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CONTEXT For India to become a major player in world trade, an all encompassing, and comprehensive view needs to be taken for the overall development of the 2

country’s foreign trade. While increase in exports is of vital importance, we have also to facilitate those imports which are required to stimulate our economy. Coherence and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the existing practice of enunciating an annual Exim Policy, it is necessary to go much beyond and take an integrated approach to the developmental requirements of India’s foreign trade. This is the context of the new Foreign Trade Policy. OBJECTIVES Trade is not an end in itself, but a means to economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy is rooted in this belief and built around two major objectives. These are: 1. To double the percentage share of global merchandise trade within the next five years. The trade (i.e. Exports less imports) as per 1.09.2004 was $ 60 US while during 31.03.2009; it is expected to grow to $ 120 US. 2. To act as an effective instrument of economic growth by giving a thrust to employment generation. During the period between the years 2004 and 2005, employment generation was 10 lacs jobs which rose to 20 lacs in the years 2006-2007. In the year 2009 it is expected to be 50 lacs.

STRATEGY These objectives are proposed to be achieved by adopting, among others, the following strategies:


1. Unshackling of controls and creating an atmosphere of trust and transparency to unleash the innate entrepreneurship of our businessmen, industrialists and traders. 2. Simplifying procedures and bringing down transaction costs. 3. Neutralizing incidence of all levies and duties on inputs used in export products, based on the fundamental principle that duties and levies should not be exported. 4. Facilitating development of India as a global hub for manufacturing, trading and services. 5. Identifying and nurturing special focus areas which would generate additional employment opportunities, particularly in semi-urban and rural areas, and developing a series of ‘Initiatives’ for each of these. 6. Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy, especially through import of capital goods and equipment, thereby increasing value addition and productivity, while attaining internationally accepted standards of quality. 7. Upgrading our infrastructural network, both physical and virtual, related to the entire Foreign Trade chain, to international standards.

PREAMBLE The Preamble spells out the broad framework and is an integral part of the Foreign Trade Policy.

DURATION In exercise of the powers conferred under Section 5 of The Foreign Trade (Development and Regulation Act), 1992 (No. 22 of 1992), the Central


Government hereby notifies the Foreign Trade Policy for the period 2004-2009 incorporating the Export and Import Policy for the period 2002-2007, as modified. This Policy shall come into force with effect from 1st September, 2004 and shall remain in force upto 31st March, 2009, unless as otherwise specified. AMENDMENTS The Central Government reserves the right in public interest to make any amendments to this Policy in exercise of the powers conferred by Section-5 of the Act. Such amendment shall be made by means of a Notification published in the Gazette of India TRANSITIONAL ARRANGEMENTS Any Notifications made or Public Notices issued or anything done under the previous Export/ Import policies, and in force immediately before the commencement of this Policy shall, in so far as they are not inconsistent with the provisions of this Policy, continue to be in force and shall be deemed to have been made, issued or done under this Policy. Licences, certificates and permissions issued before the commencement of this Policy shall continue to be valid for the purpose and duration for which such licence, certificate or permission was issued unless otherwise stipulated.

With a view to doubling our percentage share of global trade within 5 years and expanding employment opportunities, especially in semi urban and rural areas, certain special focus initiatives have been identified in various sectors. Agriculture: This is the most important area. A special agricultural produce scheme called the Vishesh Krishi Upaj Yojna was set up as an initiative to promote exports in this sector.


VISHESH KRISHI UPAJ YOJANA (SPECIAL AGRICULTURAL PRODUCE SCHEME) Objective The objective of the scheme is to promote export of fruits, vegetables, flowers, minor forest produce, and their value added products, by incentivising exporters of such products. Entitlement Exporters of such products shall be entitled for duty credit scrip equivalent to 5% of the FOB value of exports for each licencing year commencing from 1st April, 2004 . The scrip and the items imported against it would be freely transferable. Imports allowed The Duty Credit may be used for import of inputs or goods including capital goods, as may be notified, provided the same is freely importable under ITC (HS). Imports from a port other than the port of export shall be allowed under TRA facility as per the terms and conditions of the notification issued by Department of Revenue. Drawback Additional customs duty/excise duty paid in cash or through debit under Vishesh Krishi Upaj Yojana shall be adjusted as CENVAT Credit or Duty Drawback as per rules framed by the Department of Revenue.

Special Provision Government reserves the right in public interest, to specify from time to time the export products which shall not be eligible for calculation of entitlement.


