Foreign Trade Policy and

Promotional Measures

Dr. Raj Agrawal

Trade Policies in India

 Exim Policies
 Streamlined trade procedures
 Liberalised import regime
 Thrust on export orientation
 Medium Term Export Strategy, 2002
 1% share in global exports by 2007
 Foreign Trade Policy 2004-2009
 To double India’s share in global merchandise
trade by 2009

Dr Raj Agrawal, IILM, New Delhi 2

Story So Far

In 1990s:
 QRs on hundreds of items;
 high levels of customs duties (22 ad-valorem rates
with peak basic rate of 300%
2005 :
 QRs removed
 Peak rate of Custom duty for most non-
agricultural products : 15 %
 EXIM Policy
 targets 12% export growth for next 5 years
 incentives for Special Economic Zones &
export-oriented clusters
 procedural simplifications to reduce
transaction costs
Dr Raj Agrawal, IILM, New Delhi 3
 Where Does India Stand
Globally?
International Trade of Select Countries in 2003
Country Exports Imports GDP Trade as % of GDP
(US$ bn.) (US$ bn.) (US$ bn.)
Korea 197.6 175.5 605.0 61.7
China 438.3 393.6 1446.9 57.5
Mexico 165.4 171.0 626.1 53.7
Russia 135.9 75.4 433.5 48.7
South Africa 38.7 35.0 160.1 46.0
Argentina 29.4 13.1 129.7 32.8
Brazil 73.1 48.3 492.1 24.7
India 57.0 74.3 588.8 22.3
Source: Economist Intelligence Unit
 India’s share in global merchandise exports: 0.8% (2003)
Dr Raj Agrawal, IILM, New Delhi 4
 India’s Export Performance
India's Export Performance (1999-2000 to 2003-04)

70000
52856 63623
60000
44147 43976
50000 47742
36760
US$ million

40000
30000
29751
20000

10000

0
1999-2000 2000-01 2001-02 2002-03 2003-04
All Commodities Years Agricultural & allied products
Ores & minerals Manufactured goods
Petroleum & crude products

Dr Raj Agrawal, IILM, New Delhi 5

 India’s Import Performance
India's Import Performance (1999-2000 to 2003-04)

90000
80000
77237
70000 61572
60000 51588
49799 50056 56613
US$ million

50000
40000
30000 37172

20000
10000
0
1999-2000 2000-01 2001-02 2002-03 2003-04

All Commodities Years

Petroleum crude & products Non-POL items

Dr Raj Agrawal, IILM, New Delhi 6

Reduction in Peak Duties

Reduction in Peak Customs Duties on Manufactured items

160
140
150
120
in per cent

100
110
80
60
40
50 42
20 38.5 30 25 20
0
1991 Mar-92 Mar-95 Mar-97 Mar-00 Mar-02 Mar-03 w.e.f March
2004

Dr Raj Agrawal, IILM, New Delhi 7

 India’s Services Exports
Trends in India's Services Exports (US $ Billion)

30 27.6
25
25
U S $ B illio n

20.3
20
18.9
15.7
15 13.2
9.4
10

0
1997- 1998- 1999- 2000- 2001- 2002- 2003-
98 99 2000 01 02 03 04

Dr Raj Agrawal, IILM, New Delhi 8

 New Trade Policy 2004-09
Highlights of New Foreign Trade Policy 2004-09
 Special Focus Initiatives for Agriculture, Handicrafts, Handloom, Gems &
Jewellery, Leather & Footwear
 Import of 2nd hand capital goods allowed without any restrictions
 Separate Export Promotion Council established for promoting Services Exports
 New Scheme to establish Free Trade & Warehousing Zones – to make India a
global trading hub - trade transactions in free currency allowed in these zones
 100% FDI permitted in development & establishment of these zones and their
infrastructure facilities
 Policy introduced to accord 100% EOU Status to Biotech Parks
 New and Comprehensive SEZ Policy soon

