National Institute of

Business Management
Master of Business
Administration (MBA)

International Trade
Management
 CONTENTS
CHAPTER TITLE PAGE No.

I International Marketing 5

II Basis of International Trade and 16

Monetary Systems

III Incoterms 2000 49

IV Consumer Behaviour and Role of Marketing 59

V Foreign Trade Policy and its Impact on 75

Foreign Trade
 CHAPTER - I

INTERNATIONAL MARKETING

OBJECTIVE
International trade facilitates specialisation on large scale. International division of labour and
international trade enable every country to specialise and to export those goods that it can produce
cheaper in exchange for those others can provide at a lower cost. This is one of the basic factors
which promote economic well being and pave way for increasing national income. Alfred Marshal,
the great classical economist has pointed out that the causes which determine the economic progress
of nations belong to the study of international trade. In short, foreign trade enables nations to improve
economic welfare.
International trade, however, is not quite free. The gains of international trade are hampered
by various tariff and non- tariff barriers.
Trade deficits constitute a serious problem for a number of countries. Trade deficits and
consequent adverse balance of payments position indicate the need for boosting exports. A developing
economy warrants large imports of capital goods, technology, raw materials, consumables etc., in
order to implement the development plans effectively. As imports are necessarily financed by exports,
the capacity to import is linked to export performance. Export marketing is characterised by intense
competition and growing protectionism.

A. INTERNATIONAL TRADE

A General Introduction
The last four or five decades have witnessed a tremendous expansion in world trade.
International trade has been growing at a rate much higher than the growth rate of world output.
International institutions such as IMF and World Bank, which used to be described by the Communist
countries as organs of Capitalist imperialism, have now been acknowledged by all as vital sources of
assistance for economic rejuvenation of the erstwhile communist nations, besides other capitalist
governments.
Economists have propounded various theories explaining the factors which account for trade
between nations. The theory of the classical economist David Ricardo is that International Trade is
due to the differences in the comparative costs of production between the countries. According to
Haberler, it is due to the differences in the opportunity costs of production of commodities between
nations. Irving Kravis has pointed out that International Trade arises as a result of the availability and
non-availability factors i.e. a nation would import those commodities which are not readily available
in the domestic market and export those which are available in greater quantities after satisfying the
domestic demand.

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 The principal objectives of India's export policy are:
(i) To accelerate the country's transition to a global oriented vibrant economy to derive maximum
benefits from global market opportunities.
(ii) To stimulate economic growth by providing access to essential raw materials, components,
consumables and capital goods required for augmenting export production.
(iii) To enhance the technological strength and efficiency in all spheres of activity for the attainment
of internationally accepted standards of quality; and
(iv) To provide good quality products at reasonable prices.

B. BASIC DEFINITIONS

1. Exports
The term "export" has been defined in the Foreign Trade ( Development and Regulation)
Act 1992, as " taking out of India any goods by land, sea or air".
The Customs Act 1962, states that "export with its grammatical variations and cognate
expressions means taking out of India to a place outside India".
While dealing with the term "Exports", the following expressions also assume significance
especially in the context of technological advancement in modern world in order to meet the
sophisticated and diversified needs of the export sector.
(a) Project Exports: Exports of engineering goods on deferred payment terms and execution
of turnkey projects and civil constructions abroad;
(b) Services Exports: Consultancy and Technical services such as preparation of feasibility
reports of projects, drawings and designs, technology transfer, operation, maintenance and
supervision of manufacturing units;
(c) Software exports where the exports are not physical and tangible;
(d) Re-export of goods imported into India from abroad;
(e) Deemed Exports: Where the transactions do not involve the goods leaving the country
but indirectly save foreign exchange through import substitution, earn foreign exchange by
supplying the goods/ services to foreign organisations operating in India or specified
organisations or units in India. For details, refer to chapter VI.
(f) Counter Trade
This refers to a variety of unconventional trade practices linking exchange of goods, directly
or indirectly, in an attempt to dispense with currency transactions. Counter trade includes
barter (direct exchange of goods of equal value with no money or third party involvement)
buy back agreements by which the supplier of plants, equipments or technology agrees to
6
 purchase goods manufactured with them, compensation deal whereby the seller receives a
part payment in cash and the rest in kind (products), counter purchase whereby the seller
receives the full payment in cash but agrees to spend an equivalent amount of money in that
country within a specific period.

"Counter Trade" as defined in the Export and Import Policy is " any arrangement under which
exports/ imports from/ to India are balanced by direct imports/exports from the Importing/
Exporting country or through a third country under a trade agreement or otherwise. Exports/
Imports under counter trade may be carried out through Escrow Account, Buy back
arrangements, Barter Trade or any similar arrangement. The balancing of exports and imports
could wholly or partly be in cash, goods and/ or services".

(g) Off shore Trading

This is a kind of transaction whereby the exporter on getting an order from a foreign
customer, sources the product from another foreign supplier. Here the goods go from one
country to another without the exporter receiving the goods physically.

(h) The term "import" has been defined in the Foreign Trade (Development and Regulations)
Act ,1992 as bringing into India of any goods by land, sea or air. Customs Act, 1962 defines
" import" with its grammatical variations and cognate expressions as bringing into India from
a place outside India.

(i) In the Foreign Exchange Management Act 1999, " Services" have also been included along
with goods while defining export and imports.

DOMESTIC AND INTERNATIONAL TRADE

The exchange of goods and service between countries is called International Trade. On the
other hand exchange of goods and services within a country is called Inter Regional Trade or Domestic
Trade.

Domestic and Foreign Trade are really one and the same as far as the activity goes. Both of
them imply exchange of goods/ services between persons. The aim of both is to achieve increased
production through Division of Labour. Only the geographical change constitutes the difference.

However, there are a number of features which distinguish foreign trade from domestic trade.

1. Immobility of factors of production

Labour and capital do not move as freely from one country to another as they do within the
same country. "Man" declared Adam Smith "is of all forms to luggage, the most difficult to
transport". Much more so, when foreign frontier has to be crossed. Hence differences in cost
of production cannot be eliminated by moving men and money.
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2. Different currencies
Each country has a different currency. Hence buying and selling between nations give rise to
complications which are absent in internal trade. The possibility of variations in exchange rates
between different countries increases the risks, thus discouraging the movement of factors of
production, particularly capital.

3. Trade Restrictions
International Trade is not free. Restrictions imposed by customs duties, fixed quotas, tariff
barriers, exchange restrictions etc. inhibit free flow or trade between nations.

4. Ignorance
Knowledge of other countries may not be as exact and full as one's own country. Difference in
culture, language, religions, social life etc. stand in the way of free communication between
countries.

5. Separate markets
National markets of different countries are distinct and separate due to difference in usage,
habits, taste etc. For example, British drive to the left while French drive to the right.

6. Transport and Insurance

Transport and Insurance costs also impinge free international trade. The greater the distance,
the higher are the costs. Wars and hostilities increase them further.

INTERNATIONAL MARKETING
The principles underlying domestic marketing and international marketing are the same. The
change is only in the marketing environment.
A reputed author L.S Walsh gives a comprehensive definition of International marketing as:
(a) the marketing of goods and services across national frontiers.
(b) the marketing operations of an organisation that sells and/ or produces within a given country
when:
(i) that organisation is part of or associated with an enterprise which also operates in
other countries; and
(ii) there is some degree of influence on or control over the organisation's marketing
activities from/ outside the country which it sells and /or produces.
Another view is that international marketing is simply an attitude of mind, the approach of
company with a truly global outlook, seeking its profit around the world, on a planned and systematic
basis.
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A. The important special problems in international marketing are as mentioned below:
(i) The political and legal environments of foreign markets increase the complexity in marketing.
The complexity increases as the number of countries in which a company does business
increases.
(ii) Economic environment.
(iii) Differences in currency unit.
(iv) Language differences.
(v) Differences in marketing infrastructure. For example, an advertisement medium effective in
one market may not be useful in another.
(vi) Trade restrictions like import controls.
(vii) High transport costs due to long distance.
(viii) Difference in trade practices.
(ix) Cultural diversity.

B. International orientations also play a significant role in the international trade:

The EPRG framework identifies four types or restrictions: Ethnocentrism, Polycentrism,

Regiocentrism and Geocentrism.
In Ethnocentric companies, overseas operations are considered secondary to domestic catering.
The management considers domestic techniques and personnel superior to foreign. Overseas
operations are conducted from a domestic base. No major modifications are employed to cater
to overseas market. This is a factor appropriate for a small company entering International
operations. No international investments or additional selling costs are incurred by such companies
whose horizons are limited.
Polycentric attitude emerges when the company conceives of special requirements to cater to
overseas markets. Apart from domestic markets, subsidiaries are established which act
independently of others and establish its own marketing options and plans. Many entrepreneurs
feel that polycentric position is more desirable. Problems of co-ordination and control of
marketing activities are important in polycentrism.
In the Regiocentric and Geocentric phases, the company views the region or the entire world
as a potential market, ignoring national boundaries. Policies of the company are developed on
a regional or world trade basis. Product lines for regional and world markets are developed,
since the orientations are regional and world wide. Improved co-ordinations and control are
important in the administration of the companies.
The desirability of a particular international orientation, EPRG depends on several factors such
as the size of the firm, experience in marketing, capturing potential markets, types of products
etc.
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C. OBJECTIVES OF INTERNATIONAL TRADE
A company may enter into international business for its growth and profit objectives. The ultimate
goal is achieved by taking a number of strategic steps. Overseas business may be for one or
more of the following reasons.

(i) To dispose of surplus stocks

When the domestic market is resilient and incapable of expansion, export may come to its help.
Even on a marginal profit, exporting may enable company's growth.

(ii) For sales and production stability

If the company is successful in export ventures, it may mitigate the effects of domestic recession
to a considerable extent. In the cases of products which have seasonal demand, export market
may enable achievement of sales and production stability.

(iii) To finance Import

Export expansion may also be sometimes necessary for financing import. Our Exim Policy in
certain cases links imports with export performance and puts down norms for export obligation
for importing capital goods and norms for input imports.

(iv) To contribute to national targets

Expansion of export paves way for earning and augmenting foreign exchange.

(v) To achieve growth and development

Export operations on a global scale contribute to the growth and development of trade and
also for research activities to improve quality.

(vi) Lowering of costs

Multinational business facilitates cost reductions. If markets are high, economies in production
are possible paving way for lowering the cost of production.

(vii) Incentives
Export oriented industries and export marketing are offered a number of export promotion
incentives to stimulate exports. Such incentives like drawback etc. have become household
names in the export sector.

D. INTERNATIONAL MARKETING ENVIRONMENT

There are two sets of factors in marketing, whether domestic or international. One is internal
factors and the other is external factors.

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 The internal factors are those on which the firm has control viz. the elements of marketing
mix-product, price, promotion and place, firm's resources and the firm's objectives. By and large
these factors are within the control of the firm. The external factors are those on which the company
has no control, like economic factors, demographic factors, political factors, legal factors etc. These
factors are commonly known as environmental factors or marketing environment, which are beyond
the control of the company.
A firm's success depends on suitably gearing the internal factors to combat the environmental
factors. Marketing strategies would therefore have to be re-set in accordance with environmental
changes. Marketing environment varies from country to country. The key to successful International
business is adaptation to the differences in environment that usually exist from one market to another.
Adaptation is not a passive process but a conscious effort on the part of international marketer to
anticipate the influence of both the foreign and domestic environment on a marketing mix and then to
adjust the mix to minimise their effects. In short, an international marketer has to design different
strategies for markets.

IMPORTANT ENVIRONMENT FACTORS

1. Political and legal environment

They may differ from those of domestic market. There are countries with free ports. There are
also the Communist countries where State Trading is the rule. In between there are great variations
in the extent and type of trade barriers.
Some governments specify stiff standards for the products marketed in their country. Some
governments may prohibit certain goods. Some may exercise quotas and controls. Some
governments may not permit advertisement. Special packaging may be insisted upon by some.
Certificate of origin is to go with the goods in some countries. These are just examples.

2. Economic environment
Variation in income levels, standard of living, economic resources, occupation pattern, level of
development etc. will have an influence on the type of products that are marketed. Marketing
strategy has therefore to be based on these variations. Luxury consumer goods are in great
demand in high income groups. In low income groups, basic necessities like food and clothing
have a greater market. Branded goods are in demand in sophisticated society. Hence marketing
has to be in accordance with the economic environment.

3. Social and cultural environment

The buying and consumption habits of people, their language, beliefs, values, customs, social
orientations and traditions have to be studied and known well when goods are marketed.
Difference in language can pose severe problems. Chevrolet's brand name 'Nova' in Spanish

11
 means 'It does not go'. In some language, Pepsi Cola's slogan 'Come Alive' translates as "come
out of the grave". Colour is another factor. Blue which is feminine and warm in Holland is
masculine and cold in Sweden. Green is a favourite colour in Muslim world but in Malaysia it
is associated with sickness. White indicates death and mourning in China and Korea. But in
some other countries it expresses happiness and peace. Red is popular in communist countries
but many African countries detest red colour.

4. Other factors

Differences in physical environment like climate may necessitate modifications in the product
offered for sale.

E. MARKET PROFILE

The term market profile refers to the overall profile of a market i.e. the general characteristic
of the nation, such as demographic pattern, economic status, political colour, business controls, foreign
trade pattern etc. The Market profile of a product is a reflection of the relevant market characteristics
of the nation. The market profile comprises of (i) trends in domestic production, imports, exports,
demand and supply; (ii) Competition, their strategies, strengths and weaknesses; (iii) Consumer
characteristics including their tastes and preferences, buying habits etc. (iv) Trade practices; (v)
Promotional strategies; (vi) Pricing pattern and (vii) Laws relating to the product.

F. PROMOTION STRATEGIES

Success of any product is directly related to market promotion. Without market promotion
even an extremely good product may not find its way to the consumer.

Promotional scheme would call for changes and adaptation, even when the same product is
marketed in different countries. Market promotion is quite a complex subject as governmental
regulations, socio cultural environment etc. influence the sale of products. Many countries have theirown
customs, habits, traditions and practices in trade promotion like giving gift, opening offers etc. To
ignore these is to invite their wrath. Promotional discounts and rebates are another area. Heavy initial
advertisement to catch the market may sometimes be necessary. The same strategy may sometime
prove disastrous. Special monetary gifts are preferred by some. Thus each market may have "its own
characteristics relevant to promotion". Thus standardisation of promotional strategy is something not
conceivable at all. Promotional strategy has to be tailor made to suit the particular marketing
environment.

India Trade Promotion Organisation (ITPO)

ITPO, an integrated product of India Trade Fair Authority and the erstwhile Trade
Development Authority (TFAI and TDA) took its birth on 1.1.1992. It seeks to develop and promote
exports, imports, upgrading of technology etc. by organising fairs in India and abroad. Its head office
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is at Pragathi Maidan, New Delhi and has branch offices at Mumbai, Bangalore, Kolkata, Kanpur
and Chennai. Overseas offices are available at Frankfurt, Dubai, New York and Tokyo.

INTERNATIONAL MARKETING INTELLIGENCE

Information is a pre- requisite for decision, be it domestic marketing or international marketing.
Market Intelligence assumes greater importance in export marketing as international environment may
not be as much familiar to the exporter / manufacturer, as the domestic market.

ORGANISATION WITHIN INDIA

There are a number of export promotion organisations in India which are important sources
of information. They have periodic publications disseminating information useful to the Trading public.
They have also publications giving general guidance of an educative nature. These organisations include
India Trade Promotion Organisation, State Trading Corporation of India, Metals and Minerals Trading
Corporation, Chambers of Commerce, Export Promotion Councils, Commodity Boards and Export
Development Authorities. Indian Institute of Packaging and Export Inspection Councils also give useful
information on the quality aspects of the goods exported. The officers of the Consulates/ Embassies
in India of foreign governments also provide a lot of information about the requirements of the countries,
they represent. Indian Institute of Foreign Trade, Management Schools and University Departments
also could be of immense help in this direction.

ORGANISATIONS OUTSIDE INDIA

The International Trade Centre, Geneva is an important source of information to exporters.
Our Indian Embassy Offices abroad could also be useful. Organisations like World Bank also make
studies and publish reports on the aspects of world trade. Several governments of countries like Japan,
Malaysia etc. share publications giving information related to specific products.

