SUBJECT-EB

NAME-MIRAL PATEL
ROLLNO-119060
1) What are the objective EXIM policy?Discuss India's performance under
EXIM policy?

ANS)1) To provide a stable and sustainable policy environment for foreign trade
in merchandise and services;
ii) To link rules, procedures and incentives for exports and imports with other
initiatives such as "Make in India", Digital India and Skill India to create an
‘Export Promotion Mission’ for India;
iii) To promote the diversification of India’s export by helping various sectors of
the Indian economy to gain global competitiveness with a view to promote
exports;
iv) To create an architecture for India’s global trade engagement with a view to
expanding its markets and better integrating with major regions, thereby
increasing the demand for India’s product and contributing to the
government’s flagship "Make in India" initiative;
v) To provide a mechanism for regular appraisal in order to rationalise imports
and reduce the trade imbalance.
INDIA’S performance
1. Merchandise Exports from India Scheme (MEIS)
2. Service Exports from India Scheme (SEIS)
3. Chapter -3 Incentives (MEIS & SEIS) to be available for SEZs
4. Duty credit scrips to be freely transferable and usable for
payment of custom duty, excise duty and service tax.
5. Boost to "MAKE IN INDIA"
6. Reduced Export Obligation (EO) for domestic procurement under
EPCG scheme
7. Higher level of rewards under MEIS for export items with high
domestic content and value addition.
8. Online filing of documents/ applications and Paperless trade in
24x7 environment:
9. Online inter-ministerial consultations
10. Simplification of procedures/processes, digitisation and e-
governance.
Q-2 What is FEMA? How it is different form FERA? Under which circumstance
FEMA is applied?
ANS) The Foreign Exchange Management Act, 1999 (FEMA) is an Act of
the Parliament of India "to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance
of foreign exchange market in India".[1] It was passed in the winter
session of Parliament in 1999, replacing the Foreign Exchange Regulation
Act (FERA). This act makes offences related to foreign exchange civil
offenses. It extends to the whole of India, replacing FERA, which had
become incompatible with the pro-liberalization policies of
the Government of India. It enabled a new foreign
exchange management regime consistent with the emerging framework
of the World Trade Organization (WTO).
FERA is an act which is enacted to regulate payments and foreign exchange in
India, is FERA. FEMA an act initiated to facilitate external trade and payments
and to promote orderly management of the forex market in the country.
FEMA came out as an extension of the earlier foreign exchange act FERA.
FERA is lengthier than FEMA, regarding sections.
FERA came into force when the foreign exchange reserve position in the
country wasn’t good while at the time of introduction of FEMA, the forex
reserve position was satisfactory.
The approach of FERA, towards forex transaction, is quite conservative and
restrictive, but in the case of FEMA, the approach is flexible.
Violation of FERA is a non-compoundable offence in the eyes of law. In
contrast violation of FEMA is a compoundable offence and the charges can be
removed.
Exchange Regulation Act (FERA) was passed in 1973; the main
purpose of which was to ensure the use of foreign exchange.
The FERA was creating obstacles in the development of the country so
government replaced it by FEMA in 1999. This article is pointing the
differences between the FERA and FEMA.
 Q-3)Differeciate between

