Major sectors of the Indian chemical industry are:

T
(a) As a whole, the Indian organic chemical industry (petrochemicals, bulk organic chemicals and speciality
chemicals) faces the problems of uneconomical capacities, scattered production bases and poor marketing. How-
ever, it can be observed in terms of industry players with distinct characteristics.
First, there are large petrochemical cracker operating companies such as Reliance and ICPL. These produce all
important commodity plastics and a few of other bulk chemicals.
Then, there are the single polymer manufacturing companies like Finolex Industries, Chemplast Sanmar and
Supreme Petrochem who buy the basic chemicals or the intermediates to make the polymers.
In bulk organic chemicals, there are many players ranging from the benzene-based producers like Hindustan
Organic Chemicals and Herdillia Chemicals to the fertilizer companies, which have diversified into products like

16
caprolactum and methanol. A separate group of companies produces molasses (industrial alcohol) based chemicals.
Some of these even compete with the petro-based products such as MFG, acetic acid and VAM. Finally, there are the
specialty chemicals that is even today is a preserve of the multinational companies such as Ciba Specialties.
(b) Petrochemicals: The petrochemical market in India is basically supply driven. For last few years, the
growth rates for various polymers and polyesters are in double digits. Indian companies therefore operate at high
rates even in case of a reduction in price. Reliance has demonstrated that Indian companies can put together extra
cost advantage by world-class delivery systems to a scattered market, thereby ensuring low working capital costs for
the customers.
With their integrated large petrochemical complexes, IPCL and Reliance, are not much affected by the chang-
ing price cycle of petrochemical prices worldwide and continue to invest further to sustain market leadership. Single
polymer companies, obviously, do not have the pricing flexibility of a cracker complex. However, some of these like

g
Finolex Industries do have world-class capacities and abilities. Most of these companies will continue as marginal

n
players only.

di
(c) Bulk Organics: The Bulk Organics segment of the Indian chemical industry is in the process of consolidat-
ing itself. Most companies even with fairly large capacities like the Hindustan Organic Chemicals Limited are

e a
finding the things a bit tough. While there is no dearth of investors in petrochemicals, investments in the bulk
organics are, at best, tardy. Despite the fact that some companies have succeeded in reducing conversion costs, real

R
competitive advantage would be possible only through world-class capacities and integration. Most of the compa-

e
nies are today hampered by lack of resources to invest. There is stagnancy all over the industry. Even multi-business

in ks
companies in fertilizers and chemicals show interest only in somehow maintaining the status quo.

l
(d) Alcohol-based Chemicals: The prices of molasses were decontrolled in 1993. Since then the alcohol-

n oo
based chemical industry has been subjected to the vagaries of molasses prices. Raw material supply and price,

O b
which are crucial to this industry, are today inextricably linked to the sugar economy and state level policies. Large

r -
sugar producers now prefer to operate an integrated complex manufacturing not only sugar, but also paper and

o E
organic chemicals. The alcohol-based chemical industry can be safely said to stay the way it is, marginal without
attracting any large investments.
f
b d
(e) Specialty Chemicals: The specialty chemical industry is a high margin segment and continues to be domi-

n
u a
nated by the technologically strong multinational companies. Indian companies do have a reasonable presence in

H
this sector and are likely to increase it with improved R&D in many companies. However, the margins heavily
depend upon the performance of end- user industries and therefore, necessarily, on country’s economic revival.

h e
(f) Pharmaceuticals: In last five decades, the Indian pharmaceutical industry has gone through several phases,
mostly in keeping with government policy. Starting merely as a repacking business and later engaging in preparation

T
of formulations from imported bulk drugs, the Indian industry has traversed a long path to become a net foreign
exchange earner, with capability to produce almost any drug in the world.
So far, the Indian pharmaceutical industry has been regulated through the Indian Patents Act, 1970 (IPA), the
FERA for foreign equity holding, and the Drug Price Control Order (DPCO). The IPA recognizes process patents as
against product ones that are in use in the developed world. This has helped Indian manufacturers to produce inter-
nationally patented drugs within the country by finding an alternate process for the drug with help of a large pool of
qualified Indian pharmacists and scientists. The IPA has been, in a way, instrumental for the spectacular rise in the
number of pharmaceutical units throughout the country. However, this has also made the sector highly scattered.