G. EXPORT PRICING
Export pricing plays an important role in export marketing. Export prices like domestic prices,
are determined by the cost and supply conditions and demand and competitive conditions. The cost
and supply conditions dictate the minimum price while the demand and competitive conditions determine
the maximum price that can be charged.
Export pricing will have to accommodate the trade practices and regulations of overseas
market. Additional costs involved for packaging, packing, labeling, transporting, storing etc. also go
into the export price.
Export pricing is influenced by export objectives. There may be companies whose sole
objective for export is profit maximisation in the short run. Such companies are not likely to export
their products unless the export price is high enough to ensure at least the domestic profit. But there
are many companies, which do not attach much importance to short term profit maximisation. Their
policies are influenced by long term considerations due to existence of excess capacity, statutory export
13
obligations etc. Their export strategy is planned keeping these in view. There are also companies who
export even sacrificing short term profit maximisation. Their polices may be for market penetration
to improve the corporate image.
Export pricing is sometimes influenced by government policies. Sometimes the government
may dictate the margins. Floor prices and ceilings in different countries are another factors. With a
view to making export prices competitive, government may sometimes grant subsidies. In certain
countries, tax concessions and duty drawback schemes help quoting lower prices for export goods.
Cheap credit and supplying raw materials at regulated prices are other factors governing export price.
In certain cases even government may compete directly in the market. Customs duties also influence
export pricing. Quota agreements, buffer stock agreements and bilateral contracts also have a controlling
effect on the export pricing.

DUMPING

Dumping is nothing but pumping products in a market at extraordinarily cheap prices affecting
the domestic production and market.

Conclusion
The task of international marketing for a company can be conceptualised as a hierarchy of
seven steps, following a logical sequence.
The first step, the most crucial, is the commitment to go for international business. The next
is to carry out the " SWOT" analysis ie. evaluating the
Strength S
Weakness W
Opportunities O
and
Threats T
of the company against the internal, external and international parameters. The third is with regard to
choosing the markets to enter, how to enter and how to market. Once a decision is taken on this, the
company will be in a position to set the target. The fourth step is terms of market penetration, sales
volume etc. The fifth step is to develop the organisational system to carry on the international marketing
functions. The sixth step involves the carrying out of the job of international marketing. The seventh
and final step is to review, identify the mistakes, modify the system and set new targets for the future.

SUMMARY
International marketing companies sometimes assume that what works in their home country
will work in another country. They take the same product, same advertising campaign, even the same
brand names and packaging, and with virtually no chance to try to market it the same way in another
14
country. The result in many cases is failure. Why? Well, the assumption that one approach works
everywhere fails to consider differences that exist between countries and cultures. While many
companies who sell internationally are successful, following a standardized marketing strategy it is a
mistake to assume this approach will work without sufficient research that addresses this question.
Area Coverage:
• basics on how to market internationally with links to useful articles and case studies
• links are provided to government agencies and other groups that will assist with export plans

QUESTIONS
1. What is the basic factor in International Marketing which promote economic well being
and pave way for increasing national income?
2. Define Export?
3. Define International Marketing?
4. What are the principle objectives of India’s export policy?
5. For technological advancement what are the expressions that assure significance by the
term export?

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 CHAPTER - II

BASIS OF INTERNATIONAL TRADE AND

MONETARY SYSTEMS
OBJECTIVE
It is almost impossible for a country, in the modern world to produce all its requirements
within its own geographical boundaries. It has to look outside and go for international trade to procure
goods which it cannot produce or produce as efficiently and as cheap as other countries. With the
continued advancement in technological skills, newer products emerge on a continuing basis in different
parts of the world and consumers at different destinations seek these products to satisfy their varied
needs. Thus foreign trade has increased both in its scope and volume. Economic interdependence is
a global phenomenon, paving way for increased and diversified employment opportunities.
All countries have not been endowed by nature with the same facilities for production. There
are differences in climatic conditions, geological factors as also the supply of labour, capital etc. Due
to these differences each country finds it advantageous to specialise in certain fields of production.
Such specialisation and production at cheaper rates would not be economically practicable without
the exchange of surplus production with other countries through international trade. In other words,
surplus production can be utilised properly only through an effective international trade. Thus a more
effective exploitation of world's resources is possible only through international trade.
Trade between nations has been growing rapidly. The last four decades have witnessed a
tremendous expansion in world trade. International trade has been growing at a rate higher than the
growth rate of world output. What are the reasons for, or the basis of increased international trade ?
Economists have propounded some important theories to explain the factors prompting or necessitating
trade between countries. International trade may take place due to the differences in the comparative
costs of production between countries, as demonstrated by the classical economist David Ricardo.
Harberler has attempted to provide a more convincing explanation in terms of the differences in
opportunity cost of production of commodities, between nations. Various other theories have been
put forward by other economists explaining why countries trade with each other.

THEORIES OF INTERNATIONAL TRADE

An outline of the important theories that explain the basis of international trade is given below:

The Comparative Cost Theory

The Theory of Comparative Costs is simply an application of the principle of Division of
Labour to different countries. This theory maintains that, if trade is free, each country in the long run,
will tend to specialise in the production and export of those commodities in whose production it enjoys
a comparative advantage and to obtain by import those commodities which can be produced at home
at a comparative disadvantage. Such specialisation is to the mutual advantage of the participating
countries.
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 The theory of Comparative Costs therefore states that " it pays countries to specialise in
the production of those goods in which they possess greater advantage or the least competitive
disadvantage". The difference in the comparative cost of producing the commodities exchanged is
essential and sufficient for the existence of international trade.
In his celebrated two country two commodities model, David Ricardo has taken the
production costs of cloth and wine in England and Portugal to illustrate the comparative cost theory
propounded by him.

Country No. of units of No. of units of Exchange

labour for units labour for units Ratio between of
of cloth wine wine & cloth

England 100 120 1 wine: 1.2 cloth.

Portugal 90 80 1 wine: 0.88 cloth

From the above example it is clear that Portugal has an absolute superiority in both the
branches of production. However, a comparison of the cost of production of wine 80/120 with the
ratio of the cost of production of cloth 90/100 in both the countries reveals that though Portugal has
an absolute superiority in both the branches of production. It will pay her however, to concentrate
on the production of wine for she has a greater comparative advantage over England in wine in relation
to cloth 80/120 <90/100 and import cloth from England which has a comparative advantage in cloth
production. England will gain by specialising in producing cloth and selling it in Portugal in exchange
for wine.
In the absence of trade between England and Portugal, one unit of wine commands 1.2
and 0.88 units of cloth in England and Portugal respectively. In the event of trade taking place, Portugal
will gain if she can get anything more than 0.88 units of cloth in exchange of 1 unit of wine and
England will gain if she has to part with less than 1.2 units of cloth against 1 unit of wine. Hence any
exchange ratio between 0.88 units and 1.20 units of cloth against 1 unit of wine represents a gain to
both the countries. The actual rate of exchange will be determined by the reciprocal demand.

The Ricardian theory is based on only one factor of production,. viz., labour. The basic
hypothesis is that each country will export that product it can produce at lower average labour cost.
In other words, differential labour productivity is the cause of price differences.

Quite naturally, the comparative cost theory has been severely criticised for its unrealistic
assumptions. It assumes that the amount of factors of production is fixed. But in a dynamic world,
there are changes in factor supplies. The doctrine of comparative cost theory is valid, if at all so, only
in case of two countries and in two commodities. It is of little use when more than two countries are
involved. Most situations in real world are of a complex nature. The absence of factors of production
other than labour makes it purely academic. In modern times labour has ceased to be the entire
17
element in cost. Goods are produced not by labour alone. Combination of different factors of
production produces the goods. The theory also assumes immobility of factors of production. It also
assumes perfect competition while real world bristles not with perfect competition, but with
monopolistic industrial organisations. The assumption that there is always specialisation under
comparative cost is untenable. It has been stated that where the two trading countries are of unequal
size, the smaller country may eventually specialise in a particular commodity but the larger country
will have to produce both, since the supply wing from the smaller country is inadequate to meet the
larger country's needs. The comparative cost theory also ignores transport cost. Whenever transport
costs are introduced it no longer follows that, price ratio between export and import goods remains
the same in the exporting and importing countries.
Comparative cost theory is static and cannot explain complex situations in the modern dynamic
world.

The Opportunity Cost Theory

The Opportunity Cost Theory propounded by Prof. Gottfried Haberler in 1983, has been
applied to the theory of international trade as a substitute for the doctrine of Comparative Costs
expressed in terms of labour cost by the classical economist David Ricardo.
The opportunity cost of anything is the value of the alternatives or other opportunities which
have to be foregone in order to obtain that particular thing. For example, assume that a given amount
of productive resources can produce either 10 units of cloth or 20 units of wine. Then the opportunity
cost of 1 unit of cloth is 2 units of wine.
The opportunity cost approach thus defines cost in terms of the value of the alternatives of
other opportunities which have to be foregone in order to achieve a particular thing. Here the basis
of international trade is the differences between nations in the opportunity costs of production of
commodities.
As far as the basis of international trade and specialisation is concerned, the logic behind
the comparative cost approach and the opportunity cost approach is the same. But there is a notable
difference in the treatment. Under the comparative cost approach, we mention the cost of producing
a unit in terms of labour or in terms of real cost, but under the opportunity cost approach we measure
the cost of producing wine in terms of the amount of cloth foregone in order to produce one more
unit of wine.

Factor Endowment Theory

Bertil Ohlin and Eli Heckscher have explained the basis of international trade in terms of
factor endowments. This theory holds that a country will specialise and export that product which is
more abundant. It will import those goods which, on the other hand are more intensive in that factor
of production which is scarce in that country.

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 In short, the Heckscher Ohlin theory states that a country will specialise in the production
and export of the goods whose production requires a relatively large amount of the factor with which
the country is relatively well endowed, with capital only if the ratio of capital to other factors is higher
than in other countries.
For example, assume that:

In country A

Supply of Labour = 25 units

Supply of Capital = 20 units
Capital/Labour ratio = 0.8

In country B

Supply of labour = 12 units

Supply of capital = 15 units
Capital/Labour ratio = 1.25

In the above example, eventhough country A has more capital in absolute terms, country B
is more richly endowed with capital because the ratio of capital to labour in country A is lower than
in Country B.
However, this theory has been criticised for its over simplification and unrealistic assumptions,
such as:
(i) Perfect competition;
(ii) Total mobility of factors of production;
(iii) Free Trade;
(iv) Negative transport costs etc.

The Availability Approach

This theory seeks to explain the pattern of international trade in terms of domestic availability
and non-availability of goods.
The Availability approach conceives of a theory that a nation would tend to import those
commodities which are not readily available domestically and export those whose domestic supply
can be easily expanded beyond the quantity needed to satisfy the domestic demand.
Goods that happen to have a high capital content are bought abroad because they are not
available at home.
According to Kravio, there are four bases of the availability factors:
(i) Natural Resources;
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 (ii) Technological progress;
(iii) Product Differentiation;
(iv) Government Policy.

The first 3 tend to increase the volume of international trade. The absence of free competition,
a necessary condition for the unfettered operation of the law of comparative advantage, tends to limit
the trade to goods that cannot be produced by the importing country. The most important restrictions
on international competition are those imposed by governments and the cartels. The imports that are
unavailable or available only at a formidable cost are subject to the least governmental interference.
The availability approach has considerable merit in its explanation of the pattern of trade.

Other Theories on International Trade

Various other theories have been put forward by economists on why countries trade with
each other.

The Human Capital approach theory, also known as Skills theory of International Trade,
has been advocated by a number of economists like Becker, Kannen and Kessing. According to this
theory, the level of skills of the labour is the most important factor in world trade. On the basis of
empirical testing, Kessing concluded that patterns of international trade and location were determined
for a broad group of manufacturers by the relative abundance of skilled and unskilled labour. For
example, a developing country having an abundant supply of unskilled labour will specialise and export
those goods which are relatively more intensive in unskilled labour. On the other hand imports will
consist of goods for which skilled labour is vital for production.

The Natural Resources Theory of Vanek

Which considers natural resources of nations concludes that a country will export those
products which are more intensive in that natural resource with which it is relatively more endowed
and import those items which use relatively more of those natural resources which are scarce in
that country.

Lunder's Identical Preferences Theory

Lunder's Identical Preferences theory is that trade opportunities are more among countries
at similar stages of development and similar demand structure. Countries having similar levels of
economic development have similar demand characteristics and provide a platform for trade to grow
between them.

The trade pattern adopted by a country would depend on a host of factors like natural
resources, availability of labour, its cost and productivity, technical skill and equipments, and adequacy
of capital.
20
TERMS OF TRADE
The tremendous expansion in international trade is proof enough that nations gain from trade.
The comparative cost theory demonstrates the fact that international trade can increase real income
and consumption.
International trade thus leads to division of labour or specialisation on a large scale. As
Adam Smith has stated, division of labour is limited by the extent of market. International trade enlarges
the market and therefore the scope of the division of labour and the gains therefrom.
When there is free trade, goods and services produced all over the world are available to
the people. The international trade makes available to the people of a country a variety of goods
and services at competitive prices. A country may not have factor endowments or technological
capability to produce certain goods. If there is no trade with other countries, it will have to do without
such goods; but international trade enables to procure such goods. No country is self sufficient in all
respects. International trade accelerates the tempo of economic growth. In the modern world, there
is a spurt in international trade. This has contributed for the development of less developed countries.
International Trade is bound to shoot up by leaps and bounds in future and will certainly pave way
for economic growth of the world.
However, international trade does not ensure equal gain for all countries. " Terms of Trade"
is the means by which the gains of international trade are evaluated.
By " terms of trade " we mean the terms at which two countries trade with each other. It is
one of the measurements of the gains from international trade to a particular country. The phrase "
terms of trade" refers to the ratio index of import prices to export prices.
The terms of trade can be put in the form of an equation as under.

Value of Imports
Terms of Trade = Value of Exports

= Price of Imports X Volume of Imports

Price of Exports X Volume of Exports

If the volumes of imports and exports remain unaltered, then the term of trade will be indicated
by the fraction
Price of Imports
Price of Exports
In order to understand how the terms of trade may have changed over a period, an index
number of imports and exports may be prepared. One year may be taken as the base year (=
100) and the index of a subsequent year may be worked out. This will give a new fraction which will
show how the terms of trade have moved as between two countries.

21
Significance
The "terms of trade" are of great economic significance to a country as they determine, the
gain that accrues to a country from international trade. If the terms of trade move in a country's favour,
it will increase gain from its international trade and raise in it the level of income. It will be just the
reverse in a country for whom the terms of trade become adverse.

FACTORS DETERMINING TERMS OF TRADE

Elasticity of Demand
If the demand for a country's exports is relatively less elastic as compared with her demand
for imports, then the prices of her exports may be higher compared to the prices of her imports. This
will make the terms of trade favourable to the country. On the other hand if the demand for a country's
exports is relatively more elastic as compared with her demand for imports then the prices of her
exports may be lower compared to the prices of the imports. This would make the terms of trade
unfavourable to the country concerned .

Elasticity of Supply
If the supply of exports from a country is relatively elastic as compared with the elasticity
of supply of its imports, then it is possible that she may be able to enjoy favourable terms of trade.
This is so because of the fact that she will be able to adjust her supply according to demand. She
will not then allow the prices of her exports to fall, in case the demand of her products falls in foreign
markets.

Availability of Substitutes
A country may be able to enjoy favourable terms of trade, given the demand conditions of
the products exported by her do not have close substitutes. This is so because in case of the non-
availability of substitutes, the country may be able to sell her products at a higher price.

Size of Demand
A highly populated country like India may be relatively in a stronger position to bargain
over price for her imports. However, this factor is such as can cut both ways.

Rate of Exchange
Appreciation of the exchange value of the currency may also pave way for favourable terms
of trade. This is because of the fact that the prices of her export will become relatively higher as
compared with the price of imports by currency appreciation. However, if the other country also
appreciates her currency, then there would be no impact on the terms of trade of either country.

Production structure
If the country produces primary goods, e.g.:- food and raw materials, then there is every
22
possibility that the country may experience unfavourable terms of trade for the reason that the demand
for these products is normally declining with economic development. It is partly because of the operation
of the Engels Law which states that as the income of a person rises, less is spent on food products
etc., and partly because of technological advances which tend to displace raw materials.

Tastes and Preferences

A change in the tastes and preferences in favour of a country's export goods would help
improve its terms of trade and vice versa. Tariffs and Quotas, if not maintained in relation by other
countries may have the effect of improving the terms of trade under certain conditions.

