P. 1
Final Project of Economics

Final Project of Economics

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oAnnexure ‘C’

Procedure for establishment of Letter of Credit

LC is established by the handling agency after deducting lump sum charges quoted for
handling port charges, ICC for 2 months and 75% of the inland freight charges based on
movement plan besides port dues from the total amount worked out on the cargo carried
by the vessel in accordance with the B/L quantity. This is computed at the pool issue
price of urea prevalent on that date.

The handling agencies are required to handle imported fertilizers on the basis of
ownership of the material. The ownership is transferred to the handling agency while the
vessel is on high seas. The handling agent is required to establish an irrevocable Letter of
Credit (valid for 3 months) for the B/L quantity through a scheduled bank at New Delhi
in favour of the DOF within 3 working days from the date of issue of Movement Order or
a maximum of 10 days from the date of issue of nomination cable of the vessel,
whichever is earlier. In the event of handling agency fails to comply with it, DOF will
levy liquidated damages (LD) @ Rs.25,000/- per day. The delay beyond the
commencement of discharge is charged at penal rate of interest.

The LC is encased on the 30th day from the date of completion of discharge of the vessel
except where the Joint Draught Survey Report indicates a difference of more than +/- 1%
over the quantity shown in the Bill of Lading. For the difference exceeding 1% B/L
quantity, the handling agencies are required to furnish the equivalent value of quantity
received in excess at the pool issue price. The DSR/Port outturn report is required to be
submitted invariably to the DOF by the handling agent, along with the Statement of Facts
(SOF) and time sheet within 30 days after completion of discharge of the vessel.


3.5 What are the Economic Effects of Import Quotas?

a)The Price Effect:

Import quotas, by limiting physical quantities, tend to raise the prices of commodities
to which they apply. While this is generally, true also of a tariff, there is one important
difference in the impact of quotas. Mostly, the rise in price caused by a tariff is limited to
the amount of the duty imposed, less any decrease in price abroad. Thus, the range of the
price change due to tariff can well be circumscribed.

In contrast, a quota can raise price to any extent, since it places an absolute limit upon the
volume of imports and leaves price determination in the domestic market to the
interaction of supply and demand force.

The price effect of quotas is, thus, related to: (i) the restrictiveness of the quota, i.e., the
degree to which the supply of imported commodity is restricted; (ii) the degree of
elatisticity of domestic and foreign supply of the commodity; and (iii) the nature of the
demand, i.e., the intensity or elasticity of demand for the commodity in the importing
country. Hence, the price change due to quotas is far less predictable.

The effect of an import quota upon the price of commodity may be illustrated
diagrammatically as in.

In, DD is the domestic demand curve. Under free trade, the equilibirum price settles at
PM (or OP ), the quantity traded being OM. If the importing country imports a fixed
quota to the amount OM1, then the relevant import supply schedule assumes the form
IQS1 Thus, the QS1 segment of the import supply curve implies that supply in excess of
the quota limit is perfectly inelastic, the new equilibrium price is set at P1M1 (or OP1).
Thus, it is obvious that, the extent of the price rise will be different under different
conditions of demand and supply.


b)The Terms of Trade Effect :

As a result of the fixing of import quotas, the terms of trade of a country change. The new
terms of trade may be either more or less favourable to the country importing the quota.

The terms of trade are generally improved by a quota, to the extent that the foreign offer
curve is elastic. If the foreign exporters of the commodity are well-organised and the
offer curve is less elastic, the terms of trade may move against the country imposing
quota. But, if the foreign offer curve is more elastic, the terms of trade may move
favourably to the country imposing the quota. To illustrate the point, we may follow
Kindleberger, in drawing.