Export of Imported Goods Goods imported, in accordance with this Policy, may be exported in the same or substantially the same form without a licence/certificate/permission provided that the item to be imported or exported is not mentioned as restricted for import or export in the ITC (HS). Exports of such goods imported against payment in freely convertible currency would be permitted against payment in freely convertible currency. Besides agriculture the other thrust sectors where government provides special focus initiatives are: • • • • Handlooms Handicraft Gems & Jewellery Leather and Footwear

Government of India shall make concerted efforts to promote exports in these sectors by specific sectoral strategies that shall be notified from time to time.

Board of Trade The Board of Trade shall be revamped and given a clear and dynamic role in advising government on relevant issues connected with Foreign Trade Policy. There would be a process of continuous interaction between the Board of Trade and Government in order to achieve the desired objective of boosting India’s exports.

Terms of Reference The Board of Trade would have the following terms of reference:


1. To advise the Government on Policy measures for preparation and implementation of both short and long term plans for increasing exports in the light of emerging national and international economic scenarios. 2. To review export performance of various sectors, identify constraints and suggest industry specific measures to optimize export earnings. 3. To examine the existing institutional framework for imports & exports and suggest practical measures for further streamlining to achieve the desired objectives. 4. To review the policy instruments and procedures for imports & exports and suggest steps to rationalize and channelise such schemes for optimum use. 5. To examine issues which are considered relevant for promotion of India’s foreign trade, and to strengthen the international competitiveness of Indian goods and services. 6. To commission studies for furtherance of the above objectives. Composition Government shall nominate an eminent person or expert on trade policy to be President of the Board of Trade. Government shall also nominate 25 persons, of whom at least 10 will be experts in trade policy. In addition, Chairmen of recognized Export Promotion Councils and President or Secretary-Generals of National Chambers of Commerce will be ex-officio members. Meetings The Board will meet at least once every quarter and make recommendations to Government on issues pertaining to its terms of reference.

Sub- committee


The Board of Trade will have the power to set up sub-committees and to co-opt experts to these, to make recommendations on specific sectors and objectives. Secretariat and Budget Head The Board of Trade will have a Secretariat and Budget Head and shall be serviced by the Department of Commerce.

The exim policy is formulated and implemented mainly by the Ministry of Commerce and Industry, but in consultation with other ministries such as Finance, Agriculture, Textiles, as well as the Reserve Bank of India. The Directorate General of Foreign Trade is responsible for the execution of the exim policy. The responsibilities of the ministries are as follows:

Ministry Agriculture Finance Textile RBI

Responsibility Designing the National Agriculture Policy Setting import duties and other border and internal taxes, surveying the working of customs, undertaking investigations, etc Promoting exports of textile, managing quotas Managing the exchange rate policy, regulating interest rates

Earlier, the exim policy for each year used to be announced by means of a public notice published in the Gazette of India. The practice continued till 1985. in order to have continuity in operations and provide stability to the external sector, the exim policy was announced first time for three years duration during 1985-88. the objective of formulating a long term policy was to reduce unpredictability in the external trade regime with minimum changes in its exceptional nature during the validity of the policy. However, the frequency of the unabated change has necessitated the issuance of revised annual policy. The current exim policy came into force on 1 st April


2002 and will remain in force co-terminus with the Tenth Five Year Plan up to 31st March 2007. The exim policy clearly outlines and defines the various export promotion measures, policies and procedures related to foreign trade. Before starting with any export-import trade, a firm is required to obtain an Import Export Code Number (IEC Number) from the Directorate General of Foreign Trade. The principle objectives of India’s exim policy are: • • To facilitate sustained growth in exports in order to attain a share of at least 1% of global merchandise trade. To stimulate sustained economic growth by providing firms an access to essential raw materials, intermediaries, components and capital goods required for augmenting production and providing services. • To enhance the technological strength and efficiency of the Indian agriculture sector, industry, and services, to improve their competitive strength • while generating new employment opportunities, and to encourage the attainment of internationally accepted standards. To provide the consumers with good quality products and services at internationally competitive prices while at the same time create a level playing field for the domestic producers. Restricted Goods: Any goods, the export or import of which is restricted under ITC(HS) may be exported or imported only in accordance with a license/ certificate/ permission or a public notice issued in this behalf. The Director General of Foreign Trade may, however, specify through a public notice such terms and conditions according to which any goods, not included in the ITC (HS), may be exported or imported without a license/ certificate/ permission.