Gains from International Trade

Gains from international trade are very largely affected by terms of trade. Suppose country
'A' can produce with the same amount of money 25 quintals of wheat and 10 Bales of cotton and
suppose it is specialising in the production of wheat as indicated by the ratio of comparative cost.
Now it has to exchange its wheat for Cotton of country 'B'. Obviously it will gain if it can get more
than 10 Bales of Cotton in exchange for 25 quintals of wheat. The exact gain will depend on how
many more bales of Cotton it will get on how many less quintals of wheat than 25 quintals, it has to
give, for getting 10 Bales of Cotton.

Balance of Trade and Balance of Payments

Balance of trade refers to the difference in value of imports and exports of commodities
i.e., visible items only. Movement of goods between countries is known as visible trade because
the movement is open and can be verified by customs officials.
During a given period of time, exports and imports may be exactly equal in case balance of
trade is said to be balanced. But this is not necessary as those who export and import are not
necessarily the same persons. If the value of exports exceeds the value of imports, the country is said
to experience an export surplus or a favourable balance of trade. If the value of imports exceeds the
value of exports, the country is said to have deficit or an adverse balance of trade.
The terms " favourable" and " unfavourable" are derived from the mercantile writers of the
th
18 century.
Balance of payments, on the other hand is more comprehensive in scope than the balance
of trade. It includes not only imports and exports which are visible items but also such invisible
items such as shipping, banking, insurance, tourist traffic, interest on investments, gifts etc. A country
like India, has to make payments to other countries not only for its imports of merchandise but also
for banking, insurance and shipping services rendered by other countries. It has to pay further the
royalties for foreign films, expenditure of Indians in foreign countries, interest on foreign investments
in India, or on loans raised by India in other countries and from such international organisations as
the IMF, IBRD etc. These are debit items for India since the transactions involve payments abroad.
23
In the same way foreign countries import goods from India, make use of Indian shipping, banking
and insurance facilities, import Indian films and so on for all which they make payment to India. These
are the credit items for India. Balance of payment thus gives a comprehensive picture of all such
transactions including imports and exports.

Current Accounts & Capital Accounts

The visible items relate to merchandise, trade and invisible items of trade are travel,
transportation, insurance and interest on loans. Both visible and invisible items together makeup the
Trade Account or what is commonly called Current Account.
There are certain capital transactions which include such items as borrowing and lending of
capital and sale and purchase of assets to and from foreigners.
Current Account deals with payments for currently produced goods and services. It includes
also interest earned or paid on claims and also gifts and donations. The Capital Account on the other
hand deals with short term and long term capital transactions. A capital outflow represents a debit
and a capital inflow represents a credit. For instance if a German firm invests Rs.100 millions in
India, this transaction will be represented as a debit in the German Balance of payments and credit
in the balance of payments of India.

FOREIGN EXCHANGE MECHANISM AND FOREIGN EXCHANGE RISK

MANAGEMENT

Exchange Control
Whenever a country faces a mounting pressure on its balance of payments position, it imposes
various forms of restrictions or control on payments and receipts in foreign exchange and imports
and exports of goods and services. Several factors are responsible for the strain on balance of
payments.
(a) Financing a major war effort through costly imports of defence equipments and war materials;
(b) Heavy imports of food grains and oil seeds in the wake of drought conditions at home;
(c) Financing the foreign exchange component of a crash industrial programme;
(d) Meeting the cost of sharply escalating prices of essential imports e.g., Crude Oil etc.
These factors may arise individually or in combination. Developing economies like India may
face all these factors together. These situations can be brought under manageable proportions only
by imposing controls on essential expenditure of foreign exchange resources, boosting exports to the
maximum possible extent and arranging for external aids/loans etc.
The imposition of controls, if properly planned in a conscious manner is known as Exchange
Management or Exchange control. One major objective of exchange control is to stabilise the external
value of local currency vis-a-vis the major currencies of the world. This works in two ways - one
24
helps to control the domestic employment and prices and two, create a climate conducive to foreign
investment.
All countries in the world have some form of exchange control or other. The genesis of
Exchange control can be traced to the First World War (1914-1918) when Germany introduced
stringent controls to mobilise gold and other scarce resources for financing the armaments industry
and procurement of materials for the same. Then came the Second World War (1939 -1945). India
was forced to enter the war as a colony of the British empire . Exchange controls were imposed in
the U.K and subsequently in India. Exchange control was enforced in India under the Defence of
India Rules, 1939.
What was intended as a war time measure was continued in peace time too as the losses of
the war needed recoupment. After India became independent, the economic upliftment and
development needs of the country required a planned effort at exchange management. The Defence
of India Rules, 1939 was replaced by the Foreign Exchange Regulation Act, 1947. This was again
amended in 1973 which came into force in 1974.
The Foreign Exchange Regulation Act, 1973 was reviewed in 1993 and a number of
amendments were enacted as a part of the on going process of economic liberalisation relating to
foreign investments and foreign trade for closer interaction with world economy. Significant
developments have taken place since 1993 such as substantial increase in our foreign exchange
resources, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation
of Indian Investments abroad, increased access to external commercial borrowings and participation
of foreign institutional investors in our stock markets. The FERA thus became incompatible with the
changes in economic policies, announced from time to time from 1994. In the changed scenario when
" foreign exchange" no longer remains " scarce and precious," FERA outlived the utility of strict
restrictions. These developments formally paved way for promulgation of Foreign Exchange
Management Act, 1999 (FEMA) and its enforcement with effect from 1.6.2000.
Section 47 of FEMA empowers Reserve Bank of India to make provisions to carry out
the provisions of the enactment.

FOREIGN EXCHANGE
Foreign Exchange is the system or process of converting one national currency into another
and of transferring money from one country to another. The term foreign exchange is used to refer to
foreign currencies.
FEMA 1999 defines foreign exchange as foreign currency and includes deposits, credits
and balances payable in any foreign currency and drafts, traveler's cheques, letters of credit or letters
of exchanges expressed or drawn in Indian currency but payable in any foreign currency and drafts,
traveler's cheques, letters of credit or bill of exchange drawn by banks, Institutions or persons outside
India but payable in Indian currency.
25
FOREIGN EXCHANGE MARKET
The Foreign Exchange market is a market in which foreign exchange transactions take place.
In other words, foreign exchange market is a market in which national currencies are bought and
sold against one another.
Five main levels of foreign exchange business dealings can be distinguished:
(i) Transaction between banks and non bank customers- i.e., primary customers who constitute
the main source of foreign exchange business;
(ii) Transaction between banks dealing in foreign exchanges in the same market;
(iii) Transaction between banks dealing in foreign exchanges in different centres;
(iv) Transaction between banks dealing in foreign exchanges and the Central Bank in the same
country;
(v) Transaction in foreign exchange between Central Banks of different countries.
A modern foreign exchange market is not a market in the physical sense of the term. There
is no market place where the participants meet.

Functions of Foreign Exchange Market

A foreign exchange market performs the following three important functions.
(i) Transfer of purchasing power from one country to another and from one currency
to another. The international clearing function performed by the Foreign Exchange market
plays an important role in facilitating international trade.
(ii) Provision of credit
Exporters may get pre shipment and post shipment credit. Credit facilities are available for
importers too.
(iii) Hedging facilities
Hedging refers to the coverage of export risks. It provides a mechanism by which exporters
and importers may guard themselves against the losses arising from fluctuations in exchange
rates.

METHODS OF PAYMENTS IN INTERNATIONAL TRADE

(i) Telegraphic transfer.
(ii) Mail Transfer.
(iii) Cheques and bank drafts. It is the draft which is widely used ;
(iv) Foreign Bills of Exchange: A bill of exchange is an unconditional order in writing addressed
by a person to another requiring the person to whom it is addressed to pay a certain sum
on demand or on a specified future date.
26
 There are two main differences between inland and foreign bills. The date on which an inland
bill is due for payment is calculated from the date on which it is drawn but the period of a
foreign bill runs from the date on which it is accepted. This is because the interval between
drawing date of a foreign bill and its acceptance may be considerable. The second important
difference is that foreign bill is generally drawn in sets of three, although only one of them
bears the stamp.
Now-a-days it is documentary bill that is employed in international trade. A documentary
bill is only a bill of exchange alongwith shipping documents like Bill of Lading, Insurance
Certificate, Consular invoice etc., attached to it.
(v) Documentary Credit:
Under this method, a bill of exchange is no doubt employed, but its distinctive feature is the
opening by the importer of a credit in favour of the exporter at a bank in the exporter's
country.

TRANSACTIONS IN FOREIGN EXCHANGE MARKET

Spot rate
If the contract with the customer to bring or sell foreign currency is agreed upon and
executed immediately, it is known as spot transaction and the rate quoted is the spot rate. In practice
the settlement takes place within 2 days in most of the markets.

Forward Rate
A forward exchange contract or simply a forward contract is one where a banker and a
customer or another bank enter into a contract to buy/sell a fixed amount of foreign currency at a
specified future date at a predetermined rate of exchange. The rate quoted for the transaction is the
forward rate.
With reference to its relationship with spot rate, the forward rate may be "at par", "at a
discount" or" at a premium".
When the forward rate is the same as the spot rate it is said to be at par. When the foreign
currency is costlier under forward rate than under the spot rate, the currency is said to be at premium.
When the foreign currency is cheaper under forward contract than under spot rate, the currency is
said to be at a discount.
The forward rate is determined mostly by the demand for and supply of foreign exchange.

Swap Operations
The simultaneous sale or purchase of spot currency accompanied by a purchase or sale
respectively, of the same currency for forward delivery are technically known as swaps or double
27
deals, as the spot currency is swapped against forward. The purchase and sale of a foreign currency
in different centres to take advantage of the differences in the rates of exchange is known as "arbitrage
operation".

Foreign Currency Accounts

To facilitate dealings in foreign exchange, a bank in India maintains bank accounts at selected
foreign centres. For e.g. it may maintain an account with Grindlays Bank, London. Obviously this
account would be in pound sterling. Similarly it may have Dollar account with Bank of America, New
York. While corresponding with the foreign bank, the Indian Bank would refer its account with the
former as 'Nostro' account meaning "our account with you". So, for the Indian Bank, Nostro account
means, the bank account it maintains abroad in foreign currency.
A foreign bank may open rupee account with an Indian Bank. While corresponding with
the foreign bank, the Indian Bank would refer to the account as 'Vostro' account meaning " your
account with us".
Janatha Bank of India has an account with Chasemanhattan Bank, London. When Bank of
Japan likes to refer to this account, while corresponding with Chasemanhattan Bank, it would refer
to it as ' Loro Account' meaning "their account with you".

Marine Insurance to cover risk

International Commerce is exposed to a number of maritime perils. These perils could be
countered by marine insurance. Risks covered by marine insurance are usually determined by an
agreement between the parties concerned. In general, the following risks are covered under marine
insurance.
(a) Perils of the sea includes out of the ordinary wind and wave action, stranding, lightning,
collision and damage by sea water etc.
(b) Fire includes direct fire damage and also consequential damage as by smoke or steam and
loss resulting from efforts to extinguish fire.
(c) Pirates and Thieves- Loss or damage caused by assailing thieves and passengers who mutiny
as well as by rioters who attack the ship from shore;
(d) Jettison-throwing off articles over board to lighten the ship in times of emergency.
(e) " Barratry" i.e. wilful misconduct of master or crew with dishonest intent.
(f) The clause 'all other perils' means only sea perils of sorts listed in the clause and not really
mean all the perils that can befall a shipment.

Average Terms
"Average" in insurance connotation means less than total. A particular average loss is one
that affects specific interest only. A general average loss is one that affects all cargo interests onboard
the vessel as well as the ship itself.
28
Types of Policy
Time Policy : Insurance for a period of Time.
Voyage Policy : Insurance for a specific voyage from one place to
another.
Mixed policy : Covers both voyage and period of time.
Construction Policy : Insures a vessel while it is being built irrespective of
the length of time taken.
Floating Policy : It is a cargo policy expressed in general terms to
cover a number of shipments declared.
It is basic in the law of insurance that the insurer, upon payment of a loss, is entitled to the
benefit of any right against third parties that may be held by the assured himself.

Credit Risk
In the context of growing competition in international markets, no exporter can thrive without
selling his goods on credit.
Exporting on credit is not without risks. The overseas buyer may default, may go bankrupt;
there may be an earthquake, a war or coup in his country which may wreck his fortune. There may
be sudden import/export restrictions. The Export Credit Guarantee Corporation (ECGC) covers the
exporter against these risks. Export credit insurance also seeks to create a favourable climate in which
the exporter can hope to get timely and liberal credit facilities from bank at home. For this purpose
export credit insurer provides guarantees to banks to protect them from the risk of loss inherent in
granting finance facilities to exporters.
In 1957, the Export Risks Insurance Corporation ( ERIC) was set up by Government of
India to provide export credit insurance support to Indian exporters. In 1964, it was transformed
into Export Credit and Guarantee Corporation Ltd., ECGC. It was renamed as Export Credit
Guarantee Corporation Ltd. (ECGC) in 1983. It is a wholly Government owned company functioning
under the administrative control of the Ministry of Commerce.
The primary goal of ECGC is to support and strengthen the export promotion drive in India
by (i) Providing credit risk insurance covers to exporters against loss in export and (ii) Offering
guarantees to banks to enable exporters to obtain better facilities from them.

Insurance Covers
The covers issued by ECGC can be divided into the following categories.
(i) Standard Policies issued to exporters to protect them against risk of not receiving payments
while trading with overseas buyers on short term credit; small exporters policy is meant for
small exporters whose turnover for the next 12 months does not exceed Rs. 50 Lakhs;

29
 (ii) Specific Policies designed to protect Indian firms against payment risks in respect of (a)
exports on deferred payment terms; (b) services rendered to foreign parties and (c)
construction works undertaken abroad;
(iii) Financial guarantees issued to banks in India to protect them from the risks involved in their
extending financial support to Exporters at Pre-shipment as well as Post-shipment stages;
and
(iv) Special schemes viz., Transfer Guarantees, Insurance cover for Buyers Credit, Line of Credit,
Joint Ventures, Overseas investment and Exchange Fluctuation risk;
(v) Specific Shipment Policy meant for covering one or more shipments only;
(vi) Turnover policy;
(vii) Buyerwise policies-(BP-ST).

Risk covered under Standard Policies

Under these policies ECGC bears the brunt of the risk and pays the exporter 90% of his
loss on account of commercial and political risks.
Commercial risks include insolvency of the buyer, buyer's default to pay for goods
accepted, buyer's failure to accept the goods when such non acceptance is not due to exporter's
actions.

Political risks are:

(i) Restrictions on remittances in the buyers country or any Government action which may
block or delay payment to the exporter;
(ii) War, revolution or civil disturbance in the buyer's country;
(iii) New import restrictions in the buyer's country;
(iv) Cancellation of import licence or imposition of new import restrictions in buyer's country;
(v) Additional handling, transport or insurance charges due to interruption or diversion of voyage
which cannot be recovered from the buyer; and
(vi) Any other loss occurring outside India and beyond the control of the exporter or the buyer
abroad.

Risks not covered

ECGC does not cover risks of loss due to
(i) disputes in quality;
(ii) causes inherent in the nature of goods;
(iii) a buyer's failure to obtain, import or exchange authorisation from the appropriate authority;
30
 (iv) insolvency or default of an exporter or his agent; and
(v) fluctuations in exchange rates.
ECGC also does not cover risks which can normally be insured with commercial insurers.
An exporter may either take a comprehensive risks policy covering both political and
commercial risks or secure himself against political risks alone as he chooses.
Though normally the cover starts from the date of shipment, in the case of goods
manufactured according to buyer's specifications, and which cannot easily be sold to alternative buyers,
cover could be permitted right from the date of contract under the Contracts (Comprehensive or
Political Risks) Policy.

Consignment Exports
Exports made on a consignment basis may be covered by ECGC by special endorsements.
This would cover political risks from the date of shipment and commercial risks from the date of sale
of the overseas stock to a buyer.

Specific Policies
Contract for export of capital goods or projects for construction works and for rendering
services abroad are insured by the ECGC on a case to case basis under specific policies.

Financial Guarantees
Exports require adequate financial support from bank to carry out export contracts effectively.
ECGC's guarantees to the banks protect the latter from losses on their lending to exporters. Six
guarantees have been evolved for the purpose:
(a) Packing Credit guarantee;
(b) Post shipment Export Credit Guarantee;
(c) Export Finance Guarantee;
(d) Export Production Finance Guarantee;
(e) Export Performance Guarantee and
(f) Export Finance ( Overseas Lending) Guarantee.
These guarantees give protection to bank against losses due to non payment by an exporter
arising from his insolvency or default.