Dr Raj Agrawal, IILM, New Delhi 9

Foreign Trade Policy 2004-09
Objectives:
 To double India’s percentage share of global
trade within five years
 To act as an effective instrument of growth
to by giving a thrust to employment
generation
Strategies
 Unshackling controls
 Simplifying procedures and reducing
transactions cost
 Neutralizing incidence of all levies and duties
used in export products
 Nurturing different focus areas
Dr Raj Agrawal, IILM, New Delhi 10
Foreign Trade Policy 2004-09
 Facilitating development of India as
global hub for manufacturing,
trading and services
 Identifying and initiating special
focus areas which would generate
employment
 Facilitating Technological and
infrastructure upgradation
 Avoiding inverted duty structure
 Revitalising the Board of Trade
Dr Raj Agrawal, IILM, New Delhi 11
Foreign Trade Policy 2004-09

Special Focus Initiatives :

 Agriculture

 Handicrafts

 Handlooms

 Gems and Jewellery

 Leather and Footwear sectors

Dr Raj Agrawal, IILM, New Delhi 12

Foreign Trade Policy 2004-09

Thrust on agricultural exports

- Quantitative restrictions on export of
almost all agricultural products
have been removed.
- Twenty Agricultural Export Zones
have been identified for
encouraging export of agricultural
products.
Dr Raj Agrawal, IILM, New Delhi 13
Foreign Trade Policy 2004-09
Special package for agriculture
 Duty free imports of capital goods
 Will lower production cost and hence improve profitability

 Exports of medicinal plants & herbal products facilitated

 Global imports of medicinal plants: US$ 1 bn (2001)

 India second largest exporter after China

 Potential to increase export to Rs. 1750 crore by 2006-07 and

more than Rs. 2500 crore by 2009-10.
 Global market for Herbal products: US$ 80 bn

 India’s exports of Herbal products: US$ 280 mn (2002-03)

Dr Raj Agrawal, IILM, New Delhi 14

Foreign Trade Policy 2004-09
Export Promotion Schemes
 Target Plus scheme introduced
 Will further boost exports from the successful exporters
 Vishesh Krishi Upaj Yojana to boost horticulture exports
 Global trade in horticulture: US$ 79 bn (1999)
 India’s exports: US$ Rs. 1830 cr (1999-2000)
 Success of AEZs for horticulture depend on “the ability of the states to
overcome existing shortcomings in infrastructure, institutional mechanism
and policy and programme support to achieve desired export orientation”

Dr Raj Agrawal, IILM, New Delhi 15

Foreign Trade Policy 2004-09
Textile sector incentives
 Duty free entitlement for garments & handicrafts increased from 3% to
5%
 Will help exporters to move up the value chain

 However, further incentives required to consolidate India’s position

in the post-MFA era
 Handicraft Special Economic Zone to be established
 Will contribute to strong growth in handicraft exports

 Will generate employment opportunities

Dr Raj Agrawal, IILM, New Delhi 16

Foreign Trade Policy 2004-09
Export Promotion Schemes
 “Services Export Promotion Council” to be set
up
 “Served from India” scheme: Service providers
who earn forex of at least Rs. 5 lakhs will be
eligible for duty credit entitlement
 Will help small scale service providers
 Will enhance India’s share in global exports
of services (1.4% in 2003)
Dr Raj Agrawal, IILM, New Delhi 17
Foreign Trade Policy 2004-09

Export Oriented Units

 Exemption from service tax
 EOUs permitted to retain 100% of export earnings
in EEFC accounts
 Income tax benefits to DTA units which convert to
EOUs
 All these should considerably increase export
growth from the EOUs
Dr Raj Agrawal, IILM, New Delhi 18
Foreign Trade Policy 2004-09

 Import of second hand capital goods allowed without

age restrictions
 No outdated technology should be imported
 “Special Focus Initiatives”
 Could be extended to other sectors of high export
orientation like chemicals & pharmaceuticals
 Export orientation of FDI should be increased

Dr Raj Agrawal, IILM, New Delhi 19

Foreign Trade Policy 2004-09
Simplifying procedures and bringing down
transaction costs
 Transaction costs are incurred at the
pre and post-production stages, and
arise out from several procedural
complexities associated with
administrative processes, availability
of finance and transportation
problems.
 For enhancing the growth of exports it
is important to reduce the transaction
costs involved.