17
 In 1994, India signed the GATT (now WTO) agreement. It meant India had to improve legislative protection to
Trade Related Intellectual Property Rights (TRIPs). Intellectual Property Rights (IPR) are the rights of the originator
of an innovation or a product to hold sole international commercial rights for a certain time. For the pharmaceutical
industry most fatal is the introduction of product patents in the country. It is bound to lead to a complete upheaval of
the industry. A 10-year transition period has been granted to enable the Indian companies to strengthen their R&D
facilities and get ready to meet the challenge thrown up by the product patent regime. India is now poised to become
a manufacturing base for the MNCs due to relatively less cost of production. Moreover, with its huge domestic
market India is certainly a good choice as base of production for these MNCs.
(g) Oil and Gas: At present India is the fourth big oil consumer in the Asia-Pacific region after Japan, China
and South Korea. Likely to increase at the rate of 7 per cent a year, the demand for petroleum products is certain to
almost double from the present 80 million tonnes to 155 million tonnes per annum by 2006-07.
Only few years back, India’s oil industry was its one of the most regulated segments. The strictness of the

g
regulations precluded any competition among companies. The industry was also nearly insulated from international

i n
shifts in oil prices. Now, many of the regulations have been removed. Prices of industrial fuels have been taken off

d
the APM and put on with comparable international fuels. In few years, India’s oil industry will be completely

a
regulation free and change over to be a competitive one because of reduced tariffs, freedom from government

e
intervention and entry of many private players.

R
INCREASING RESPONSIBILITY
At every stage of its manufacturing activity the chemical industry has to ensure greatest safety of health and

e
environment within the plants as well as in the area surrounding the chemical complexes. The concerned laws

in ks
enforced by central and state regulatory authorities are becoming more and more severe. Even the existing chemical

l
units are being forced to put up extra safeguards at extra costs, which were not taken into account originally when

n oo
the units were started. As if this is not enough, many NGOs like the Green Peace Brigade often come in the way of

O b
setting up of new projects at places, which offer certain location advantages. Going over to any other location adds

r -
not only to the capital costs of the project but may also put a recurring strain on the operating expenses. The net

o E
result of compliance to regulations is that project costs go beyond the reach of the industries, particularly when

f
production capacities are traditionally kept low.

b d
In addition to above the chemical industry has to be always on alert about following responsibilities:

u a n
1. The chemical industry has also to abide by a host of international treaties like the Chemical Weapons Con-

H
vention, Basel Convention, Montreal Protocol on Ozone Depleting Substances, Persistent Organic Pollutants, etc. to
which the country is bound as a signatory. The industry has to therefore strictly follow the stipulations of these

e
treaties, with long-term repercussions.

h
2. With the new WTO regime, chemical industry must also adhere to the provisions of World Trade Organiza-

T
tion and the Intellectual Property Rights, and such other non-tariff barriers.
3. The industry has to keep a watch on the possible dumping of goods by other nations that would damage the
interest of the industry. If dumping occurs it must without delay bring it to the notice of the designated authorities to
start anti-dumping actions and protection procedures.
4. In international trade the voluntary disciplines like the Responsible Care and ISO Certification are almost
becoming mandatory. In a fast moving world, a company can easily get ticked off for any lapse in compliance with
the RC or ISO or other such requirements.
5. The most important development in the world of business in recent times is the emergence of e-Commerce.
The Information Superhighway and instant global connectivity have made the international trade extremely com-