Special Facilities
The ECGC provides special facilities to small scale sector by offering higher percentage to
cover and procedural relaxations.
Exporters of books and publications also get a number of liberalised facilities.

31
Special Schemes
(i) Transfer Guarantee;
(ii) Overseas Investment Insurance.

Foreign Exchange Fluctuation Risk

The Exchange Fluctuation Risk cover Schemes are intended to provide a measure of
protection to exporters of capital goods, civil engineering contractors and consultants who have often
to receive payment over a period of years for their export, construction work or services. When
such payments are to be received in foreign currency, they are open to exchange fluctuation risk.
Forward exchange market does not provide cover for deferred payments.
If the export bills are drawn in rupees, the exporters are not affected by exchange rate
fluctuations. But generally the buyer prefers to invoice in his own currency as this enables him to
know how much the goods will cost him in his own currency. If the bills are drawn in foreign currency
the exporter will have to bear the exchange fluctuation risk. If the currency in which the bill is raised,
depreciates in terms of rupee, he will receive less in terms of rupees. But if the currency appreciates,
the exporter will stand to gain.

INTERNATIONAL ECONOMIC ORGANISATION AND FORUMS

An efficient international monetary system, is a necessary condition for smooth functioning
of International Trade.
A short history of the evolution of the International monetary system is given below.

GOLD STANDARD
In the 19th Century and prior to the World War I, most of the major industrial nations of
the world operated under a Fixed Exchange system called "Gold Standard". Under this system, each
nation defined its currency in terms of gold. Under the Gold standard, accounts between countries
were settled in theory and to a considerable extent by physical exchange of gold. If a country imported
goods more than it exported, gold flowed out. This gold standard provided for, in theory, automatic
correction of a disequilibrium in the Balance of Payments through changes in the monetary gold reserves
of nations.
Till the outbreak of the World War I the Gold standard worked remarkably well and stability
of exchange rates was maintained with no conscious effort. The golden rule of the Gold Standard
was "expand credit when gold is coming and contract credit when gold flows out". But the gold
standard broke down in the first few weeks of the war. Most of the countries withdrew the privilege
of conversion and prohibited the export and import of gold. Inconvertible paper currencies became
the order of the day.
After the War, Gold standard was restored in nearly every country. But the Great Depression
(1929-33) which engulfed the entire world gave a death blow to Gold Standard. The breakdown of

32
the Gold standard was followed by an era of inconvertible currencies. With the outbreak of World
War II (1939-45), nations began to impose far reaching systems of exchange control and the monetary
agreements became inoperative.
Serious deliberations by eminent economists planned to evolve an international economic
system in the post war period.
A conference held in Bretton woods, U.S.A in July, 1944 proposed setting up the following
Institutions.
A. International Monetary Fund (IMF) mainly to achieve exchange rate stability and help
member countries to finance the short term Balance of Payments Deficits.
B. International Bank for Reconstruction and Development (IBRD), ( now known as World
Bank) to assist the post war reconstruction and development of member countries.
C. An International Trade Organisation (ITO) to work towards the liberalisation of
International trade.
The IMF and IBRD known as "Bretten Wood Twins" came into existence in 1946. The
proposal to establish ITO did not materialise. However in its place, the General Agreement on Tariffs
and Trade, was formed.
Details of these institutions are given below:

A. INTERNATIONAL MONETARY FUND

The International monetary system introduced by Bretten Woods was to ensure maintenance
of stable exchange rates and a multilateral credit mechanism in IMF.
International Monetary Fund is an organisation of countries that seek to promote international
monetary co-operation and facilitate expansion of trade with a view to improve the economic condition
of member countries. The member countries of the Fund today account for over 80% of world
population and 90% of World trade.
Membership in IMF is open to every country. Membership in the Fund is a pre -requisite
to membership in World Bank (IBRD). Close working relationship exists among World Bank, IMF
and GATT. IMF is a specialised Agency within United Nations, co-operating with UN on matters of
common interest.
The aim of IMF is:
(i) to promote international monetary co-operation;
(ii) to facilitate the expansion and balanced growth of international trade and thereby keeping
high levels of employment and income levels.
(iii) to promote exchange stability;

33
 (iv) to assist in the establishment of multilateral system of payments between member countries;
(v) making available general resources of the Fund under safeguards to correct maladjustments
in balance of payments;
(vi) to shorten the duration and lessen the degree of disequilibrium in international balances of
payments of members.
To achieve the above purposes, the Fund has a code of economic conduct for its members
in making finance available to members in balance of payments difficulties and providing technical
assistance to improve economic management.
Member countries undertake to collaborate with the Fund to assure orderly exchange
arrangements and a stable system of exchange rate.
The fund maintains a large pool of financial resources that it makes available to member
countries to enable them carry out their programmes to remedy their payments of deficits without
resorting to restrictive measures adversely affecting their economic well being. Members make
repayments so that Fund's resources are used on a revolving basis and are continuously available to
countries facing payments difficulties.
To enable the fund to carry on its policies member countries continuously supply it with a
broad range of economic and financial data. The Fund consults with each member on its economic
situation. The Fund is therefore in a position to assist members in devising corrective steps when
problems arise in balance of payments.
Since the fund is responsible for international payments, it is very much concerned with global
liquidity i.e., the level and composition of reserves available with it for meeting the payment requirements
of member countries.
In effect the Fund provides a permanent international monetary forum through which its
members can work together to ensure a stable world financial system and sustainable economic growth.

Resources
The resources of the Fund come from the subscription of members and by borrowings.
Every member is required to subscribe to the Fund an amount equivalent to its quota. Each
member is assigned a quota expressed in Special Drawing Rights (SDRs). Quotas are used to
determine the working power of the members, their contribution to the Fund's resources, their access
to these resources and their share in allocation of SDRs.
Quotas of members are reviewed at intervals of five years.
As a result of member's payment of subscriptions, the Fund holds substantial resources in
member's currencies and SDRs which are available to meet the countries' temporary Balance of
Payment needs.

34
 The Fund is authorised to supplement its resources by borrowings. The borrowings could
be from official authorities as well as from private sources.

Conditionality
A country making use of the resources of IMF is generally required to carry out an economic
policy programme arrived at achieving a viable Balance of Payments position over a period of time.
This requirement is known as conditionality.
Conditionality is an essential element of the Fund's role in helping to alleviate the Balance of
Payments problems of member countries. Fund conditionality requirements seek to ensure that the
member's policies are adequate to achieve a viable Balance of Payments position over a reasonable
period.

IMF & INTERNATIONAL LIQUIDITY

One of the main functions of the IMF is to provide international liquidity to member
countries. The use of the resources of the IMF would enable the countries to tide over temporary
Balance of Payments difficulties without recourse to exchange restrictions and competitive
devaluation.
International liquidity is the name given to generally acceptable money media in which
international residual balances of payments are settled. In a narrow sense international liquidity
includes all assets and facilities that are freely and unconditionally usable by monetary authorities
for meeting the balance of payments difficulties. Such assets and facilities consist of holdings by
monetary authorities of gold, convertible foreign exchange reserve and positions with IMF and the
SDRs.
Provision of International liquidity is one of the important objectives of the IMF. The
creation of SDRs was an innovation that helped to increase the international liquidity.

IMF LOANS AND INDIA'S ECONOMIC REFORMS

India is one of the founder members of the IMF and World Bank. India has made use of
different financial and other assistances of the IMF a number of times.
India's recourse to the IMF funds started during the second five year plan following the
sharp fall in foreign exchange reserves in 1957 -58. The Balance of payments was quite bad till
1968-69 necessitating several drawals from the IMF. The rupee was devalued in 1966, apparently
on the advise of the IMF to correct the adverse balance of payments disequilibrium. Even after this,
on several occasions Fund's resources had been drawn for correcting the balance of payments
deficiencies.
The surge in the Oil imports bill necessitated a major borrowing in 1980-81. In order to
meet the situation, India entered into an arrangement with the IMF whereby India could draw SDR 5
Billion over a 3 year period. Actual drawings, however by the end of 1983-84 were only to the tune
35
of 3.9 billion, when the programme was terminated in view of the improvement in the reserves position.
However, the Reserve position did not remain comfortable for long. By mid 1989 the position
became precarious, particularly after the Gulf War. The fall in emigrant remittances, massive withdrawal
of NRI deposits, drying up of foreign resources due to fall in credit rating etc. aggravated the problem.
By 1991, the position became acute and pretty bad. There was hardly reserves sufficient for 2 weeks.
This was the situation when Narasimha Rao Government assumed office.
Several radical measures were needed to rejuvenate the economy.
At the instance of the IMF and World Bank certain economic reforms were introduced.
Devaluation of currency, reduction in the fiscal and budgetary deficit, reduction/abolition of subsidies,
reduction in Customs duties, Import liberalisation, Industrial policy reforms, reduction in statutory
liquidity rates and partial convertibility of rupee were the highlights of the economic reforms attempted.
The reforms introduced in India are almost the same introduced in many other countries
including China, East European countries and erstwhile USSR. Peoples Republic of China which
began introducing economic reforms in the 1970's has made commendable progress and is
experiencing an economic boom, despite the fact that it is the largest borrower from the World Bank.
There is a section of people who think that the economic liberalisations introduced in India
will lead to dominance of the Indian economy by multinationals resulting in the ruin of the small industrial
sectors. These are at best only the fears of the conservative mind. Broadly the economic reforms are:
(i) measures for domestic economic discipline;
(ii) accelerating economic growth, particularly in the industrial sector;
(iii) improving trade and Balance of payments position; and
(iv) Procedural simplification;
with a view to giving a boost to the economic activity. These were long overdue and the
present policy appears to be in the right direction especially when such and similar economic reforms
are being carried out by most of the nations all around the world.
Success of the developmental measures depends on clear perspective, strong commitment,
comprehensiveness of the reforms package, rapid development of infrastructural facilities, external
financing and efficient domestic economic management.
Overnight results may not be expected. Long and strenuous efforts with sincerity of purpose
and continuous bold efforts will certainly yield results. The experiences of several Latin American
countries, Korea and China may be borne in mind when the liberalisation package and economic
reforms are put to practice According to the economists of the World Bank, Indian Economy would
become one of the most dynamic in the world, ere-long.

B. WORLD BANK (International Bank for Reconstruction and Development)

Membership in IMF is a precondition for membership in world Bank.

36
Aims:
As per the Articles of Agreement of Bank, the purposes of the World Bank are:
(i) to assist in the reconstruction and development of the territories of members by facilitating
investment of capital for productive purposes;
(ii) to promote private foreign investment; and
(iii) to promote long term balanced growth of international trade and maintenance of equality in
balance of payments, by encouraging international investment for development purposes
thereby raising productivity, standard of living and high employment opportunities;
In its lending operations the Bank is guided by certain policies such as:
(i) Repayment prospects of the loan;
(ii) Lending should be on specific projects which are technically sound and of high priority
nature;
(iii) Loans to be given only to meet the foreign exchange content of the project;
(iv) Bank expects the borrower country to spend the loan amount in the best manner possible;
(v) Continued relationship will be maintained by the Bank to check the progress of the project;
and
(vi) Bank indirectly places special importance on promotion of local private enterprises.

Lending Operations
Countries borrowing should satisfy the " eligibility norm" prescribed. The eligibility norm is a
per -capita GNP of $ 2650 at 1980 prices. Normally 5 years after reaching the GNP benchmark of
$ 2650 at 1980 prices, the graduation is reached and the country comes out of the lending facilities.
Graduation is considered as a stage in evolving of a relationship between the borrowing country and
World Bank. But even after graduation World Bank may continue to provide assistance depending
on the needs of the borrowing country.

INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)

IDA is a subsidiary to world Bank to provide what is called soft loans ie., loans on liberal
terms with regard to rate of interest and period of repayment. Poverty test, Performance test and
Project test are the criteria for such loans.
This was set up in 1960 and in the 40 years of its operation, a number of nations like South
Korea has made enough progress.

Assistance to India
India is one of the founder members of IBRD and one of the largest beneficiary, eventhough
the largest is China.
37
 China's entry into World Bank has seriously affected the fund flow to India. Although in
absolute terms the World Bank Assistance to India is quite large, the per capita assistance has been
low.
International Finance Corporation (IFC) was established in 1956 as an affiliate of World
Bank with the object to assisting private enterprise in developing countries. The main features of
assistance are:
(i) IFC makes investment in partnership with private investors;
(ii) IFC's investments will be confined to 50% of the capital requirements of the enterprise;
(iii) The minimum investment for an enterprise is paid at $ 1,00,000/- with no upper limit;
(iv) The rate of interest is negotiable;
(v) IFC will not seek government guarantee for repayment.
The special role of IFC is that it judges potential ventures in terms of both their
financial viability and contribution to economic development.

ASIAN DEVELOPMENT BANK (ADB)

Set up in 1966 under the auspices of ECAFE- (United Nations Economic Commission for
Asia and the Far East), its Head Quarters is Manila in Philippines.
Its objects are to promote investment in Asia and Far East, to utilize available resources for
financing development giving priority to regional, sub regional and national projects and programmes
for the economic growth of the region, to co-ordinate regional development of member countries, to
provide technical assistance for execution of development projects and to co-operate with UN, its
organs and subsidiaries.
Functions are to provide financial assistance, technical assistance and conduct of surveys
and research to develop a course of action for future and promote regional economic integration.

C. GENERAL AGREEMENTS ON TARIFFS AND TRADE (GATT)

The General Agreement on Tariffs and Trade is a multilateral treaty between governments
that lays down agreed rules for conducting international trade. It came into force on 1st January, 1948.
It is subscribed to by 90 governments accounting for more than 4/5 th of the World's trade.
Its basic aim is to liberalise trade. For the last fifty years it has been concerned with negotiating
for the reduction of trade barriers and improving international trade relations. It also provides a forum
in which countries can discuss and overcome their trade problems and negotiate to enlarge international
trading opportunities. The preamble to GATT mentions raising standard of living, ensuring full
employment, full use of the world resources and expansion of international trade as its objectives.
Liberalisation of international trade and bringing about all round economic prosperity are
the primary objectives.
38
CONVENTIONS AND GENERAL PRINCIPLES
Under the conventions, any proposed change in the Tariff or other type of commercial policy
of a member country should not be undertaken without consultation with the other parties to the
agreement and that countries which adhere to GATT should work towards the reduction of tariffs
and other barriers to international trade.

For the realization of the above objectives the following principles are adopted:

1. Trade without discrimination: Trade should be conducted on the basis of non- discrimination.
All contracting parties are bound to grant to each other treatment as favourable as they would
to any country in the application and administration of import and export duties. Certain
exemptions, however are allowed to this principle. For instance, GATT does not prohibit
economic integration such as Free Trade areas or Customs union, provided its purpose is
to facilitate trade between the constituent territories and not to raise barriers to the trade of
other. It also permits the members to adopt measures to counter dumping and export
subsidies.

2. Protection should be given to domestic industries only through Customs Tariffs and not
through other commercial measures. The aim is to make the extent of protection clear and
make competition possible. Exception is however made in the case of developing countries
where the demand for imports generated by development may require them to maintain
quantitative restrictions in order to prevent excessive drain on foreign exchange resources.

3. A stable and predictable basis for trade is provided by the binding of Tariff levels negotiated
among contracting countries.

4. Consultation: By providing a forum for continuing consultation, GATT seeks to resolve

disagreements through consultations. The GATT council has established panels of independent
experts to examine trade disputes among member states. Panel members are chosen from
countries which have no direct interest in the dispute under investigation. The Panel procedure
has generally led to mutually satisfactory settlement.

An Evaluation of GATT

The member countries to GATT account for over 90% of world trade. This means that Global
trade is considerably influenced by the deliberations of GATT.

One of the main accomplishments of GATT is the location of a recognisable forum for
consultations on a continuing basis. Though GATT's efforts at getting tariff reductions and other
measures arising at trade liberalisation are not upto the expectations, their achievement has been
quite significant. Developing countries, however, have been by and large, dissatisfied with the
outcome of GATT's negotiations.
39
 Trade liberalisations have been confined mostly to goods of interest to development of
countries.

UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) was established
in 1964 to provide a forum where the developing countries could discuss their problems relating to
economic development. This was set up particularly as there was a feeling that the institutions like
GATT and IMF were not properly organised to handle the peculiar problems of developing countries.
The conference with a large body of members meets normally at intervals of 4 years.
The primary objective of the UNCTAD is to formulate policies relating to all aspects of
developments including trade, aid, transport, finance and technology.
One of the principal achievements of UNCTAD has been to conceive and implement General
System of Preferences (GSP). In order to promote exports of manufacturers from developing
countries, it was thought necessary to offer special tariff concession to such exports. Accepting this
argument, the developed countries formulated the GSP Scheme under which exports of manufacturers
and semi-manufacturers and some agricultural items from developing countries enter duty free or at
reduced rates of duty in developed countries. Since imports of such items from other developed
countries are subject to normal rates of duties, exports from developing countries would be more
competitive.
Another major achievement for UNCTAD is the formulation of integrated programmes on
commodities for stability in prices. Creation of a common fund through maintaining a buffer stock
paves way for stabilisation of prices. The common fund will finance the buffer stock operations of
certain primary products and will also finance the promotional activities relating to marketing.
UNCTAD also endeavours to reduce the debt burden of developing countries. UNCTAD
persuades the developed countries to write off a part of accumulated debts. The major problem
with UNCTAD has been that it has been trying to tackle too many problems. It is partly due to the
wide divergent interests of the developing country members of UNCTAD.

UNIDO
The United Nations International Development Organisation (UNIDO) set up in 1967, is
an organ of UN General Assembly. Its primary function is to promote industrialisation of developing
countries by mobilising national and international resources. Unlike UNCTAD, UNIDO works
directly with business firms.
The major activities of UNIDO is offering direct technical assistance to industries, conducting
feasibility studies on the requirements and potential of industry in developing countries and co-ordinating
the activities by organising and sponsoring interregional and international meetings, seminars and
symposia.
40
WORLD TRADE ORGANISATION ( W.T.O)
The origin, functions and achievements of GATT have been described earlier.
GATT, as we have seen came into force in January, 1948. GATT is a contract as well as
an institution. GATT has no member countries. It has only contracting parties who sign the agreement.
The Director General of GATT and its staff are the contracted parties.
Between 1948 and 1979 in the course of 32 years GATT completed seven rounds of
discussions on Tariff and Trade.
In the first round held at Geneva in 1948, there were 23 participant countries. In the Annessee
Round, there were 13 countries who took part in the deliberations. In the Torquay Round of 1951,
there were 38 participant countries. In 1956 at the Geneva Round the participants dwindled to 26.
In the Dillion Round of 1960-61, again 26 countries were represented. In the Kennedy Round of
1964-67, 62 countries participated. In the 1978-79 Tokyo Round 99 countries participated. As a
result of these seven rounds of discussions, GATT was able to bring down the tariff rates to the level
of 40% to 5%. The reduction of tariff rates saw an unprecedented economic growth in the post second
world war decades, particularly in the capitalist countries. The European Economic Community (EEC)
comprising of England, France, Germany and other continental countries became big economic powers
to be reckoned with. Similarly in Asia, Japan came out as a major economic power.
The above seven rounds of GATT were concerned only with the international trade in
industrial products and the guiding principle governing the conduct of GATT was only to bring about
all round economic prosperity and liberalisation of world trade.
The eighth and the latest round of Multinational Trade Negotiations (MTN) under the auspices
of GATT known as Uruguay Round was launched in 1986 at the Capital City of Punta del Este in
Uruguay, a developing country in Latin America.
In the fifteen point agenda of the Eighth Round, the undermentioned items not very much
germane to normal international trading activities were also included for deliberation and discussion.
These items are:
(1) Trade in Services
(2) Trade Related to Intellectual Property (TRIPS)
(3) Trade Related Investment Measures (TRIMS)
(4) Agriculture
Following Uruguay Round Agreement, GATT was converted into an international Organisation
called " World Trade Organisation" (WTO) with effect from 1.1.1995. WTO will serve as a single
institutional framework encompassing GATT and all the results of Uruguay Round. The WTO will
be regulated by a Ministerial conference that will meet at least once in every two years. Its business
will be supervised by a general council.

41
 The GATT system had allowed what is known as “the grand father clause” by which domestic
legislation can continue even if it violated a GATT agreement which had been accepted by a member
country. This clause no longer exists in the W.T.O set up.

W.T.O has the following specific functions:

1. Facilitate implementation, administration and operation of multinational trade agreement

2. Provide a forum for negotiations among the members concerning their multilateral trade
relations.
3. Administer Trade Review Mechanism.
4. Administer the “Understanding on Rules and Procedures governing the settlement of disputes".
5. With a view to achieving greater coherence in global economic policy, the W.T.O shall co-
operate with the IMF, World Bank(IBRD) and its agencies.

The WTO is a more powerful body with more enlarged functions than the GATT, attuned
to play a major role in the world economic affairs. To become a member of W.T.O, a country must
accept the results of Uruguay Round.

The W.T.O is governed by a ministerial level meeting which meets once in two years. At
present there are 146 member countries in W.T.O.

The General Council of W.T.O attends to four main functions.

1. To supervise on a regular basis the operations of revised agreements and ministerial

declarations relating to (a) goods (b) services and (c) trade related to Intellectual property
(TRIPS).
2. To act as a Dispute Settlement body.
3. To serve as a Trade Review mechanism.
4. To establish goods council, services council and TRIPS council.

Uruguay Round envisages substantial Tariff reductions both in the developing and developed
countries.
In the areas of Non Tariff Barriers, the agreements to abolish Voluntary Export Restraints
(VERs) and to phase out the Multi Fibre Arrangements (MFA) are regarded as landmark achievements
of developing countries. The main objective of industrial economies in restricting textile imports was
to protect the domestic industry . Because of the restrictions consumers in MFA importing countries
had to pay a heavy price. Trade got distorted. The exports and economic growth of developing
countries suffered. The UR agreement seeks to phase out MFA by 2005.
Abolition of VER and phasing out of MFA within 10 years (from 1995) would scaleback
the coverage of Non Tariff Barriers (NTB) on the trade of developing countries.

42
Liberalisation of Agricultural Trade

The inclusion of agriculture in the Multinational Trade Negotiations (MTN) was an important
feature of Uruguay Round. The important aspects of the Uruguay Round Agreement in agriculture
include:-
1. Tariffication
2. Tariff Binding
3. Tariff cuts and
4. Reduction in subsidies and domestic support.

Tariffication means replacement of existing non tariff restrictions on trade such as import quotas
by tariff which would provide substantially the same level of protection.
Industrial countries are then to reduce tariff bindings by an average of 36% with in 6 years
from 1995, while all developing countries except the poorest are required to reduce tariff by 24% in
a span of 10 years. On agricultural tariff developing countries have the flexibility of indicating the
maximum ceiling bindings.

Subsidies and Domestic Policies

The Uruguay Agreement deals with 3 categories of subsidies.
(i) prohibited subsidies - those contingent on export performance or the use of domestic
instead of imported goods.
(ii) actionable subsidies-those that have adverse effects on other member countries.
(iii) non-actionable subsidies including those provided to industrial research and pro-competitive
development activity to disadvantaged regions or to existing facilities to adopt themselves to
new environmental requirements.
The Agreement also places restrictions on the use of countervailing measures against
competitors subsidies.
Assistance for food security such as food subsidy under public Distribution system (PDS)
will be exempted to the extent they confine to the poor.

GATS
General Agreement on trade in services which extend to multilateral rules to services is
also an achievement of the UR although the achievement is little in terms of liberalisation.

TRIMS
Trade Related Investment Measures refer to certain conditions or restrictions imposed by
a Govt. in respect of foreign investment in the country. TRIMS were widely employed by developing
countries.
43
 The agreement on TRIMS provides that no contracting party shall apply any TRIM which
is inconsistent with the WTO Articles. The Agreement requires the notification of all WTO -
inconsistent TRIMS and their phasing out in the two, five and seven years by industrial, developing
and least developed countries respectively. Transition period is extendible if difficulties are faced in
eliminating TRIMS.

TRIPS

One of the most controversial outcomes of the UR is the Agreement on Trade related aspects
of Intellectual Property Rights including trade in counterfeit goods (TRIPS).

TRIPS along with TRIMS and services were called the “new issues” negotiated in the
Uruguay Round.

Intellectual Property Right may be defined as “information with a commercial value”. IPRS
have been characterised as a composite of ideas, inventions and creative expression plus the public
willingness to bestow the status of property on them and give their owners the right to exclude others
from access to or use of protected subject.

IPRS may be legally protected by patents, copyrights, industrial designs, geographical

indications and trade marks. Special (sin generis) forms of protection have also emerged to address
specific needs of knowledge producers as in the case of plant breeder's rights and protection of
layout designs of integrated circuits . A number of countries have also trade secret laws to protect
undisclosed information that gives a competitive advantage to the owner.

The UR Agreement on TRIPS covers seven intellectual property viz.,

1. Copy rights and related rights

2. Trade mark
3. Geographical indications
4. Industrial designs
5. Patents
6. Layout designs of integrated circuits and
7. Undisclosed information.

The UR Agreement on patents is in substantial variance with Indian Patent Act of 1970 and
therefore has given rise to a lot of controversy in India.

According to UR Agreement on patents, patents shall be available for any invention, whether
products to processes, in all fields of technology, provided that they are new, involve an inventive
step and one capable of industrial application. Exclusion of an invention from patentability for
commercial exploitation is permitted if it is necessary to protect public order or morality.

44
Indian Patent Law and UR Agreement

There are significant difference between the UR Agreement on patents and Indian Patent
Act, 1970.
Under Indian Patent Act 1970, Patentability of inventions relating to substances intended
for use as food, drug or medicines or substances produced by chemical processes is limited to the
methods or processes of manufacture only. This means that we can make and market a product similar
to the patent product through a different process or method than the patented one. This practice is
prevalent in the Indian pharmaceutical industry. The UR agreement requires both product and process
patents.
A major area of concern for India is the protection of the bio diversity. India does not have
a sin generis system for its protection. The absence of a legal mechanism to protect our heritage of
common knowledge and even what are there in the ancient books and scripts may lead to bio piracy
by firms/individuals in developed countries as happened in the case of granting patent for the invention
in USA, that turmeric can promote the healing of wounds or the medicinal or other properties of
neem .

Anti Dumping Measures

The UR agreement provides greater clarity and detailed rules for determining dumping and
injury, the procedure to be followed in antidumping investigation and the duration of antidumping
measures.
A product is regarded as dumped when its export price is less than the normal price in the
exporting country or its cost of production plus a reasonable amount for administrative, selling and
any other costs for profits.
Anti dumping measures can be employed only if dumped imports are shown to cause serious
damage to domestic industry in the importing country.

Safe Guard Actions

Members may take safe guard action. i.e. import restrictions to protect a domestic industry
from the ill effects of an unforeseen import surge, if a domestic industry is threatened with serious
injuries. The UR agreements have prohibited the use of such actions where they constitute grey area
measures including voluntary export restraints and similar measures effected on exports or imports.
The existing grey area measures are to be phased out by 1999.
Safe guard measures would not be applicable to developing countries.

An Evaluation Uruguay Round

It is the most complex and controversial one. That it took seven years to complete the

45
negotiations itself speaks of its complexities. The inclusion of TRIPS, TRIMS, services,
liberalisation of agricultural trade etc. had been responsible for the complex nature of the negotiation.
The success of the UR Agreement will depend upon the spirit with which it will be translated
into practice.
According to the estimates, world trade would increase by 12% if the UR package is
completely implemented.
Developing countries in general are not quite satisfied with the outcome of Uruguay round.
As the Foreign Minister of Uruguay remarked all nations which signed the Uruguay round trade
agreement have "a sense of shared dissatisfaction". There will be disputes between developed and
developing countries. "There are more than 5 billion people competing for their share of the pie and
that makes the conflict all the more inevitable".
One of the achievements of the UR is the making of the rules and regulations more transparent,
thus making trade and unilateral actions more difficult. The results of the UR will be implemented by
the newly setup WTO (World Trade Organisation).
The effects that WTO and its policies will have on India are enumerated below:
1. Global trade is expected to touch USD 8 trillion by 2007 A.D. India hopes to improve its
share of world trade to 1% by the Tenth Plan from the current share of 0.8%. For this, the
country has to achieve 11.9 percent compounded growth of exports from the year 2002-
2003;
2. Boost expected in textiles and agriculture exports. The current share for India in world textiles
trade is 2.5%. This is expected to go upto 9% by 2004 AD;
3. India will have to modernise its power looms and increase productivity per hectare to be
more competitive in textiles and agriculture respectively;
4. Public distribution system has to be revamped;
5. Prices of essential drug will go up;
6. Cost of new patented seed varieties will go up. However farmers can produce seeds from
their harvest for cultivation. They will not be permitted to commercialise seed production.
India will have to enact a Plant Breeders Rights (PBR) system by 2002 A.D;
7. WTO provides a platform for negotiations with 145 other members at one go. MFN (Most
Favoured Nation) status will help to boost trade with other member countries;
8. Countries like India with unfavourable balance of payments situation need not open 3% of
its agriculture market to imports;
9. Farm subsidies in India constitute only 5.2% of GAP (Gross Agricultural Product). This is
well within the prescribed 10% limit of WTO;

46
 10. More focus is required on Research and Development activities.
SUMMARY
Microeconomics is a prerequisite for International Trade Theory, and Macroeconomics is a
prerequisite for International Monetary Theory. Despite the size and importance of the foreign exchange
market, it remains largely unregulated. There is no international organization that supervises it, nor
any institution that sets rules. However, since the advent of the flexible exchange rate system in 1973,
governments and central banks, such as the Federal Reserve System in the United States, occasionally
intervene to maintain stability in the foreign exchange( FX) market.

There is no standard definition of instability or a disorderly market—circumstance must be

evaluated on a case-by-case basis. Sharp rapid fluctuations of exchange rates and traders’ reluctance
to be ready to either buy or sell currencies (maintaining a “two-way” market) may be signs of disorderly
market.

To restore stability, the central banks often work together. However, a country taking a
conservative view on intervention would act only in response to unusual circumstances that require
immediate action, like political unrest or natural disasters. Most monetary authorities would be less
likely to intervene to counteract the fundamental forces that drive FX markets, such as trade patterns,
interest rate differentials and capital flows.

A monetary system secures the proper functioning of Money by regulating Economic agents,
transaction types, and Money supply.Monetary systems are traditionally formed by the policy decisions
of individual governments and administrated as a domestic economic issue.

The current trend, however, is to use international trade and investment to alter the policy and
legislation of individual governments. The best recent example of this policy is the European Union ‘s
creation of the Euro as a common currency for many of its individual states. Modern currencies are
not linked to physical commodities (silver or gold) and are not a contract to deliver a good or service.
As such the value of a currency fluctuates based on politics, perception and emotion in addition to
monetary policy.

The transactions in the intervention are small compared to the total volume of trading in the FX
market and these actions do not shift the balance of supply and demand immediately. Instead,
intervention is used as a device to signal a desired exchange rate movement and affect the behavior
of investors in the FX market.

The frequency of intervention in the FX markets by the U.S. monetary authorities has reduced
tremendously over the last decade. The Federal Reserve Bank of New York intervened only twice
since 1995.

Central banks in other countries have similar concerns about their currencies and sometimes
47
intervene in the FX markets as well. Usually, intervention operations are undertaken in coordination
with other central banks.

Most of the Federal Reserve Bank of New York’s activities in the foreign exchange market are
for far less dramatic purposes than to influence exchange rates. The New York Fed often intervenes
in the FX market as an agent for other central banks and international organizations to execute
transactions related to flows of international capital.

Some countries have special arrangements with other countries to help them keep their currencies
stable. Many less developed countries have their soft currencies pegged to hard currencies, so their
value rises and falls simultaneously with the stronger currency. Some peg, or target, their currency to
a basket of hard currencies, the average of a group of selected currencies.

Countries that are part of the European Union (EU) had pegged their currencies to the euro.
There were formulas set for converting from the euro to the currency of each member nation. However,
since January 2002, all currencies that were part of the Economic and Monetary System of the EU
ceased to exist.

Intervention in the FX market is not the only way monetary authorities can affect the value of
their countries’ currencies. Central banks can also affect foreign exchange rates indirectly by influencing
interest rates.