Director General of Foreign Trade may, through a notification, adopt and enforce any measure necessary for:• • • • • • • • Protection of public morals Protection of human, animal or plant life or health Protection of patents, trademarks and copyrights and the prevention of deceptive practices Prevention of use of prison labor Protection of national treasures of artistic, historic or archaeological value Conservation of exhaustible natural resources Protection of trade of fissionable material or material from which they are derived Prevention of traffic in arms, ammunition and implements of war

The Indian government is authorized to maintain import prohibitions and restrictions under section 11 of the Customs Act, 1962. This act allows the Central Government to prohibit imports and exports of certain goods either absolutely or subject to conditions by notifications in the Official Gazette. Presently, only a few items are prohibited for imports, which are as follows: • • • • Tallow, fat, and/or oils, rendered or unrendered of any animal origin Animal rennet Wild animals, including their body parts and products, and ivory Beef and products containing beefs in any form

At present, the import restrictions are maintained only on a limited number of products for reasons of health, security and public morals. These include firearms and ammunition, certain medicines and drugs, poppy seeds, and some


other products used for the preservation of wild life and environment. The exim policy also restricts the import of second hand vehicles, which should not be more than 3 years old, due to environmental reasons.

Under the current exim policy, export of wild animals, birds, tallow, wood products, beef, sandalwood products, peacock feathers, human skeletons and other items including certain endangered species of wild orchids and plants are prohibited. Exports to Libya are subject to certain conditions in accordance with United Nations Security Council Resolutions. However, the earlier restrictions on exports to Fiji and Iraq have now been lifted. Export of restricted items is permitted only after obtaining license from the DGFT. The list of items restricted for exports include cattle, horses, camels, seaweeds and chemical fertilizers.

Schemes for Concessional Imports Inorder to reduce or remove the anti-export bias inherent in the system of indirect taxation and to encourage exports, several schemes have been established which allow importers to benefit from tariff exemptions, especially on inputs. The schemes have been summarized as under:


Scheme Duty Drawback

Export Promotion Capital Goods

About the Scheme The rebate of duty chargeable on any imported or excisable material used in the manufacture of goods exported from India; based on industry drawback rates Import of capital goods at concessional rate of duty subject to an appropriate export obligation accepted by the exporter An advance licence is used to allow duty free import of physical inputs used in producing exports products after making normal allowance for wastage

Objective Provide a level playing field to the country’s exporters so as to exclude the export production from the incidence of import duty and other indirect taxes Reduce the incidence of high capital cost on export prices to make exports competitive by way of reduced import duty on capital goods Promote duty free imports when large quantities of standard raw materials are required for export production

Duty Exemptio n

Duty Remission

Neutralizes the incidence of The grant of customs duty customs duty by assuming the credit is on post export basis inputs as imported and as a specified percentage of additional duty is not levied fob value of exports made in freely convertible currency

Schemes to Promote Export Production and Related Infrastructure The development of export related infrastructure and enclaves, which create an environment conducive for export production, is crucial to sustain the export growth. Schemes for concessional import for firms primarily engaged in export production are summarized as under:


Scheme Exportoriented Units Export Processing Zones

About the Scheme Objective Offers wide option in Attract large number of locations for units under exporters to set up their units DTA(Domestic Tariff Area) in these zones Develop infrastructure for export production at Special enclaves separated internationally competitive from DTA by fiscal barriers prices and environment and economic development Act as growth engines that A duty-free enclave to be boost manufacturing, augment treated as a foreign territory exports and generate for trade operations and employment duties and tariffs Services which are expected to be managed and coordinated by state government/corporate sector and include various provisions A software development unit is set up for software development , data entry and conversion, data processing, data analysis and control data management or call center services for exports A unit can be set up for manufacture and development of electronic hardware or electronic hardware and software in an integrated manner Promote agricultural exports from the country and remunerative returns to the farming community in a sustained manner

Special Economic Zones

AgriExport Zones

Software Technolog y Parks

Facilitate production software

export of

oriented computer

Electronic Hardware Technolog y Parks

Facilitate production hardware

export of

oriented computer

Export Houses/Trading Houses/Star Trading Houses/Superstar Trading Houses

The objective of the scheme Export Houses, Trading Houses, Star Trading Houses, Superstar Trading Houses is to give recognition to the established exporters and large export houses to build up the marketing infrastructures and expertise required for export promotions. The registered exporters having a record of export performance over a number of years are granted the status of export/trading houses or star trading houses subject to the fulfillment of minimum annual average export performance in terms of FOB value or net exchange earning on physical export or services prescribed in the Exim policy.