18
petitive. Bids can be now made and struck instantly with the most preferred offer on the Internet and even goods on
a ship on high seas can be quickly diverted to a new destination for delivery with the least extra costs of transporta-
tion and time.
6. These days, the customers and consumers have also become far more vocal and demanding. In case of
chemical products, they insist not only on high quality standards but also ask for safer products and cleaner and
environmentally caring processes. They seek a conscious commitment about social responsibility from the manufac-
turers. Institutional investors and bankers now take such commitments as a matter of routine. The net effect is that
the earlier simple quality control methods have been replaced by strict quality assurance systems.
7. Total Quality Management is the byword in the chemical process industries today. Not surprisingly, the RC
and ISO culture is spreading at all levels of organizational structure. As a consequence, well thought out orientation
and training programmes are being conducted all the time for all categories of employees. These are invariably
followed by rigorous performance assessments.

g
8. Creating awareness about social issues among the formulators on one hand, and among the product users on

i n
the other is another responsibility entrusted to the manufacturers.

d
Q. 5. Write short notes on the following :

a
(a) Major problems in India’s exports

e
Ans. Major Problems for India’s Export Sector: Among the major problems faced by Indian exporters the

R
crucial ones are poor quality image, high costs, unreliability, infrastructure bottlenecks, inadequacy of trade information
system, supply problems, faceless presence, uncertainties, procedural complexities and institutional rigidities, etc.

e
1. Poor Quality Image: Made in India product line does not enjoy a good reputation in markets abroad. Rather

in ks
it is considered to be a sign of poor quality. The products manufactured in Japan, Korea and now even in China are

l
frequently quoted abroad as examples of dependable quality. Despite the measures taken under the Exports (Quality

n oo
Control and Inspection) Act and other laws, our exports continue to suffer because of the quality problem. On

O b
several occasions, carelessness and lack of commitment on the part of exporters are also responsible. There is a

r -
general impression that a proper export culture is lacking in India.

o E
2. High Costs: In India, the rate of interest on export finance is much higher as compared to other countries.

f
According to trade circles, interest payments alone constitute nearly 15 per cent of the cost of production in India. In

b d
addition, there are also the bank charges in India, which work out to be as high as 3 per cent compared to 1 per cent

u a n
in countries like Japan and Republic of Korea. Similarly, even the port charges in India are three to four times higher

H
than those of Colombo, Hong Kong, Singapore and South Korea.
Technological factors and low productivity also contribute to high cost of production in India. Further, Indian

e
exporters are also deprived of advantages of the economics of scale and do not utilize their ability of bulk supplies

h
due to lack of finance and other reasons. Productivity is thus low leading to higher costs. Manufacturing perfor-

T
mance is directly related to use of technology and management techniques. The Indian policy towards technology
has been somewhat lukewarm. Indians lag behind in the adoption of modern technology and technological innova-
tions, as is done by South-East Asian countries. Our traditional export sectors of textiles and jute have suffered a lot
due to this lack of modernization, whereas many other, competing countries have gone ahead of us in modernizing
their industries.
3. Unreliability: As pointed out above the products imported from India are considered to be of poor quality.
Besides quality, Indian exporters are also looked upon as unreliable on many counts such as going back on a contract
or refusing to fulfil it on its original terms. A major lacuna is also the inability to provide prompt after-sales service.
Exporters from countries like Japan, South Korea and Taiwan normally replace a defective consignment free of cost

19
and without taking much time. It is the prompt response or after-sales service which projects image of the supplying
country for generating additional business. In sharp contrast, within the framework of our policies and procedural
formalities a quick response for replacing a damaged or defective consignment or for providing a prompt after-sales
service more often than not remains an illusive idea for Indian exporters. This unprofessional reluctance to give
good and timely service after-sales ultimately results in their losing all future business.
4. Infrastructure Bottlenecks: In India, infrastructure deficiencies such as energy shortages, inadequate and
unreliable transport and communication facilities have so far hindered growth of exports. Power shortages and
breakdowns are so common that they often disrupt production schedules, increase costs and badly affect timely
shipments. Improving the transportation system, including the expansion and modernization of the port facilities,
rationalisation of their charges, improving the procedurals etc., is absolutely necessary if the country is serious about
development of its export sector.