QUESTIONS

1. Define Foreign Exchange?

2. Define Forward Rate?

3. What is “Terms of Trade”. Write its equation?

4. What is a Foreign Exchange Market?

5. Explain the theories of International Trade ?

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 CHAPTER - III

INCOTERMS 2000

OBJECTIVE
Incoterms 2000 are internationally accepted commercial terms defining the respective roles
of the buyer and seller in the arrangement of transportation and other responsibilities and clarify when
the ownership of the merchandise takes place. They are used in conjunction with a sales agreement
or other method of transacting the sale.

Incoterms make international trade easier and help traders in different countries understand
each another. These standard trade definitions that are most commonly used in international contracts
are protected by ICC.Correct use of Incoterms goes a long way to providing the legal certainty upon
which mutual confidence between business partners must be based. To be sure, of using them correctly,
trade practitioners need to consult the full ICC texts.

INTRODUCTION

The purpose of ‘INCOTERMS’ or the International Commercial Terms, is to provide a

set of international rules for the interpretation of the most commonly used trade terms in foreign
trade. Thus, the uncertainties of different interpretations of such terms in different countries can be
avoided or at least reduced to a considerable degree.
Frequently parties to an international trading contract are unaware of the different trading
practices in their respective countries. This can give rise to misunderstandings, disputes and litigations
all of which contribute to waste of time and money. In order to seek a remedy for these problems,
the International Chamber of Commerce (ICC) first published in 1936 a set of International rules
for the Interpretation of trade terms. These rules were known as ‘Incoterms 1936’. Amendments
and additions were later made in 1953, 1967, 1980, 1990 and the latest on 1st January 2000, in
order to bring the rules in line with current international trade practices.

WHY NEW INCOTERMS 2000 ?

The main reason for the 2000 revision of Incoterms was the desire to adapt the commercial
terms to the increasing use of electronic communications in business transactions and to be in tune
with the spread of customs-free zones around the world. For example, in export transactions, both
the parties have to prepare and provide various documents (such as commercial invoices, documents
needed for customs clearance, documents in proof of delivery of the goods as well as transport
documents). Particular problems arise when the seller has to present a negotiable transport document
like the Bill of Lading. In such cases, it is of vital importance, when using Electronic Data Interchange
(EDI) messages, to ensure that the buyer has the same legal position as he would have, had he
received the hard copy of the bill of lading from the seller.

49
 Incoterms 2000 are grouped into four basically different categories; starting with, the only
term whereby the seller makes the goods available to the buyer at the seller’s own premises (the
“E”-term: Ex-Works); followed by the second group whereby the seller is called upon to deliver
the goods to a carrier appointed by the buyer (the “F”-terms : FCA, FAS and FOB);continuing
with the “C”-terms where the buyer has to contract for carriage, but without assuming the risk of
loss or damage to the goods or additional costs due to events occurring after shipment and despatch
(CFR, CIF, CPT and CIP); and finally, the “D”-terms whereby the seller has to bear all costs
and risks needed to bring the goods to the place of destination (DAF, DES, DEQ and DDP). A
chart setting out this new classification is as follows.

INCOTERMS 2000

Group E EXW Ex Works (at a named place)

Group F FCA Free carrier (at a named place)

FAS Free Alongside Ship (at a named

Port of shipment)

FOB Free on Board (at a named Port of

shipment)

Group C CFR Cost and Freight

(upto a named Port of destination)

CIF Cost, Insurance and Freight (upto a

named Port of destination)

CPT Carriage Paid to (upto a named

Port of destination)

CIP Carriage and Insurance paid to (upto a

named Port of destination)

Group D DAF Delivered At Frontier (to a named place)

DES Delivered EX Ship

(at a named Port of destination)

DEQ Delivered EX Quay (at a named Port

of destination)

DDU Delivered Duty Unpaid (at a named

place of destination)

DDP Delivery Duty Paid (at a named place

of destination)
50
 Let us now discuss each of these terms separately.
In EXW, the seller has to deliver the goods in the agreed specification and packing mode to
the buyer, either at the doors of his factory or at any named place not cleared for export and not
loaded on any collecting vehicle. The risk and title to the goods passes on from the seller to the buyer
at the factory door, when the goods are accepted by the buyer. The buyer has to then make his own
arrangements to carry the cargo to his warehouse including payment of freight and insurance charges.
In some cases, the seller may agree to arrange transportation on behalf of the buyer. He then makes
the arrangements and charges the expenses to the buyer in his invoice. When quoting EXW, the place
has to be specified ; for eg :- Ex-works Mumbai.
In the case of FCA, the seller arranges to deliver the cargo cleared for exports, to the carrier
designated by the buyer and he obtains a receipt from the carrier as proof that the goods have been
delivered. The risk and title to the goods pass on from the seller to the buyer at this point. From
here, the buyer has to then make his own arrangements to carry the cargo to his warehouse including
payment of freight and insurance charges.
In FAS, the seller’s obligations end when the goods are placed on the wharf alongside the
ship designated for carriage by the buyer at the named port of shipment. Clearance of goods for
export is done by the seller. He bears the cost of customs formalities, duties, taxes and other charges
applicable to export. The buyer has to then make his own arrangements to carry the cargo to his
warehouse including payment of freight and insurance charges. It should not be used when the seller
cannot carry out directly or indirectly the export formalities.
In FOB, the seller has to make arrangements to put the cargo on board the designated ship/
vessel used for sea or inland waterway transport. Once this is done, the obligation of the seller ceases.
The buyer has to then make his own arrangements to carry the cargo to his warehouse including
payment of freight and insurance charges.
In CFR, the seller contracts a carriage on behalf of the buyer and also pays the freight charges
to reach the goods to the designated port of destination. However, once these have been done and
the goods are put on board, the obligation of the seller is over. The risk of loss or damage to the
goods and all costs once the goods pass over the ship’s rail, including Insurance are borne by the
buyer.
CIF term is to be used only for sea and inland waterway transport. In CIF, the seller contracts
a carriage on behalf of the buyer and also pays the freight and insurance charges upto the port of
destination. Once these have been done and the goods put on board, the obligation of the seller is
over. Clearance of the goods for exports is arranged by the seller. It may also be noted that cost of
customs formalities and duties and taxes on the goods for transit through any country, have to be
borne by the seller if it has been so specified under the contract of carriage between him and the
buyer.
CIP and CPT terms are intended for any mode of transportation or a combination of many
modes of transportation including multimodal transport. In the case of CPT, the seller contracts the

51
respective carriage and also pays the freight charges on behalf of the buyer. Once these are done
and the goods are handed over to the first carrier, his obligations are over. Under CPT the two parties
can decide as to how and to what extent insurance coverage should be done. However, in the case
of CIP, the insurance charges also are paid by the seller on behalf of the buyer.
DAF is primarily used when goods are to be carried by rail or road and delivered at the
frontier. This means that the seller delivers the goods on the transport, in an unloaded condition and
cleared for export. Unloading and import clearance have to be done by the buyer. The seller has to
bear all costs and risks upto delivery at the frontier.
DES is used only when the goods are to be delivered by sea or inland waterway transport.
Here, the seller fulfills his obligation to deliver when the goods have been made available to the buyer
on board the vessel uncleared for import at the named port of destination. The seller has to bear all
the costs and risks involved in bringing the goods to the destination port.
In DEQ, the seller makes the goods available to the buyer on the quay (wharf) at the named
port of destination. Clearance for import has to be arranged by the buyer. The seller has to bear all
risks and costs including duties, taxes and other charges of delivering the goods upto the quay.
DDU means that the seller bears the costs and risks involved in bringing the goods to the
named place in country of importation in an unloaded condition, uncleared for import. In DDP, the
seller delivers the goods to the buyer, in an unloaded condition, but cleared for import. The seller has
to therefore pay the import duty also in the importer’s country and so also bear the costs and risks in
bringing the goods thereto.
Thus, it can be seen that INCOTERMS offer a range of commercial terms from EX-WORKS
at one end where the buyer assumes all the risk to DDP, where the seller bears all the risk.
The terms which are most commonly used in International trade are EX-Works, FOB, FAS,
CFR & CIF. These terms are explained in detail below.

A. EX-WORKS :
Under EX-Works contract, the seller must place the goods at the disposal of the buyer at
the time which is specified in the contract. These goods have to be clearly specified and set right or
identified as the contract goods. Then, the buyer takes delivery either at the premises of the seller or
at a named place and bears all the risks and expenses from thereon. Examples of such contract are
the purchases by specialised exporters of coffee, tea, cocoa or even the entire crop of a plantation.
Large importers may decide to select the produce they want and arrange their transportation.
Machinery made to the order of a particular client and high in value is also sold under “Ex-works”
contract.

B. FOB (FREE ON BOARD)

Under this contract, the responsibility and liability of the seller do not end until the goods
have actually passed the ship’s rail. The obligations of the sellers and buyers under this type of
contract are as under.
52
Obligations of the Seller
1. The seller must deliver the goods on board to the vessel named by the buyer at the named port
of shipment. The delivery must be in the manner, customary at that port and on the date or
within the period that is stipulated.
2. He must provide at his expense for the customary preparation and packing suitable to the nature
of the goods and to their carriage by sea.
3. He must bear all costs payable on or for the goods until they have effectively passed the ship’s
rail at the port of shipment.
4. He must give the buyer a proper notice of shipment of the goods so that the buyer can insure
them.
5. The seller must provide at his expense the customary ‘clear’ document in proof of delivery of
goods aboard the vessel.
6. He should bear the cost of checking operations (ie., checking the quality, measure, weight or
quantity) which are necessary for the purpose of loading the goods on board at the port of the
shipment.
7. He must bear the cost of all dues and taxes payable on the goods for the purpose of loading
them on board.
8. He must bear all the risks of the goods until such time as they shall have effectively passed the
ship’s rail.
9. He must provide the buyer the certificate of origin and other documents as per the contract.
10. The seller must render the buyer every assistance in obtaining a bill of lading and any documents
or equivalent electronic messages, issued in the country of shipment/or of origin and which the
buyer may require, to import the goods into the country of destination. The assistance will be
rendered at the request, risk and expense of the buyer.

Buyer’s Obligations under FOB

1. He should charter a vessel or reserve the necessary space on board a vessel. He should also
give the seller due notice of the name, and date of delivery of the goods to the vessel.
2. He must bear all costs and risks of the goods from the time when they shall have passed the
ship’s rail effectively at the named port of shipment. He must pay the price of the goods as
provided in the contract.
3. The buyer must bear any additional costs incurred. Such costs might arise due to (a) failure of
the vessel to arrive on the stipulated date or by the end of the period specified, or (b) the
buyer was unable to take the goods, or (c) closed for cargo earlier than the stipulated date or
end of the period specified. In addition he has to take all the risks of the goods from the date
of expiration of the period specified.
53
4. The buyer must pay the cost of any pre-shipment inspection except when such inspection is
mandated by the authorities of the country of export.

C. FAS ( FREE ALONGSIDE SHIP)

Under this contract the seller must place the goods alongside the vessel during its loading
period and pay all charges upto that point. The seller’s legal responsibility ends once he has arranged
for export clearance of the cargo and obtained a clean wharfage receipt. But he must assist the buyer
(at buyer’s expense) to obtain any other documents that the buyer requires to complete export and
carriage, plus those needed for clearance at destination. The seller must provide at his own expense
the customary packing of the goods unless it is the custom of the trade to ship the goods unpacked.
He must pay the costs of any checking operations which shall be necessary for the purpose of delivery
of the goods alongside the vessel.
The buyer must give the seller due notice of the name, loading berth of and delivery dates
to the vessel.

D. CFR (COST AND FREIGHT)

This type of contract involves obligations both for the seller and the buyer as explained below.

Obligations of the seller

1. The seller must supply the goods in conformity with the contract of sale, together with such
evidence of conformity as may be required by the contract.
2. He must contract on usual terms, at his own expense, for the carriage of the goods to the agreed
port of destination by the usual route in a sea-going vessel of the type normally used for the
transport of goods of the contract description. He must pay freight charges and any charges
like port congestion charges, valuation charges etc., which may be levied by the shipping line
at the time of shipment at the port of despatch itself.
3. The seller must obtain an export licence or other Government authorisation if necessary, for the
export of goods, at his own risk and expenses.
4. The seller must load the goods at his own expense on board the ship. This must be done on
the date or within the period fixed. He must also notify the buyer without delay that the goods
have been loaded on board the ship.
5. The seller must bear all risks of the goods until such time as they shall have effectively passed
the ship’s rail at the port of shipment.
6. The seller must furnish to the buyer a clean negotiable bill of lading for the agreed port of
destination. He should also furnish the invoice of the goods shipped. The seller has to furnish
these documents at his own expense. If the two parties have agreed to communicate
electronically, the documentation is to be done by EDI.
7. The seller must provide at his own expense the customary packing of the goods unless it is the
custom of the trade to ship the goods unpacked.

54
8. He should pay the costs of any checking operations (ie., quality, measuring, weighing, counting)
which shall be necessary for the purpose of loading the goods.

9. The seller should pay the dues and taxes incurred in respect of the goods upto the time of their
loading. These may also include any taxes, fees or charges levied because of exportation as
well as the costs of any formalities which he shall have to fulfill in order to load the goods on
board.

10. The seller must provide the buyer, with the certificate of origin and any other document prescribed
in the contract.

11. The seller must render the buyer, at the latter’s request, risk and expense, every assistance in
obtaining any documents issued in the country of shipment which the buyer may require for
the importation of the goods into the country of destination.

12. He must bear the charges for unloading at the named port of destination and also bear the
costs and charges for customs formalities related to the transit of goods through any country if
they were for the seller’s account under the contract of carriage.

Buyer’s Obligations

Following are the obligations of the buyer under CFR contract:

1. He must accept the documents when tendered by the seller if they are in conformity with the
contract of sale. The buyer must pay the price as provided in the contract.

2. The buyer must receive the goods at the agreed port of destination. He must bear with the
exception of the freight, all costs and charges incurred in respect of the goods in the course of
their transit by sea until their arrival at the port of destination. The buyer should also bear
costs including lighterage and wharfage charges unless such costs and charges are included in
the freight or collected by the steamship company at the time the freight was paid.

3. The buyer must bear all risks of the goods from the time when they have effectively passed the
ship’s rail at the port of shipment.

4. He must pay all customs duties as well as any other duties and taxes payable at the time of the
importation.

5. The buyer must procure and provide at his own risk and expense any import licence or permit
or the like which he may require for the importation of the goods at the destination.

6. The buyer must pay the cost of any pre-shipment inspection except when such inspection is
mandated by the authorities of the country of export.

55
E. C.I.F (COST, INSURANCE, FREIGHT)
A contract between the seller and the buyer stipulates the duties and responsibilities as
mentioned below:

Seller’s Obligations
1. The seller must supply the goods in conformity with the contract of sale. He must provide
the necessary evidence of conformity as may be required by the contract.
2. He must arrange clearance of goods for exports
3. He must enter into a contract on usual terms for the carriage of the goods to the agreed port
of destination in the usual route in a sea-going vessel of the type normally used for the
transport of goods of the contract description. He must pay freight charges and any charges
like port congestion charges, valuation charges etc. which may be levied by the shipping line
at the time and port of shipment.
4. The seller must obtain an export licence or other Government authorisation if necessary, for
the export of goods, at his own risk and expenses.
5. The seller must load the goods at his own expense on board the ship. This must be done on
the date or within the period fixed. He must also notify the buyer without delay that the
goods have been loaded on board the ship.
6. The seller must bear all risks of the goods until such time as they shall have effectively passed
the ship’s rail at the port of shipment.
7. The seller must furnish to the buyer a clean negotiable bill of lading for the agreed port of
destination. He should also furnish the invoice of the goods shipped. The seller has to
furnish these documents at his own expense. It has to be done by EDI if the agreement so
specifies.
8. The seller must provide at his own expense the customary packaging of the goods unless it
is the custom of the trade to ship the goods unpacked.
9. He should pay the costs of any checking operations (ie., quality, measuring, weighing, counting)
which shall be necessary for the purpose of loading the goods.
10. The seller should pay the dues and taxes incurred in respect of the goods up to the time of
their loading. These may also include any taxes, fees or charges levied because of exportation
as well as the costs of any formalities which he shall have to fulfill in order to load the goods
on board.
11. The seller must provide the buyer, with the certificate of origin and any other document prescribed
in the contract.
12. He should provide the buyer on the latter’s request, every assistance in obtaining any documents

56
 issued in the country of shipment which the buyer may require for the importation of the goods
into the country of destination.
13. He must provide insurance cover for the goods upto the destination point prescribed in the
contract. He should also provide the insurance certificate to the buyer.
14. He has to pay the costs of customs formalities and also duties and taxes on the goods for their
transit through any country, if they were on the seller’s account under the contract of carriage.