Category Export House Trading House Star Trading Houses Super Star Trading House

Average FOB/FOR value during the preceding 3 licensing years (in Rs) 15 crores 100 crores 500 crores 2000 crores

The exporters who have been granted the status of export house/trading house are entitled to a number of benefits under the EXIM policy including the following: • • • License/Certificate/Permission and customs clearances for both imports and exports on self declaration basis Fixation of input-output norms on a priority basis Priority finance for medium and long-term capital requirement as per conditions notified by RBI


Exemption from compulsory negotiation of documents through banks. The remittance, however, would continue to be received through banking channels

• •

100% retention of foreign exchange Enhancement in normal repatriation from 180-360 days

The registered exporters are provided certain extra benefits.

The state governments generally do not distinguish between production for domestic market and production for export market. Therefore, there had been few specific measures taken by the state governments especially targeted at exporting units. However, the state governments have taken a number of policy measures to encourage industrial activity in the state. These measures mainly relate to (a)Capital investment subsidy or subsidy for the preparation of feasibility report, project report, etc.; (b)Waiver or deferment of sales tax or providing loans for sales tax purposes; (c) Exemption from entry tax, octroi duty, etc.; (d)Waiver of electricity duty; (e)Power subsidy; (f) Exemption from taxes for certain captive power generation units; (g)Exemption from stamp duties; and (h)Provision of land at concessional rate, etc. These concessions extended by the state governments vary depending upon various factors, such as (a)the size of the unit proposed (cottage, small, and medium industry);


(b)the backwardness of the district or area; (c) the rate of employment in the weaker sections of the society; (d)the significance of the sector, e.g., software, agriculture; (e)the source of investment such as foreign direct investment (FDI) or investment by NRIs; and (f) the health of the unit (sick), etc. Therefore, it may be noted that most of the exemptions tend to encourage capital or power-intensive units, though some concessions are linked to turnover. Most of the concessions in the state industrial policies have been designed keeping in view the manufacturing industries. An analysis of industrial policies of various states indicates that most state governments concessions. On examination of export promotion initiatives by the state governments, it is difficult to find commonality among various states. However, some of the measures taken by the state governments are as follows. (a)provide information on export opportunities (b)allot land for starting an export-oriented unit (EOU) (c) plan for the development of export promotion industrial parks (d)exemption from entry-tax on supplies to EOU/EPZ/SEZ units (e)exemption from sales tax or turnover tax for supplies to EOU/EPZ/SEZ units and inter-unit transfers between them. do compete among themselves in extending such


The State Governments shall be encouraged to participate in promoting exports from their respective States. For this purpose, Department of Commerce has formulated a scheme called ASIDE. Suitable provision has been made in the Annual Plan of the Department of Commerce for allocation of funds to the states on the twin criteria of gross exports and the rate of growth of exports. The States shall utilise this amount for developing infrastructure such as roads connecting production centres with the ports, setting up of Inland Container Depots and Container Freight Stations, creation of new State level export promotion industrial parks/zones, augmenting common facilities in the existing zones, equity participation in infrastructure projects, development of minor ports and jetties, assistance in setting up of common effluent treatment facilities, stabilizing power supply and any other activity as may be notified by Department of Commerce from time to time.

In order to encourage exporters to explore the overseas markets and to promote their exports, Market Development Assistance (MDA) Scheme of the Department of Commerce is available for the following activities. • Assist Export Promotion Councils, Commodity Boards, and Exports Development Authorities to undertake promotional activities for their products and commodities • • Assist consortium approach for overseas marketing Assist trade bodies/approved organization for carrying out non-recurring innovative activities for export promotion


• • • •

Assist export promotion councils to contest countervailing duty/antidumping cases initiated abroad Assist focus export promotion programmes in specific regions abroad like FOCUS LAC programme Assist individual exporters for export promotion activities abroad Residual essential activities connected with marketing promotion efforts abroad.

In order to supplement the Market Development Scheme and facilitate promotional efforts on a sustained basis, Market Access Initiative (MAI) Scheme was launched in 2001-02. The scheme is formulated on focus product-focus country approach to evolve specific strategy for specific market and specific product through market studies or surveys. Under the scheme, assistance is provided to export promotion organizations/trade promotion organizations or exporters for the enhancement of export through venturing into new markets or through increasing the share in the existing markets. Financial assistance is provided for the following activities under the scheme: • • • • To identify the priorities of research relevant to the Department of Commerce and to sponsor research studies consistent with the priorities To carry out studies for evolving a WTO-compatible strategy To support EPCs/trade promotion organizations in undertaking market studies/surveys for evolving proper strategies To support marketing projects abroad based on focus product-focus country approach. Under marketing projects, the following activities are funded   Opening of showrooms Opening of warehouses