(A) Bilateral and commodity agreements

Bilateral trade: The exchange of goods between two countries. Bilateral trade
agreements give preference to certain countries in commercial relationships,
facilitating trade and investment between the home country and the foreign
country by reducing or eliminating tariffs, import quotas, export restraints and
other trade barriers. Bilateral trade agreements can also help minimize trade
deficits Commodity trade.
Commodities agreement: The market for commodities is particularly
susceptible to sudden changes in the conditions of supply conditions, which
are called supply shocks. Shocks such as bad weather, disease, and natural
disasters are largely unpredictable, and cause commodity markets to become
highly volatile. In comparison, markets for the final products derived from
these commodities are much more stable.
(B) Tariff and Non Tarrif barrier
Tarrif-
With tariffs the Government receives the revenue whereas no revenue is received
by the Government by applying non-tariff measures. However, it is favoured as
an appropriate measure to meet the demand of the country and to protect the
industry.
In tariff customer’s classification and valuation procedures pose a problem before
the customs authorities. Where-as under non-tariff measures no such problem
arises.
Tariffs are simple to operate. Tariff rates once fixed through legislation require
no individual allocation of licensing quotas or exchange.
NON Tarrif
Non-tariff measures protect the procedures and make them feel more secure
than under a tariff. But incentives are not there under tariffs.
Non-tariff barriers to trade induce the domestic producers to form
monopolistic organisations with a view to keeping output low and prices high.
This is not possible under import duty.
In non-tariff the price differences will be greater in two countries because
there is no free flow of imports; but in tariff—price differentiation will be equal
to the cost of tariff and transportation between exporting and importing
countries.
(D) Custom union and free trade area
Customs unions and free trade areas are very similar in terms of the internal
arrangements with which member nations agree to trade among each other.
Within both the free trade area and customs union, there is an agreement to
lower or eliminate obstacles to trade such as tariffs, essentially, taxes imposed
on imported goods that arbitrarily raises the cost of those goods to the
consumer, thereby making those goods less competitive with domestic
sources, import quotas and other protectionist tools used to protect domestic
industries from foreign competition. The key distinction between customs
unions and free trade areas, however, involves their approach to non-treaty
nations. While a customs union, by definition, requires all parties to the
agreement to establish identical external tariffs with regard to trade with non-
treaty nations (those nations that are not signatories to the agreement),
members of a free trade area are free to establish whatever tariff rates with
respect to foreign imports from non-signatory nations that they deem
necessary or desirable. That creates an uneven playing field with respect to
foreign nation/non-signatory countries' ability to circumvent individual country
tariffs by focusing on exporting to those nations with the lowest external
tariffs.
(Q-4) What is SEZ? How it works? Discuss advantage and limitation?
Ans) The Special Economic Zone (SEZ) policy in India first came into inception on
April 1, 2000. The prime objective was to enhance foreign investment and provide an
internationally competitive and hassle free environment for exports. The idea was to
promote exports from the country and realising the need that level playing field must
be made available to the domestic enterprises and manufacturers to be competitive
globally
.A legislation has been passed permitting SEZs to offer tax breaks to foreign
investors. Over half a decade has passed since its inception, but the SEZ Bill has
certain drawbacks due to the omission of key provisions that would have relaxed
rigid labour rules. This has lessened India's chance of emulating the success of the
Chinese SEZ model, through foreign direct investment (FDI) in export-oriented
manufacturing.
The policy relating to SEZs, so far contained in the foreign trade policy, was
originally implemented through piecemeal and ad hoc amendments to different laws,
besides executive orders. In order to avoid these pitfalls and to give a long-term and
stable policy framework with minimum regulation, the SEZ Act, '05, was enacted.
The Act provides the umbrella legal framework, covering all important legal and
regulatory aspects
LIMITATIONS

 Loss of revenue to government. Generally government gets huge tax

from industries.
 Land grabbing
 Loss of agricultural land
 Compensatory problems
 Deindustrialisation
 Regional disparity
ADVANTAGES
 15 year corporate tax holiday on export profit – 100% for initial 5 years,
50% for the next 5 years and up to 50% for the balance 5 years
equivalent to profits ploughed back for investment.
 Allowed to carry forward losses.
 No licence required for import made under SEZ units.
 Duty free import  or domestic procurement of goods for setting up of
the SEZ units.
 Goods imported/procured locally are duty free and could be utilized
over the approval period of 5 years.
 Exemption from customs duty on import of capital goods, raw materials,
consumables, spares, etc.
 Exemption from Central Excise duty on the procurement of capital
goods, raw materials, and consumable spares, etc. from the domestic
market.
 Exemption from payment of Central Sales Tax on the sale or purchase of
goods, provided that, the goods are meant for undertaking authorized
operations.