Buyer’s Obligations
Following are the obligations of the buyer under CIF :
1. He must accept the documents when tendered by the seller if they are in conformity with the
contract of sale.
2. He must receive the goods at the agreed port of destination. He should bear all costs and
charges (excepting the freight and marine insurance) incurred in respect of the goods in the
course of their transit by sea until arrival at the port of destination. He must also bear the
expenses of unloading costs unless such costs have been included in the freight.
3. The buyer must bear all risks of the goods from the time when they shall have effectively passed
the ship’s rail at the port of shipment.
4. The buyer must pay all customs duties as well as any other duties and taxes payable at the
time of or by reason of the importation.
5. The buyer must procure and provide any import licence or permit or the like which he may
require for the importation of the goods at destination. This is to be done at his own risk and
expense.
6. The buyer must pay the cost of any pre-shipment inspection except when such inspection is
mandated by the authorities of the country of export.
In order to avoid ambiguity and to ensure that both the seller and the buyer understand
their obligations perfectly, care should be taken to arrive at the appropriate incoterm for any particular
transaction. The appropriate Incoterms 2000 to be used during different modes of transportation are
indicated below
(A) All modes of transport - EXW, FCA, CPT, CIP, DAF, DDU, DDP
(B) Shipments by sea and through inland waterway transport alone - FAS, FOB, CFR, CIF,
DES and DEQ
An express reference should always be made to the Incoterms 2000, in the contract of sale.
Care should be taken to avoid any reference to the previous versions. These two careful steps will
help to avoid any disputes as to which version governs in the contract of sale.

57
SUMMARY

Incoterms or international commercial terms are a series of international sales terms that are
widely used throughout the world. They are used to divide transaction costs and responsibilities
between buyer and seller and reflect state-of-the-art transportation practices. They closely correspond
to the U.N. Convention on Contracts for the International Salale of Goods.Incoterms deal with the
questions related to the delivery of the products from the seller to the buyer. This includes the carriage
of products, export and import clearance responsibilities, who pays for what, and who has risk for
the condition of the products at different locations within the transport process. Incoterms are always
used with a geographical location and do not deal with transfer of title.

They are devised and published by the International Chamber of Commerce (ICC). The
English text is the original and official version of Incoterms 2000, which have been endorsed by the
United Nations Commission on International Trade Law UNCITRAL (Authorized translations into
31 languages are available from ICC national committees.

When negotiating an international sales contract, both parties need to pay as much attention
to the terms of sale as to the sales price. To make it as clear as possible, an international set of trade
terms (INCOTERMS) has been adopted by most countries that defines exactly the responsibilities
and risks of both the buyer and seller including while the merchandise is in transit.

QUESTIONS

1. What is the purpose of INCOTERMS?

2. What are the obligations of the seller and buyer under CFR?

3. Why new INCORTERMS 2000?

4. What are the obligations of the seller and buyer under FOB?

5. What are the obligations of the seller and buyer under C. I. F?

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 CHAPTER - IV

CONSUMER BEHAVIOUR AND ROLE OF

MARKETING

OBJECTIVE

Consumer behaviour is the study of how people buy, what they buy, when they buy and why
they buy. It blends elements from Psychology Sociology, Sociopsychology Anthropology and
Economics. It attempts to understand the Buyer decision process, both individually and in groups. It
studies characteristics of individual consumers such as Psychographics” and behavioural variables in
an attempt to understand people’s wants. It also tries to assess influences on the consumer from groups
such as family, friends, reference groups, and society in general. Consumer behaviour also called as
Consumer Psychology is a branch of applied Psychology, marketing and Organizational Behaviour. It
examines Buyer decision processes and ways in which they gather and analyze information from the
environment. Consumer behaviour is a multidisciplinary field which is integral to Industrial Psychology
and aspects of household economy studied in Microeconomics

BASIS OF CONSUMER BEHAVIOUR

The psychological factors generated by marketing activities are often more powerful than
the physical differences in products. For example, it was found that beer drinkers could not distinguish
one brand from another though they rate their own brands higher when labels were left on the bottles.
The psychological determinants of consumer behaviour are to be clearly understood in order to plan
the marketing strategy.
The decisions consumers take in connection with purchases are influenced by various factors.
The major factors which influence the consumer behaviour are four variables viz., Culture, sub-culture,
social class and personal factors.

1. Culture
Culture occupies the most fundamental place in the behavioural aspects of any person. While
among animals it is the instinct that determines their behaviour, among human beings it is their culture
born out of education and civilisation that triggers his behaviour. The exposure to values in life results
in a particular behaviour. Marketers try to locate cultural shifts in order to shape their appropriate
marketing strategy. For example cultural theme may be ‘leisure time’ when people think more in terms
of leisure time and indulge in sports and vacationing. Old people may want to feel young and this
theme may be termed “youthfulness”. These are factors within the cultural aspect of consumer behaviour.

2. Sub-culture
Within a culture group, there are smaller groups termed “sub-cultures”. Nationality groups

59
such as Indian, Polish, Greeks, Italians, Dutch, Irish etc., religious groups such as Catholics, Sikhs,
Jews etc. , racial groups such as Blacks and Orientals, etc., having different culture styles and attitudes
are examples. This sub culture segmentation can also be applied in the Indian context as we have
several types of linguistic and communal groups. Behaviour patterns vary from Northern India, South
India, West India and Eastern India.

3. Social Class
Different castes constitute different social groups and different communities. People within a
social class tend to behave on similar lines and can be motivated by similar marketing appeals.

4. Personal Factors
Personal factors such as age, occupation, life style, financial soundness also count for the
buyer's decisions. Tastes in eating, dressing, furniture, recreation etc. change in the course of a life
time for the same individual. A company executive will attach more importance to his dress and
demeanour while a school teacher will be quite sober and conservative. A clerk may use dhoti and
half shirt while the M.D. will go in for three piece suit. A college girl will go in for jeans and shirt
whilst a housewife will wrap a saree around. These personal factors count a lot in working out the
marketing strategy and production planning.

CONSUMER PSYCHOLOGY
A knowledge of individual’s motive and factors responsible for the full expression of his
faculties is basic to understand consumer motivation.
Knowledge, Activities and Emotion, Intention and Motives are the determinants of consumer
psychology.
Knowledge is individual’s state of awareness or understanding of a person, group, object,
institution or idea. Customer knowledge is useful in formulating marketing activities such as advertising,
door to door campaigning for sale, etc. Understanding is a step further. This is particularly important
in connection with goods such as major equipment and other durable goods. The promotional objective
is not merely to bring to notice the new product but to increase the prospective buyer’s understanding
of how it works. Attitudes are important determinant of behaviour. Attitude is predisposition to feel
or act in a given manner towards a specific person, group, object or institution. Attitude is defined as
a system of beliefs, values and feelings. Customer attitudes, understanding and awareness of the product
are intimately related. A preference for a particular brand indicates the customer’s attitude. Hence
marketing managers should endeavour to develop a set of favourable attitudes of the customer towards
his company’s products.
Intention refers to the anticipated future action of customers. The plans of a family to purchase
a car or the plans of an organisation for acquiring new gadgets in the coming years are examples in
this regard. Durables like car and fridge rather than frequently purchased items like food stuff and

60
clothing require a greater degree of planning. Data on intention are useful for planning market strategies.
Motive is an inner urge that prompts a person to action. Desire is based on buying motive.
Vanity, pride, fashion, romance, love or affection for others, health, comfort, convenience etc., are
some of the important buying motives. Once major motives that underlie the purchase of a product
are precisely known, the marketing executives are in a better position to develop an effective marketing
programme.
Patronage motive in retail purchase is another factor. Location of store, motive and variety
of goods stocked, reputation of store, store keeper’s conduct and behaviour, service offered by the
stores like home delivery, the general appearance of the store etc. go in to kindle the patronage motive.
Industrial consumers also are influenced by patronage motive by factors such as product, quality, price
per unit, discounts offered, customer services etc.
Thus marketing manager must bear in mind the psychological consideration in his planning
product, pricing strategy and promotional strategy while forecasting the sales.
The marketing manager should first identify the major motives and then appeal to them in
his marketing efforts particularly through promotional strategy.

MARKETING RESEARCH
Marketing Research helps in gathering useful information, in order to raise the level of
performance of the marketing executive. Through reliance on facts clearly interpreted, the executive
can lean less on intuition for his decisions.
Marketing Research is the systematic, objective and exhaustive research for and study of
the facts relevant to any problem in the field of marketing. Marketing Research has been defined as
the systematic gathering, recording and analysing of data about problems relating to the marketing of
goods and services.
Marketing Research activity began around the sixties and developed, as more and more
companies began to get interested in regional and later in national markets. It has now been accepted
by all that market research plays a significant role in marketing management. As in other countries, in
India also advertising agencies saw the need for organised research in marketing even prior to
manufacturing. Infact, most of the manufacturing companies generally rely on advertising agencies and
marketing research agencies for conducting research on their behalf.
Acceptance of marketing concept necessitates a thorough knowledge of consumer’s
preferences, attitudes and motivations. Marketing research can help management in its desire to remain
consumer-oriented in its decisions. For examples, textile mills desiring to sell their products must be
familiar with the habits and preferences of different regions at different times. In Sabarimala season,
black dhoties and black shirts have a thrust. Similarly on the eve of elections in Kerala, red coloured
cloth has a special preference among the left parties and green by the Indian Muslim League. Khadi
is preferred by the Congress. A superstitious dislike for blue exists in Arabian countries. Dhoti has

61
been driven out and pants and shirts are the ruling dresses. Similarly sarees are being fastly replaced
by Jeans and Salvar kammez. Women’s designs are changing fast in India too. All these changes require
adequate consumer orientation on the part of management of cotton mills. This equally applies to
other industries.
Apart from the need for consumer orientation being assisted by research, marketing research
can considerably reduce the risks involved in marketing decisions. Facts emanating from marketing
research form the basis of planning, selling, sales promotion, advertising etc. A marketing manager
responsible for introduction of new products can take a better decision if he has relevant information
on consumers preference, performance of alternative packaging, prevailing price of competitor's
products and dealer's reaction to various types of sales promotion. Since direct observation and
experience are insufficient guides to marketing manager, formal research becomes necessary to obtain
details required for selecting alternatives.

Market research assists in minimising the risks involved in marketing decisions in two ways,
namely providing

1. Current information for the management to take decisions;

2. Generalised knowledge about marketing process.

Marketing research is an aid to decision making. The best way to make full use of research
is that both the marketing executives and research specialists relate their problems to a common forum,
wherein market decision problems and research problems are dealt with together. Marketing
researchers should be considered as helpers to solve market problems. They should not be viewed
as mere data suppliers.

Types of Research
Marketing research are three fold:

(i) Research on product or services

(ii) Research on markets; and
(iii) Research on sales methods.

Research on products relate to existing products or new products. It may include, study of
competitive standing of a company’s products in its industry and economic researches showing the
trend in industry volume. The Research may seek to compare the consumer or customer acceptance
of the company’s products or services with that of competitor's similar products or services. This
study would be valuable where the sales volume of the product has been found declining.

When introducing a new product it is necessary to estimate its possible demand to determine

62
the consumer's acceptance and to appraise its progress after the product has been launched.

Research on Markets
It is useful to analyse the size of the total market or the Industry volume, to help forecasting
the sales and ascertain the share of the total market the company could secure.

Research on Sales Methods and Policies

An assessment of territorial variations in sales and sales effectiveness is necessary so that

strong territories could be separated from weak ones and remedial measures taken. It is also necessary
to evaluate the effectiveness of individual salesman and ascertain his contribution to the progress of
the company.
Thus the scope of marketing research is ever expanding into new fields.

Steps of research process

The following are generally the various steps involved in marketing research -
1. Crystalize the market problem
2. Identify the marketing research problem
3. Determine the information needed and the sources from where it can be secured
4. Secure the relevant facts
5. Analyse and interpret the facts with reference to the problems
6. Prepare the Research report incorporating the findings.
The emphasis at first is to define the marketing problem and not the marketing research
problem. In solving a complex marketing problem such as an unexplained decline in sale, the general
framework of marketing elements, competitive elements, industry elements etc. have to be studied
and the reason for the decline has to be crystallised. These comparative studies would indicate that
the decline in sale is merely a reflection of similar decline in the entire industry or that the company's
product may be poor compared to the products of competitors.
If it is ascertained that the question relates to quality of the product as compared to the
product of competitors, “product research” may be resorted to. If the problem is the question of the
size of consumer franchises, a consumer survey may be answer. If it is found to be regarding the
efficiency of the sales organisation, pre-research in that direction may be necessary. A plan may be
prepared for each problem and a master plan may be prepared combining the problems.
In determining the type of information required, the objectives of research must be kept in
mind. After the problem has been defined in clear terms, management is in a position to determine as
to what information is required to take a decision.

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 Facts that constitute the raw material for marketing research are (1) Primary Data ie.
information gathered by an investigator for solving his problem; and (2) Secondary Data ie. information
gathered by other organisations or individuals which may be relevant to the study.
Once it is found that secondary sources are not adequate in the process of planning, either
or all of the following methods may be adopted for securing the relevant facts.
Observational method
Experimental method
Survey method.
Observational method relies upon direct observation of the physical phenomenon in gathering
data and avoids talking directly with people. The experimental method is based on the premise that a
small scale experiment is useful to indicate what can be expected in large scale experiment. This
method, however is not very commonly used because it involves more time and is costly. Survey
Method involves talking directly to consumers. Surveys could be had through telephone, mail and
personal interview.
The data thus collected requires analysis and interpretation. Statistical conclusions must be
converted into recommendations on marketing policies. The relationship between the facts and the
recommendations must be real. A purely theoretical interpretation may be modified by practical
considerations such as the condition of the company and the market. If possible recommendations
should be interpreted into concrete gains which would follow the proposed course of action.
After interpretation stage, the marketing research man knows what the research has disclosed.
The information has to be translated into a form so that others can understand it. Research reports
are prepared in written form in an organised arrangement.
The report generally starts with a title page reflecting the objectives of the research. A brief
introduction follows. Overall organisation plan will be given in the introduction. The body of the report
contains the findings, which is presented in a unified whole. Sometimes recommendations are added
to the report though such recommendations are outside the scope of a research report.
The report should be customer-oriented to facilitate its easy acceptance. It should be from
the customer's point of view using management language and emphasis for managerial action.
Marketing Research increases business success. It keeps the business in constant touch with
the markets.
Emerging from elementary sales record keeping analysis, marketing research has now assumed
great significance. It includes not only getting facts in each sector of marketing activity but also helps
in solving general management problems. It is a great aid to decision making.
Marketing Research has a bright future in India. As more and more companies become market
oriented, the appreciation of the result of marketing research has increased and the demand for

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marketing research personnel is getting pronounced. Greater acceptance of marketing research will
be secured provided the marketing research manager also tries to understand the problems of marketing
management and helps them to solve them by supplying useful and adequate information through his
market analysis.

Market Selection and market Profiling

An important decision in international marketing is market selection.
The global market is a conglomeration of innumerable independent nations having their
distinctive characteristics. There may be markets which are not profitable. Similarly there may be
markets not worth pursuing, their intake being insignificant. There may be countries which have to be
avoided for political reasons. The company also may not be resourceful enough to deal with several
countries simultaneously.
A systematic approach is therefore called upon depending on the financial resources of the
company backed by advanced planning. Otherwise entry to different markets at a time may prove
detrimental to company’s interests.
All these point to the fact that there should be a proper market selection after due processes
of sifting and weighing pros and cons. The markets have to be ranked and priorities fixed before final
selection. For evaluating the markets, market survey and market research are vital. International
marketing intelligence has to be gathered and collated for this purpose.

There are a number of export promotion organisations in India, which are important sources
of information pertaining to marketing. They have periodic publications which disseminate information
on international trade. The offices of the Consulates/Embassies in India of foreign governments could
also provide a lot of information on these aspects. International Trade Centre, Geneva and Japan,
External Trade Organisation, World Bank etc., could be contacted to gather useful information on
marketing.
It is also helpful to prepare a profile of selected markets to help formulating market strategy.

Market Selection Process

The important steps in the market selection process are given below:
1. Determine international marketing objectives;
2. Determine parameters for market selection;
3. Preliminary screening;
4. Detailed investigation with a view to short listing of markets;
5. Evaluation and selection.