g
5. Inadequacy of Trade Information System: Efficient and time bound trade information system is a basic

i n
need for success in today’s dynamic export business. Electronic commerce including Electronic Data Interchanges

d
(EDI) and Internet play a very crucial role in the world trade at present. The unparalleled spreading out of Internet,

a
has taken the world into the Age of Information Superhighway. It has now become very easy to obtain any kind of

e
information in a matter of seconds. However, in India there are still no proper facilitates of communication and

R
therefore it is not possible to rely on Internet for getting up to date trade information. Even if the facilities are

e
available, they are very costly. Some of the developed countries insist that they would not like to trade with a country

in ks
whose exporters/importers cannot even complete necessary formalities through the Electronic Data Interchange. In

l
India, satisfactory progress in communications and information highway is still a pipe dream.

n oo
6. Supply Problems: A very severe shortcoming of the Indian export sector is its inability to ensure continuous

O b
and smooth supply in sufficient quantities relating to many products. The main problem is that much of the exporting

r -
is the result of the lingering approach and not any deliberate effort of producing for the export. The predisposition is

o
for exporting what is produced rather than producing for export. Such an attitude still continues to characterise the

f E
export behaviour and has proved extremely harmful for the export business.

b d
7. Faceless Presence: Major export items of India like seafood, leather manufactures, spices, etc. mostly have

u a n
a faceless presence in world markets. The exports undergo further processing or repacking in many cases. However,

H
in such instances Indian goods are sold in the foreign markets in the same condition as they are exported but under
foreign brand names. Possibly, when a product carries a foreign brand name it gets a much higher price than if it is
sold with an Indian name.

h e
8. Uncertain Policies: A basic defect of India’s trade policy has been the uncertainty about future policies,

T
incentive schemes, etc. To free the exporters from anxiety and ensure stability in this direction, the Export- Import
(EXIM) Policy is given a five-year span. However, even then every year a large number of amendments are made in
the EXIM Policy.
9. Procedural Complexities and Institutional Rigidities: India has lost exports worth hundreds of crores of
rupees due to the serious problem of inter-departmental coordination. It is observed that most of the existing procedural
and documentation formalities prescribed by different authorities have been defined to suit their own individual re-
quirements with no regard to the adverse consequences they can lead to on the total export activity. When the country
is trying its utmost to boost the exports, it is absolutely necessary that the documentation and procedural formalities

20
related to exports are streamlined, simplified and kept to bare minimum. This way they will not become obstacles in the
path of growth of country’s export business.
(b) Reforms in industrial policy after 1991
Ans. The Industrial Policy of 1991 was followed by many supporting reforms, which further tried to boost
foreign investment in the country. These reforms included:
1. Amendment of Foreign Exchange Regulation Act,
2. Reduced list of industries requiring industrial licensing,
3. Dilution of MRTP Act,
4. Reduction in number of industries reserved for public sector,
5. Liberalisation of imports and reduction in tariffs,
6. Convertibility of the Indian rupee,

g
7. Throwing open Indian capital market to foreign investors.

n
Moreover, as part of country’s initiative to promote and protect foreign investments, India became a member of

protection agreements with Denmark, Germany, Malaysia, Russia, U.K., and some other countries.
di
the Multilateral Investment Guarantee Agency (MIGA). The government also signed bilateral investment promotion

e a
In general, liberalisation of policy and procedural framework has been tied in with revising of special policy
and incentive packages for key industrial sectors like telecom, hydrocarbons, tourism, drugs and pharmaceuticals,
etc.
R
e
(c) India’s competitive advantages and disadvantages in the export of services

in ks
Ans. While discussing export of various services from India, we also referred to the competitive advantages and

l
disadvantages India had in each field. It is somewhat difficult to state in general terms the advantages and disadvantages

n oo
of such wide range of services. However, it is still useful to broadly find out the advantages that India offers and the

O b
disadvantages it suffers from in services exports.

r -
Competitive Advantages

o E
1. An important aspect of the services sector is that they are generally labour-intensive. India is blessed with

f
ample labour. Also, many services need not only unskilled, but also semi-skilled and skilled labour. India is

b d
in a position to offer plenty of semi-skilled and skilled labour. This gives the Indian services sector an edge

n
u a
over its competitors in securing orders from a number of developing and developed countries.