In, OE is the curve of England, exporting cloth. OP is the offer curve of Portugal,
exporting wine. Under free trade, OA represents the terms of trade. Now, if we assume
that England limits her imports of Portuguese wine to OB, the terms of trade would
change. The new terms of trade between English cloth and Portuguese wine may be OA
or OA or any price in between, depending upon the degree of elasticity of the offer
curve of Portuguese wine. Obviously, OA is favourable to England while OA terms of
trade are unfavourable to it.

c)The Balance of Payments Effect :

It has been argued that import quotas can also serve as a useful means for safeguarding
the balance of trade. By restricting imports, quotas seek to eliminate deficit and influence
the balance of payments situation favourably. Further, it is usually assumed that
administrative reduction of imports, through import quotas, would be a less harmful
measure for correcting disequilibrium in the balance of payments than such
microeconomic measures like deflation or devaluation.

Moreover, there is a greater expansive income effect of quotas, considered important for
underdeveloped countries which usually suffer from balance of payment difficulties
resulting from domestic inflation. Due to import quotas, the marginal propensity to


import becomes zero after the quota limit is reached, which thus, reduces leakages and
increase the value of income multipliers in the country.

d)Other Miscellaneous Effects :

Another important effect of quotas is that they have a protective effect. By limiting
imports to a fixed amount, irrespective of supply and demand conditions or prices in the
domestic or foreign markets, import quotas may tend to be absolutely protective. They
stimulate home production.

Further, import quotas raise domestic prices, causing reduction in overall consumption.
This is the consumption effect of quotas. They tend to discourage consumption of
imported goods as also domestic consumption of goods involving foreign raw materials,
since the prices of these goods rise due to the artificial scarcity created by import

Another effect of quota is found to be the redistribution effect. When prices rise, there is
redistribution of income from consumers to producers. The domestic producers' receipts
increase when prices of goods rise and the consumers' surplus in these goods decreases.
Hence, there is a redistribution effect.

All these effects, viz., protective, consumption and redistribution effects, can be depicted
in a partial equilibrium diagram originated by Kind leberger.

In, OP3 is the equilibrium price, equating domestic demand (DD) and is supply (SS) in a
closed economy. If, however, the country imports and we assume that OP1 is the price
settled, then OM4 demand is satisfied by OM1 domestic supply and M1M4 import of
goods. If we assume that the foreign supply of imports is perfectly elastic, and an import
quota is fixed upto M2M3 the foreign offer price remains unaffected but the home price
of the commodity would rise from OP1 to OP2 assuming it to be equal to a tariff
imposition of P1P2.. This rise in price (P1P2) is the price effect of quota (same as tariff)


which stimulates domestic production of the commodity to increase from OM1 to OM2.
Thus, M1M2 is the protective effect. However, it reduces home consumption from OM4
to OM3 Thus, MM2 reduction is the consumption effect. Further, the domestic producers'
receipts increase by the area P1 ea P2 which is derived by subtraction from consumers'
surplus. Thus, P1 ea P2 is the redistribution effect.

When the domestic demand and supply curves of a commodity are not particularly
inelastic, these effects of an import quota are similar to tariff effects. Hence, under such a
situation, it makes no difference whether a country imposes a tariff or a quota. Thus., in
the above diagram, instead of import quota M2MV if a tariff of P1P2 per unit were
imposed on imports, the effects would be the same. There is, however, one significant
distinction between a tariff and a quota in regard to revenue effect.

To see the revenue effect of tariff we have to multiply the quantity imported by the duty
imposed per unit. Thus, in the above diagram, the area abed would be collected as
governmental revenue in the importing country (for import duty (PlP2) x import quantity
(M2M3) is equal to abed). This is the revenue effect. Now, instead of tariff, if a quota
M2M3 is imposed, the prices of imports rise to OP2. Obviously then it is the importer
who gets this high domestic price for the commodity and enjoys extra profit; the
government does not get any revenue, except what may be received by way of licence
fee, for issuing the import licence. However, there is one possbility; the government, by
auctioning off import licences, can obtain this extra price and profit as its revenue. In
such a case, quota becomes equal to tariff in revenue effect also. But usually auction of
import licences is not widely used. Importers, therefore, benefit most under quota system
and the government under tariffs.