Dr Raj Agrawal, IILM, New Delhi 20

 Ex-Im Bank Study on
Transaction costs:-
Sector No. of Transaction costs as Transaction costs
Firms % of export revenue as % of export
 Findings of Exim Bank’s Study (2003 Survey) revenue
(1998 Survey)
Textile/Garments 23 3-10  
15

Engineering goods 18 <5 10

Pharmaceuticals 9 8 10

Chemicals 7 <5 14

Computer software 9 1-5 10

Agro-Industries 2 1-2 7-8.5

Electronic & Electrical 3 5 -

machinery
Plastic components 2 5-10 -

Paper Industry 2 5-7 -

Dr Raj Agrawal, IILM, New Delhi 21
Others 7 1-2  
Foreign Trade Policy 2004-09
Transaction Costs: International Experience
 Simplified and less stringent bureaucratic
procedures like single window clearance and
business friendly approach
 Better technology due to higher levels of foreign
investment, faster loading/unloading methods
 Flexible labour laws
 Cheap availability of power and raw materials,
 Freight incentives by the Government,
 Lower ocean freight rates due to greater
availability of vessels

Dr Raj Agrawal, IILM, New Delhi 22

Studies: Transaction Costs
 Reduction in costs; OECD study , cost poor border
transaction procedures: vary between 2% to 15%,
while average post-Uruguay tariffs on Industrial
goods amounts to 3.8%s
 UNCTAD, Direct and Indirect transaction costs
( banking and insurance,customs,business
information,transport and logistics) 10% of the
total value of world trade (US $ 400)
 Improving performance (below global average
countries): Port Efficiency: Global trade will
increase by US$ 117 billion,
 Improvement in custom procedures :$22billion

Dr Raj Agrawal, IILM, New Delhi 23

Foreign Trade Policy 2004-09

Quantum Jump in Merchandise Exports Required:

 Enhance exports of major export
commodities
 Identify potential export commodities
 Diversify export destinations
 Increasing Export competitiveness in global
market

Dr Raj Agrawal, IILM, New Delhi 24

Foreign Trade Policy 2004-09
Exim Bank Study “Strategy for Quantum Jump in Exports:
Focus on Africa, Latin America and China”
 India could aim to achieve:
 US$ 18 billion in Africa’s Imports by 2007 from US$
3.8 bn in 2003-04
 US$ 4 bn in China’s imports by 2007 (in 64 identified
groups) from US$ 0.86 bn in 2000
 US$ 1.8 bn in LAC’s imports by 2007 (in 100
identified groups) from US$ 0.6 bn in 2000
 Share in India’s Exports in 2003-04: Africa (6%); Latin
America (1.8%); China (4.7)
Dr Raj Agrawal, IILM, New Delhi 25
Export Competitiveness and
FDI
 Export as a proportion of sales among
sample of 450-odd (FDI) controlled firm
in India was just 11.6 percent.
 40 percent went into acquisition of
gross fixed assets such as plant and
machienery
 More tariff jumping and market seeking
than efficiency seeking (that is export
driven)

Dr Raj Agrawal, IILM, New Delhi 26

 Low share of FDI in major export sectors

Sector Share in FDI

(%)
Transportation industry 7.50
Computer software industry 6.46
Chemicals & pharmaceuticals 5.70
Textiles 1.20
Leather & leather goods 0.20
Services (incl. Hotels & Tourism) 8.37
Dr Raj Agrawal, IILM, New Delhi 27
Some Suggestions
 Export margins thinning
 Exporters wants “ Single Window”
announcements
 EDI or electronic data interchange is
yet to function as a seamless network
 EOUs versus SEZs
 Specific incentives to Pharma industry
Dr Raj Agrawal, IILM, New Delhi 28
Some Suggestions:
 Need of implementing all export procedures
online
 Various export incentives cost the
government about Rs 40,000 crore. But are
they really needed ?
 Need of creating adequate infrastructure
 Issue of delayed payment of legitimate
dues or rebates for tax borne

Dr Raj Agrawal, IILM, New Delhi 29

 THANKS YOU

For suggestions & Questions

contact me at
brahm123@ rediffmail.com

Dr Raj Agrawal, IILM, New Delhi 30