H
2. India has a large domestic market for a number of services. This creates sufficient economic strength and
learning capacity to manage a large number of areas of the services sector.

h e
3. In certain areas, such as tourism, India offers a truly large diversity of natural resources and numerous
cultural and artistic places. These have a great potential for the tourist trade. The infrastructure facility in

T
terms of transport, hotels, motels etc. is now fast developing to make Indian tourism appealing to tourists,
especially the foreign tourists. The cost of tourism in India is very low and it is therefore more alluring.
4. The Government of India is now proactive in encouraging services sector and has enacted many new
laws to promote the export of services.
Competitive Disadvantages
1. Though India is willing to export its labour, mobility of labour to promote export of services is restricted
because of visa policies of importing governments. Many governments do not want to liberalise their visa
policies.

21
 2. Market access in spite of GATS is not yet free for a number of services, which are of interest to India. This
is especially so in factor services such as labour movement including skilled personnel. Even short and
medium term movement is hindered by visa policies, problems of residence, etc.
3. Many areas of the services sector are labour- intensive. However, globally are being treated as capital-
intensive with the advancement of technology.
4. In many areas of services sector India suffers from inadequate capital.
5. Necessary finance including export finance is just not available for many areas of the services sector at
lower cost.
6. Many developing countries like South Korea and Taiwan have surged ahead in the services sector by en-
hancing their capacities and nurturing their blossoming services sector.
7 Market access for Indian services is hampered not only by government policies of the importing govern-

g
ments, but also by lack of clear information about rules and regulations in the market on the part of Indian

i n
suppliers of services. This has been proved to be a big handicap in advancement of our services sector.

d
8. Marketing of services by the Indian producer of services is generally not of world standards, which has

a
reached a very sophisticated level. Also, quality of service determines its acceptance by the consumer.

e
Foreign consumers, as a rule of thumb, depend not only on the quality but also on its perception. Indian

R
producers may offer a quality product but it must be so perceived by the customers. Thus, aggressive

e
marketing is absolutely essential.

in ks
9. Reliability of service supply is yet another factor about which Indians are often not very serious. Very often

l
this factor is overlooked. In the long run, business gets badly affected. Indian suppliers have to realize the

n oo
critical importance of reliability in continuance of getting orders.

O b
(d) Indo-ASEAN trade and economic relations

r -
Ans. The trade and economic relations between India and countries of the ASEAN region though quite old were

o
not quantitatively significant in last century.

f E
In 1970-71, India’s total trade with the world was of the order of Rs. 3106 crore of which ASEAN accounted

b d
for 1.87 per cent only. ASEAN’s share in India’s exports and imports during that year was 2.65 and 1.12 per cent

u a n
respectively. The trade balance, though not very significant, was in favour of India and continued to be so till 1976-

H
77. In 1977-78 ASEAN’s share in India’s exports and imports went up to 3.76 per cent and 5.02 per cent respectively,
turning the trade balance against India from that year. Again, the trade deficit was not very large but India continued

h e
to have adverse balance of trade with ASEAN till 1991-92. The position in 1992-93 once again changed and ASEAN’s
share in India’s exports and imports went up to 6.61 per cent and 5.33 percent respectively. As a consequence, the

T
balance of trade turned in favour of India in 1992-93 and continued to be so in 1993-94. In 1994-95, India again had
adverse balance of trade with ASEAN, which turned in favour of India in 1995-96. In 1995-96 ASEAN’s share in
India’s exports and imports went up to 8.51 per cent and 7.32 per cent respectively. In 1996-97 while ASEAN’s share
in India’s exports continued at the same level but ASEAN’s share in India’s imports went up marginally. In 1996-97,
India again had adverse balance of trade. The imports from ASEAN countries have been growing further. In the year
1999-2000, India had a negative trade balance of 2748.52 $ million.