Q-5) To What is WTO?What extent it has benefitted India?

ANS) The World Trade Organization (WTO) is the only global international
organization dealing with the rules of trade between nations. At its heart are
the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations and ratified in their parliaments. The goal is to help
producers of goods and services, exporters, and importers conduct their
business.
 BENEFITS TO INDIA
Exports and Imports:
 According to the recent estimates, India’s exports have almost doubled
in less than a decade. With exports going up from $26.33 billion in 1994-
1995 when India joined WTO to $51.7 billion in 2002-03. Besides, India’s
share in total world exports of goods and commercial services increased
from 0.6 in 1995 to 0.86 in 2001 whereas its total world imports of
goods and commercial services increased from 0.78 in 1995 to 0.99 per
cent during the same period.
 Exports of Textiles and Clothing
According to a WTO agreement known as Multi- Fibre Agreement (MFA)
entire quotas in textile and clothing trade will come to end from
January1, 2005. Till now WTO agreement has required the member
countries to phase out their existing quotas by the Dec. 31, 2004. It has
further restrained them from expanding the size of quotas annually.

 These measures have helped India to increase its market access for its
textile and clothing products. With effect from January 1, 2005, the
entire textiles and clothing trade would get integrated into the
multilateral trade framework of WTO.

 According to recent report (Feb. 2004), after China, India is largest gainer
from the end of quotas and the consequent free trade in textiles and
clothing. It is estimated that export market of $500 billion in garments
alone with employment potential of 30 million jobs will be up for grabs
from which India can get a good share

Q-6)What are regional block? What are different type of regional

block? Discuss the advantage and limitation of regional trade
agreement?
ANS) A regional trading bloc (RTB) is a co-operative union or group of countries
within a specific geographical boundary. RTB protects its member nations within
that region from imports from the non-members. Trading blocs are a special type of
economic integration. There are four types of trading blocs −
 Preferential Trade Area − Preferential Trade Areas (PTAs), the first step
towards making a full-fledged RTB, exist when countries of a particular
geographical region agree to decrease or eliminate tariffs on selected goods
and services imported from other members of the area.
 Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the
participating countries agree to remove or reduce barriers to trade on all
goods coming from the participating members.
  Customs Union − A customs union has no tariff barriers between members,
plus they agree to a common (unified) external tariff against non-members.
Effectively, the members are allowed to negotiate as a single bloc with third
parties, including other trading blocs, or with the WTO.
 Common Market − A ‘common market’ is an exclusive economic integration.
The member countries trade freely all types of economic resources – not just
tangible goods. All barriers to trade in goods, services, capital, and labor are
removed in common markets. In addition to tariffs, non-tariff barriers are also
diminished or removed in common markets.

Advantages of having a Regional Trading Bloc are as follows

 Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs

and it benefits the economies of participating nations.
 Economies of Scale − The larger markets created results in lower costs due
to mass manufacturing of products locally. These markets form economies of
scale.
 Competition − Trade blocs bring manufacturers from various economies,
resulting in greater competition. The competition promotes efficiency within
firms.
 Trade Effects − As tariffs are removed, the cost of imports goes down.
Demand changes and consumers become the king.
 Market Efficiency − The increased consumption, the changes in demand,
and a greater amount of products result in an efficient market.