     • • • • •

Display in international department stores Publicity campaign and brand promotion Participation In trade fairs abroad Research and product development Reverse visits of the prominent buyers from the project focus countries

To undertake export potential survey of the states To take registration charges for product registration abroad for

pharmaceuticals, bio-technology, and agro-chemicals To test charges for engineering products abroad To support cottage and handicraft industries To support recognized associations in industrial clusters for marketing abroad Under the scheme, the financial assistance is given to central and state governments and its departments, export promotion councils, commodity boards, registered trade promotion organizations and apex trade bodies, recognized industrial clusters, and individual exporters. However, the assistance to individual exporters is available only for evaluating the charges of engineering products abroad and registration charges of pharmaceuticals, biotechnology, and agro-chemicals. The proposals for assistance are examined by an Empowered Committee under the Championship of Commerce Secretary for a particular product and a particular market. The Market Access Initiative scheme provides an excellent opportunity, especially for public and private-sector export promotion organizations, to fiancé their marketing activities for the thrust products in the pre-identified markets. The scheme could not make the anticipated headway mainly due to limited initiatives by the state and central government organizations, which had been the target principal beneficiaries, and also because of non-


awareness among the target beneficiaries due to poor marketing of the scheme.

In order to assist the promotion of Indian brands and to project India as a reliable supplier of world-class goods and services, the Government of India established the Indian Brand Equity Fund Trust in 1996. Under the scheme, financial assistance is available for activities o promote generic products such as tea, basmati rice, textiles, software, etc. in addition to activities aimed at promoting India as a reliable supplier of quality products at a competitive price. The financial assistance is also available for promoting India as the major source and provider of world-class services in the areas space, telecommunication, and technology to boost and enhance India’s image. The IBEF Trust provides medium-term soft loans to encourage promotion of Indian brands that conform to the global quality and performance standards. Under the scheme, the soft loans are granted to exporters at the lending rate as applicable at the time of disbursement of loan amount. The following credit options are available to the exporters. (a)Rupee packing credit rate minus 2% with royalty of 0.25% of the incremental branded sales in the identified markets with maximum cap of 20% of loan amount. (b)Rupee packing credit rate minus 3% with royalty of 0.30% of the incremental branded sales in the identified markets with maximum cap of 30% of loan amount. The SSI units are given an additional concession of 1% on interest. The maximum funding from IBEF is made only up to 2/3 rd of the total expenditure, while 1/3rd of the promotional expenditure has to be generated by the exporter. The support for the product under IBEF is


considered once its market potential has been established by the market research surveys. With the growth and emergence of economic liberalization both public and private financial institutions are becoming more and more customer friendly and loans are easily available. Given the operational hassles in the scheme, it did not gain popularity among the exporters.

The emergence of rules based on multilateral trading system under the WTO trade regime has affected the Indian trade policies and their promotional efforts. For example, India has no clue as to which subsidies are prohibited, which can face countervailing measures, and which are allowed. The details of the WTO agreement are discussed in a separate chapter. However, the impact of the WTO agreements on trade policy and export promotion measures would be examined in the present chapter. The framework of GATT is based on the following four basic rules. Protection to Domestic Industry through Tariffs Even though GATT stands for liberal trade, it realizes and recognizes the fact that its member countries may have to protect their domestic products against foreign competition. However, it requires countries to keep such protection at low levels and to provide it through tariffs. To ensure that this principle is followed in practice, the use of quantitative restrictions is prohibited, except in limited situations. Binding of Tariffs Countries are urged to reduce and, wherever possible, eliminate the protection of domestic products by reducing tariffs and removing other


barriers to trade in multilateral trade negotiations. The tariffs so reduced are bound against further increases by being listed in each country’s national schedule. The schedules are an integral part of the GATT’s legal system. Most-favored-nation (MFN) Treatment This important rule of GATT lays down the principle of non-discrimination. The rule requires that tariffs and other regulations should be applied to imported or exported goods without discrimination among countries. Thus, it is not open to a country to levy customs duties on imports from one country a rate higher than it applies to imports from other countries. There are, however, some exceptions to the rule. Trade among members of regional trading arrangements, which is subject to preferential or dutyfree rates, is one such exception. Another is provided by the Generalized System of Preferences. Under this system, the developed countries apply preferential or duty-free rates to imports from developing countries, but apply MFN rates to imports from other countries.


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