22
 Table 34.1
India’s trade with ASEAN
Years Export Import Trade Balance
1993-94 1675.55 1101.67 573.88
1994-95 1901.99 1940.10 38.11
1995-96 2710.01 2688.06 21.95
1996-97 2857.68 2921.16 – 63.48
1997-98 2421.84 382.30 – 960.46
1998-99 1592.48 4142.64 – 2550.16
1999-00 2200.87 4949.39 – 2748.52
A Table 34.1shows India’s trade with ASEAN. The exports and imports both have been growing. The exports

g
have increased From $ 1675.55 million in 1993-94 to $ 4449.39 million in 1999-2000. The growth in imports has

n
been faster than the export growth. The growing imports have given higher negative trade balance.

i
The major products that are currently being exported by India to ASEAN region as a whole include: Oil meals;

d
manufactures of metals; machinery and instruments; primary and semi-finished iron and steel; cotton raw including

a
waste; cotton yarn, fabrics, made-up; meat and preparations; gems and jewellery; transport equipments; dyes, inter-

e
mediates and coal tar chemicals; electronic goods; spices; drugs, pharmaceuticals and fine chemicals; inorganic/

R
organic / agro chemicals: fruits and vegetables; marine products; groundnut; processed minerals; iron-ore; leather
and manufactures; rubber manufactured products; cashew; aluminium; manmade yarn; fabric; made ups; plastic and

e
linoleum products; paints/ enamels/varnishes etc; other ores and minerals; iron and steel bar/rod; residual chemical

in ks
and allied products; processed fruits and juices; paper/wood products; cosmetics/ toiletries; RMG cotton including

l
accessories; natural silk yarn, fabrics, made up; mica; glass/glassware/ceramics/refts/cmnt; RMG manmade fibres;

n oo
footwear of leather; other cereals; sports goods and Shellac.

O b
It may be observed form the above that India exports mainly primary commodities that do not have much

r -
value-addition. The non-traditional items are being exported to these countries for obvious reasons that the ASEAN

o
countries are India’s competitors in those items.

f E
Similarly, India’s imports from the ASEAN countries are largely confined to primary products which include

d
electrical machinery; machinery except electrical and machine tools; wood and wood products; organic chemicals;

b n
natural rubber; pearls, precious, semiprecious stones; vegetable oils fixed (edible); professional instruments, optical

u a
goods etc.; cashew nuts; non-ferrous metals; textile yarn, fabrics, made-up articles; inorganic chemicals; metallic

H
ferrous ores and metal scrap; artificial resins, plastic materialistic.; coal, coke and briquettes etc.; pulp and waste

e
paper; non-metallic mineral manufactures. excluding pearls; synthetic and regenerated fibres; medicinal and phar-

h
maceutical products; dyeing, tanning, colouring material; chemical material and products; printed books, newspa-
pers, journals etc,; project goods; transport equipments; fertilizers manufactured; paper board and , manufactures;

T
manufactures of metals; iron and steel; leather; pulses; and synthetic and reclaimed rubber.
There are a few items that India exports to and imports from ASEAN countries. They are: Cashew nuts,
transport equipment, drugs, pharmaceuticals and fine chemicals, gems and jewellery, organic chemicals, Inorganic
chemicals, primary and semi-finished iron and steel. The explanation for such trade follows the normal logic for
intra-industry trade. With increased industrialization and liberalized trade policy framework both in India and ASEAN,
the volume of such trade is bound to increase in coming years.

23