Disadvantages of having a Regional Trading Bloc are as follows −

 Regionalism − Trading blocs have bias in favor of their member countries.
These economies establish tariffs and quotas that protect intra-regional trade
from outside forces. Rather than following the World Trade Organization,
regional trade bloc countries participate in regionalism.
 Loss of Sovereignty − A trading bloc, particularly when it becomes a
political union, leads to partial loss of sovereignty of the member nations.
 Concessions − The RTB countries want to let non-member firms gain
domestic market access only after levying taxes. Countries that join a trading
bloc needs to make some concessions.
 Interdependence − The countries of a bloc become interdependent on each
other. A natural disaster, conflict, or revolution in one country may have
adverse effect on the economies of all participants.
Q: 7 consider 3 countries A, B and C and the production of commodity X in
these countries costs Rs 4, 5 and 3 per unit respectively. Assume that A is a
very small country and has a perfectly elastic supply curve of foreign trade. A
will import X commodity to fulfill its excess demand?
Later on, in order to protect its domestic industries, A imposes an import
tariff at the rate of Rs 1 per unit. What will be consumption effect,
production effect, revenue effect, price effect and trade effect. Will there be
a deadweight loss?
Now consider that A and B forms a customs union. Will there be trade
creation or trade diversion effect?

A have perfectly elastic supply curve means that any decrease in the product
price would immediately cause the supply to shift to zero so that A will not
import from country B because that cost are higher than country A and country
B have lower cost compare to A so country A has perfectly elastic supply curve
that main reason they don’t import to fulfill its excess demand.
Consumption effect
In above figure demand and supply are measured along the horizontal scale
and price along the vertical scale. D and S are the domestic demand and supply
curves of the given commodity respectively. Originally PW is the world supply
curve of the commodity and the pre-tariff price is OP. At the price OP, the
domestic supply is OQ and demand is OQ1.

It was constituted by OQ as the consumption of home produced good and

QQ1 as the consumption of foreign produced good. After the imposition
of tariff, when price rises to OP1, the consumption is reduced from OQ1 to
OQ2. ... Thus, there is a reduction in consumption by OQ1 – OQ2 = Q1Q2.

Production effect

The imposition of tariff may be intended to protect the home industry from the
foreign competition. As tariffs restrict the flow of foreign products, the home
producers find an opportunity to increase the domestic production of import
substitutes.
In above figure, the gap QQ1 between demand and supply is met through
import of the commodity from abroad. If PP1 per unit tariff is imposed on
import, the price rises to OP1 and world supply curve shifts to P1W1. At this
higher price, the demand is reduced from OQ1 to OQ2 whereas the domestic
supply expands from OQ to OQ3.

Thus, the domestic production of import substitutes rises by the extent of

QQ3. This is the protective, production or import substitution effect. The
increased domestic production reduces the demand for foreign product from
QQ1 to Q2Q3.

In case the per unit tariff were PP2 causing the price to rise to OP2, the
domestic production would have expanded large enough to meet fully the
domestic demand. In such a situation, imports would have been reduced to
zero.
Revenue effect

The imposition of import duty provides revenues to the government. The

revenue receipts due to tariff signify a revenue effect. In above figure the
original price OP does not include any tariff and no revenue receipts become
available to the government.
Subsequently when PP1 per unit tariff is imposed, the revenue receipts of the
government can be determined by multiplying per unit tariff PP1 (or BF) with
the quantity imported Q3Q2 or (EF). Thus, the revenue receipts due to tariff
amount to PP1 × Q3Q2 = BF × EF = BCEF. This is revenue effect of tariff.
Price effect
Tariffs increase the prices of imported goods. ... Because the price has
increased, more domestic companies are willing to produce the good, so Qd
moves right. This also shifts Qw left. The overall effect is a reduction in imports,
increased domestic production, and higher consumer prices
The figure below illustrates the effects of world trade without the presence of
a tariff. In the graph, DS means domestic supply and DD means domestic
demand. The price of goods at home is found at price P, while the world price
is found at P*. At a lower price, domestic consumers will consume Qw worth of
goods, but because the home country can only produce up to Qd, it must
import Qw-Qd worth of goods.
When a tariff or other price-increasing policy is put in place, the effect is to
increase prices and limit the volume of imports. In the figure below, price
increases from the non-tariff P* to P'. Because the price has increased, more
domestic companies are willing to produce the good, so Qd moves right. This
also shifts Qw left. The overall effect is a reduction in imports, increased
domestic production, and higher consumer prices.