3.6 ) Department of Commerce

Import:: Region-wise

Dated: 12/10/2012
Values in Rs. Lacs



2010-2011 %Share 2011-2012 %Share %Growth


EU Countries

20,277,858.1712.0453 28,018,188.9811.9457



European Free Trade
Associatipn (EFTA)

11,710,036.776.9559 15,930,490.166.7920



Other European Countries





Southern African Customs
Union (SACU)

3,332,619.551.9796 4,820,016.082.0550



Other South African Countries

2,393,877.821.4220 3,317,538.611.4144



West Africa

5,850,465.633.4752 8,675,167.923.6987



Central Africa





East Africa





North Africa

2,684,391.391.5946 3,583,065.111.5277



North America

10,587,063.456.2888 14,371,341.456.1273



Latin America

5,930,700.373.5229 7,690,336.913.2788



East Asia (Oceania)

5,307,109.823.1525 7,654,490.623.2635




13,943,932.608.2829 20,297,531.598.6540



West Asia- GCC

34,109,397.7320.2614 48,146,460.1920.5275



Other West Asia

11,292,108.456.7077 18,131,326.027.7304



NE Asia

34,663,157.4620.5903 47,263,385.7220.1510



South Asia

988,783.920.5873 1,247,351.380.5318



CARs Countries





Other CIS Countries

2,493,216.501.4810 3,913,101.341.6684







India's Total Import




3.7 Imports of goods and services (% of GDP) in India

The Imports of goods and services (% of GDP) in India was last reported at 29.85 in
2011, according to a World Bank report published in 2012. Imports of goods and services
represent the value of all goods and other market services received from the rest of the


world. They include the value of merchandise, freight, insurance, transport, travel,
royalties, license fees, and other services, such as communication, construction, financial,
information, business, personal, and government services. They exclude compensation of
employees and investment income (formerly called factor services) and transfer
payments. This page includes a historical data chart, news and forecasts for Imports of
goods and services (% of GDP) in India. India's diverse economy encompasses traditional
village farming, modern agriculture, handicrafts, a wide range of modern industries, and a
multitude of services. Services are the major source of economic growth, accounting for
more than half of India's output with less than one third of its labor force. The economy
has posted an average growth rate of more than 7% in the decade since 1997, reducing
poverty by about 10 percentage points.




A tariff on imports is the most commonly used trade policy tool. In this chapter, we
have studied the effect of tariffs on consumers and producers in both Importing and
exporting countries. We have looked at several different cases.
First, we assumed that the importing country is so small that it does not affect the world
price of the imported good. In that case, the price faced by consumers and producers in
the importing country will rise by the full amount of the tariff. With a rise in the
consumer price, there is a drop in consumer Surplus; and with a rise in the producer price,
there is a gain in producer surplus. In addition, the government collects revenue from the
tariff. When we add together all these effects—the drop in consumer surplus, gain in
producer surplus, and government revenue collected—we still get a net loss for the
Importing country. We have referred to that loss as the deadweight loss resulting from the
The fact that a small importing country always has a net loss from a tariff explains why
most economists oppose the use of tariffs. Still, this result leaves open the question of
why tariffs are used. One reason that tariffs are used, despite their deadweight loss, is that
they are an easy way for governments to raise revenue, especially in developing
countries. A second reason is politics: the government might care more about protecting
firms than avoiding losses for consumers. A third reason is that the small-country
assumption may not hold in practice: countries may be large enough importers of a
product so that a tariff will affect its world price. In this large-country case, the decrease
in imports demanded due to the tariff causes foreign exporters to lower their prices. Of
course, consumer and producer prices in the importing country still go up, since these
prices include the tariff, but they rise by less than the full amount of the tariff. We have
shown that if we add up the drop in consumer surplus, gain in producer surplus, and
government revenue collected, it is possible for a small tariff to generate welfare gains
for the importing country.



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