Trade effect

If the foreign supply of a good is perfectly elastic or if the foreign suppliers are
ready to supply the product at a constant price, the imposition of tariff is not
likely to improve the terms of trade for the tariff-imposing country. In case the
foreign supply of a good is not perfectly elastic, the imposition of tariff can
have varying effects upon the terms of trade of the tariff-imposing country
depending upon the elasticities of demand and supply in the two trading
countries
In above figure country A is an importing and country B is an exporting
country. The domestic demand and supply curves of the exporting country B
are less elastic. Country B imposes per unit tariff of P0P2 amount for reducing
import of the commodity. Since the domestic demand is inelastic, the surplus
product of country B can be disposed of in the other country A. Therefore, the
exporters lower the price of the commodity by P1P0. So P0P1 part of tariff is
borne by exporters and P1P2 part of it by the importers.
If the tariff burden borne by importers in country A is less than the burden
borne by the exporters i.e., P1P2 < P1P0, the rise in price of the commodity in
country A is less than the fall in the export price of the commodity in country
B. In such a situation, the terms of trade become favorable to the tariff-
imposing country A.
In case, P1P2 is more than P1P0, the rise in price of the commodity in country
A being larger than the fall in export price of the commodity in country B, the
terms of trade get worsened for country A. It can happen when the elasticities
of demand and supply for the commodity in country B are relatively more than
in country A.

Deadweight loss

The reduction in consumption associated with the tariff creates a deadweight

loss. Consumers who should be buying pomelos, if they could get them at the
true price, but are not buying them at the high price created by the tariff. This
area is a deadweight loss.
The imposition of tariff, on the one hand, causes a reduction in consumer’s
satisfaction and, on the other hand, provides a larger producer’s surplus or
economic rent to domestic producers and revenues to the government. Thus,
tariff leads to redistributive effect in the tariff-imposing country. The
redistributive effect can be shown with the help of above figure,
Loss in Consumer’s Surplus = RHP – RCP1 = PHCP1
Gain in Producer’s Surplus = TBP1 – TAP = PABP1
Gain in Revenues to the Government = BCEF
Net Loss = PHCP1 – (PABP1 + BCEF)
= ΔBAF + ACEH
Kinde Berger calls this net loss as the “deadweight loss” due to tariff. It signifies
the cost of tariff. It is clear that tariff causes a redistribution of income or
satisfaction in the given country. Consumers suffer a loss while producers and
government make a gain

That A and B forms a customs union. Will there be trade creation or trade
diversion effect?

Production cost of commodity (X) in three countries.

A: 4
B: 5
C: 3
Assume that the transport costs among the countries are negligible and
assume that each country can produce good (X) at a constant cost. That is,
assume that the prices indicated in the table are constant regardless of the
level of output.
If country A has a tariff of 100% percent on (X), there will be no imports of the
good, but the domestic producers will dominate the home market. If A forms a
customs union with country (C), she will be better off; if the union is with (C)
she will get a unit of commodity (X) at an opportunity cost of Rs. 3 worth of
exports instead of at the cost of Rs. 4 worth of other goods entailed by
domestic production. This is an example of “trade creation”.
If (A) has been levying a somewhat lower tariff, say 50% percent and it was
non-discriminatory, she would have imported the good from the lower cost
source, country (C), and the price in (A’s) home market would be Rs. 4. Let us
now assume that (A) and (B) form a customs union. (A) will then instead,
import (X) from (B), and the price in (A’s) market will be Rs. 5. Import will be
switched from the low-cost supplier (C) to the high-cost supplier (B). This is an
example “trade diversion” 
that A and B forms a customs union. Will there a trade diversion effect