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International Marketing Objectives
The market selected to serve a particular international marketing objectives need not
necessarily be the best suited to achieve some other objective. Various markets may have different
degrees of attractiveness from the point of different objectives.
A firm whose export objective is only to sell out a marginal surplus will select a foreign market
suited to serve this particular purpose. Another firm producing the same product which wants to export
a very large quantity, forming a significant share of its output may have different considerations than
the first firm in market selection. In the case of the second firm where the quantity involved is a
significant share of its total output, market diversion is important to minimize the risk. In the case of a
third firm which also wants to export the same product as the first two firms but which wants to
export several other products also, the market which it selects may be different from the first two
firms; it would give more importance to the total exports of all its products than that of a single product.

Further market selection may be influenced by other objectives like growth. When business
growth is an important objective, growth potential of the market will be an important criterion for
selection. A company that has plans for large expansion of foreign business may choose a market to
start with, which can serve as hub for international business.

Another important determinant is the resources of the company, consisting of financial,

technological and managerial factors. The dynamism of the top management and the internal power
relations also will influence the market selection decision.

Parameters of Market Selection

There should be a preliminary screening of markets. The objective of the preliminary screening
is to eliminate those markets which are obviously not potential even on a cursory look.
The parameters used by the preliminary screening may vary from product to product.
However parameters like size of population, per capita income, structure of the economy, infrastructural
factors, political conditions etc. are commonly used. Information about these factors will enable the
company to eliminate certain markets from consideration. For eg., in a country where there is no
telecasting, there is obviously no market for T.V. Sets. If an area is not electrified there may not be
any need for electrical gadgets. If the domestic income of the majority is very low, the demand for
consumable luxury goods will be poor. The object is to distil out a small number of markets which
are likely to satisfy the company’s criteria for market selection for a detailed analysis for ranking and
final selection. One or more markets are selected from the rank list.

Determinants of Market Selection

Market selection is normally based on two sets of factors.

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 Market Selection

Firm related matters Market related matters

Firm related Matters
Firm related matters refer to such factors as the objectives, resources, product risk,
international orientation etc. of the firm, which have already been discussed elsewhere.

Market Related Matters

The market related matters may be broadly grouped into general factors and specific factors.
General factors are factors general to market as a whole, like:
(a) Economic factors, stability, GDP, growth trends, income distribution, per-capita income,
indebtedness etc.
(b) Economic policy, industrial policy, foreign investment policy, commercial policy, fiscal policy
etc.
(c) Business regulations, industrial licences, restrictions on growth, take over, merger, restrictions
on foreign remittance, tax laws, import/export policy, export obligations etc.
(d) Currency stability:- Stability of national currency is an important consideration in market
selection.
(e) Political factors:- Character of political system including the nature and behaviour of ruling
party/ parties, opposite party, Govt. systems etc.
(f) Ethnic Factors:- Ethnic factors like ethnic characteristics, ethnic harmony etc., should also
be analysed.
(g) Infrastructural factors:- Such as availability of power, communication facilities, port, air ports,
shipping opportunities etc.
(h) The nature and behaviour of bureaucracy and the procedure of Govt. controls.
(i) Marketing hub:- The ability of the market to act as a hub, a base from where the company
can operate is a very important factor in market selection.

Specific Factors
Besides the general factors, factors specific to the industry also need to be analysed for the
evaluation of market. Important specific factors are:
(i) Trends in domestic production and consumption and estimates for future expansion;
(ii) Trends in imports and exports and estimates for future;
(iii) Competition;
(iv) Government Policy and regulations for the Industry;
(v) Supply conditions of raw materials and other inputs;
(vi) Trade practices and customs;
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 (vii) Consumer characteristics;
(viii) Market characteristics including price trends.

MARKET PROFILE
Profiles of selected markets are prepared to help formulation of appropriate market strategies.
The market profile of a product is a fairly detailed account of relevant market characteristics. It provides
those information necessary for the formulation of marketing strategy. A market profile will for example
help to identify market segments that the company may target, the appropriate product characteristics,
distribution strategy and promotion strategy. It should contain the following:-
(a) Trends in domestic production, demand, imports and exports and forecasts of the same for
the future;
(b) Competition-the competitors, their strategies, strengths and weaknesses;
(c) Market segment characteristics-the number of segments and their size, the success factors
in each segment, determinants of demand in each segment, growth potential of each segment
etc.
(d) Customer characteristics including tastes and preferences, attitudes, buying habits etc.
(e) Trade practices;
(f) Promotion characteristics;
(g) Factors relevant to pricing;
(h) Laws and regulations relating to product , price, promotion, distribution, import etc.

Market Entry Strategies

Mode of entering the foreign market is an important factor in international business. On one
hand a company may manufacture mostly for domestic market and export a part to a foreign market.
On the other, a company may manufacture the product domestically and export the whole to a foreign
market. There are several alternatives in between. The choice depends on the relevant factors related
to the company and the foreign market.
The important foreign market strategies are:
(i) Exporting - Direct Exports
(ii) Contract manufacturing
(iii) Management contract
(iv) Assembly operations
(v) Fully owned manufacturing facilities
(vi) Joint venturing
(vii) Counter trade
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 (viii) Mergers and acquisitions
(ix) Strategic alliance
(x) Third country location.
(i) "Direct export" refers to sale in foreign market directly by the manufacturer. The manufacturer
may make the sale directly to the foreign customer or to a middleman located overseas. In
both cases export is direct. Firms with considerable export business usually resort to direct
exporting. Though investment and risk are involved in direct exports, the potential returns
are attractive.
The export business may be conducted by a domestic based export department/division.
The company may establish overseas sales branches or subsidiaries in addition to or instead of a
domestic marketing department. This may enable the company to do more efficient management of
foreign marketing activities. The company may also establish storage or warehousing facilities abroad
to place the marketing on a strong footing.
The company may employ travelling salesmen for overseas market, either home based or in
association with foreign branches or subsidiaries it may have.
Direct exporting may also be carried out by establishing contracts with foreign based
distributors or agents.

(ii) Contract Manufacturing

Under contract manufacturing, the company engaged in international marketing contracts with
firms in foreign countries to manufacture or assemble its products while retaining the responsibility of
marketing and distribution of the products.
Contract manufacturing has a drawback in that its control over manufacturing process and
consequently potential profits on manufacturing tend to be low. Also it offers manufacturer a chance
to get started faster with less risk.

(iii) Management Contracting

Under management contracting, the international market supplies management knowhow for
a company in a foreign country for which capital is provided by the country in which the company is
located.
It is a low risk method of getting into a foreign market and it starts yielding income right
from the start. The arrangement is specially attractive if the contracting firm is given an option to purchase
some shares in the managed company within a stated period. Management contracting prevents the
company from setting up its own operations for a particular period.

(iv) Assembly Operations

A manufacturer who wants to avail of the various advantages associated with overseas
manufacturing facilities and yet does not want to go that far, may find it desirable to establish overseas

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assembly facilities in select markets. Under this set up, the manufacturer exports all or most of his
products in knocked down condition to the overseas assembly plant where parts are assembled to
form the complete products which are then marketed.
The main advantage for assembling abroad is the reduction in costs. Further this method is
sometimes resorted to, to circumvent some of the customs and import restrictions of the importing
countries.

(v) Fully owned Manufacturing Facilities

An effective way of capturing the overseas market is to have a manufacturing plant abroad.
Such a step may be taken to overcome the customs barriers, to make economic use of the local
resources in production to achieve production at low cost because of the availability of cheap labour
etc.
The international market has been increasingly dominated by multinational corporations.
The advantages are numerous. It offers control of sales policy and a flexibility never possible
with a licence; it provides product control of the market; it seizes advantage offered by foreign
governments as investment incentives; it makes protections of trade mark easier and creates a better
image in the host country and a permanent interest in foreign markets.

(vi) Joint Ventures

Any form of association, which implies collaboration for more than a transitory period, is a
joint venture. The essential feature of a joint venture is that ownership and control are shared between
a foreign firm and a local firm. It may be brought about by a foreign investor buying an interest in a
local company, a local company buying an interest in existing operation of a foreign company, or by
both parties jointly forming a new enterprise.
Some countries like India have made it mandatory that foreign companies should dilute foreign
ownership by allowing national participation in equity capital. In some cases therefore joint ownership
is necessary if a company wants to operate in a foreign country.

(vii) Counter Trade

Counter trade refers to a variety of unconventional international trade practices which link
exchange of goods, directly or indirectly in an attempt to dispense with currency transactions. Some
of the common forms of counter trade are barter, (exchange of goods of equal value with no money
or third party involved), buyback (under this the supplier of plant, equipment or technology agrees to
purchase the goods manufactured with that), compensation deal (the seller receives part of the payment
in cash and the in rest in products) and counter purchase (the seller receives the full payment in cash
but agrees to spend an equal amount of money in that country within a specified period).
Some countries have found counter trade as a means to increase sale through disguised
undercutting of the cartel prices. Countries pursue counter trade to overcome foreign exchange
problems. Some countries resort to counter trade for reasons of selling obsolete products, increasing
the sale of capital goods, increasing aggregate business etc. Its drawbacks are that it encourages

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bilateralism at the expense of multilateralism; it adversely affects export market development. The
exporting countries stand to lose in terms of price and it adversely affects competition.

(viii) Mergers and Acquisitions

“Mergers and acquisitions” has been an important entry strategy as well as expansion strategy.
Japanese companies have made massive 'M&A' in U.S.A and Europe. Korea and Taiwan have also
made such inroads in other countries. Recently Indian companies have made entries into Germany.
The specific advantages of M&A, are instant access to market and distribution network,
access to new technology and reduction in competition.
M&As may give rise to some problems because of the deficiencies of evaluation during
acquisition. Further when an enterprise is taken over, all its problems are also acquired along with it.
The success of the enterprise will naturally depend on the success in solving the problems, particularly
of evaluation at the time of merger.

(ix) Strategic Alliance

In International business, Strategies Alliance is gaining popularity. Also known as "entente
and coalition", this strategy seeks to enhance the long term competitive advantage of the firm by forming
an alliance with its competitions, existing or potential, in critical areas instead of competing with each
other.
Strategic alliance may sometimes be used as a market strategy for marketing or distributing
the former’s products. A U.S. firm may use the sales promotion and distribution infrastructure of a
Japanese firm to sell the products in Japan and in return Japanese firm can use the same strategy for
the sale of its products in U.S.A.
Strategic alliance, more than an entry strategy, is a competitive strategy. Strategic alliances
enable companies to increase resource productivity and profitability by avoiding unnecessary
fragmentation of resources and duplication of investment and effort. Management experts are of the
view that in the not too distant future, alliances will be a necessity for orderly development of entire
industries and that companies in slow growth industries will increasingly look to strategic alliances for
survival.
Alliance are classified, according to purpose as follows:
(i) Technology development alliances like research consortia, technology commercialisation
agreements, joint development agreements.
(ii) Marketing, sales and service alliances in which a company makes use of marketing
infrastructure etc., of another company in the foreign market for its products.
(iii) Multiple activity alliances which involve the combining of two or more types of alliances.
Strategic alliances also differ according to how they are structured. They can be equity based
(Joint ventures) or non equity based. Non equity based alliances such as technology transfer
agreements, licencing agreements, marketing agreements etc. are seen to be more dynamic and more
constructive.
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 Strategic alliances have been rapidly increasing in international business in recent times.

(x) Third country location

Third country location is again used sometimes as an entry strategy. When there is no
commercial transactions between two nations because of political reasons or the like, a firm in one of
these nations which want to enter the other market will have to operate from a third country base.
Case of countries not having commercial transactions are Israel with Arab countries, India
with South Africa and Mauritius till a few years ago. Sometimes commercial reasons encourage third
country location. For example, several Japanese companies have established production facilities in
developing countries to circumvent tariff barriers (like quota) to import to countries like U.S.A.
Reduction of cost of production is another reason for third country location. The incentives offered
by developing countries for investment and export encourage third country location. The export
processing zones are particularly attractive in this regard. The Special Economic zones of Chinese
Republic deserve special mention here.

MODERN MARKETING CONCEPT

Separate business management functions such as production, marketing and finance were
till recently performed as separate units of operations. Production was considered most important.
However, the modern trend is towards recognising these operations are interdependent. All operations
are to be considered in relation to marketing. What is the use of production unless the goods produced
are sold profitably? Today’s management therefore realises that marketing is not something that one
can add on after manufacturing the product, but it must be integrated with business management.
The need for integration and the realisation that a business is basically a marketing organisation
is described as the modern concept of marketing or the marketing concept. It is based on two
fundamental core points, viz:
(i) The company policies and operations should be custom oriented;
(ii) The goal of the company should be profitable sales.
It is thus a philosophy of business which believes that the economic and social justification
of a company’s existence is the satisfaction of the customer’s wants. All the activities of the company
in production, engineering, finance, advertisement etc., should be arrived at in determining the
customer’s wants and attempting to satisfy them and in the process making a reasonable profit.
Marketing concept has been described as “a corporate state of mind that insists on the
integration and co-ordination of all marketing functions, which in turn are welded with all other
corporate formations, for the basic objective of producing maximum long range corporate profits”
(Arther . P. Felton). "Concern and responsibility for marketing must therefore permeate all areas of
the enterprise" (Peter Drucker).
The relative cost of performing the marketing function and the number of people employed
in the marketing process are indicative of the importance of marketing in a country’s economic system.

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As a country becomes more industrialised and urbanised, marketing becomes functionally more
important. As the production efficiency increases, it may also indicate that marketing is urgently needed
to find ways efficiently and effectively for distributing and selling the output.
Developing countries like India should take particular attention to marketing strategies. India’s
agricultural system generally employs hand tools and animal power. The manufacturer of modern farm
equipment therefore is not likely to have an easy job of selling his products to farmers. The manufacturer
must find ways of assisting the farmers with finance to purchase his products. He must also educate
the farmers on the use of the equipments. Thus marketing activities are as difficult to execute in a
relatively under developed country, as in developed countries.

SUMMARY

The study of consumers helps firms and organizations improve their marketing strategies by
understanding issues such as how
• The psychology of how consumers think, feel, reason, and select between different alternatives
(e.g., brands, products);
• The the psychology of how the consumer is influenced by his or her environment (e.g., culture,
family, signs, media);
• The behavior of consumers while shopping or making other marketing decisions;
• Limitations in consumer knowledge or information processing abilities influence decisions and
marketing outcome;
• How consumer motivation and decision strategies differ between products that differ in their
level of importance or interest that they entail for the consumer; and
• How marketers can adapt and improve their marketing campaigns and marketing strategies
to more effectively reach the consumer.
Understanding these issues helps us adapt our strategies by taking the consumer into
consideration. For example, by understanding that a number of different messages compete for our
potential customers’ attention, we learn that to be effective, advertisements must usually be repeated
extensively. We also learn that consumers will sometimes be persuaded more by logical arguments,
but at other times will be persuaded more by emotional or symbolic appeals. By understanding the
consumer, we will be able to make a more informed decision as to which strategy to employ.
One “official” definition of consumer behavior is “The study of individuals, groups, or
organizations and the processes they use to select, secure, use, and dispose of products, services,
experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer
and society.” Although it is not necessary to memorize this definition, it brings up some useful points:
• Behavior occurs either for the individual, or in the context of a group (e.g., friends influence
what kinds of clothes a person wears) or an organization (people on the job make decisions
as to which products the firm should use).

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 • Consumer behavior involves the use and disposal of products as well as the study of how
they are purchased. Product use is often of great interest to the marketer, because this may
influence how a product is best positioned or how we can encourage increased consumption.
Since many environmental problems result from product disposal (e.g., motor oil being sent
into sewage systems to save the recycling fee, or garbage piling up at landfills) this is also an
area of interest.
• Consumer behavior involves services and ideas as well as tangible products.
• The impact of consumer behavior on society is also of relevance. For example, aggressive
marketing of high fat foods, or aggressive marketing of easy credit, may have serious
repercussions for the national health and economy.
The main applications of consumer behavior:
• The most obvious is for marketing strategy—i.e., for making better marketing campaigns.
For example, by understanding that consumers are more receptive to food advertising when
they are hungry, we learn to schedule snack advertisements late in the afternoon. By
understanding that new products are usually initially adopted by a few consumers and only
spread later, and then only gradually, to the rest of the population, we learn that (1) companies
that introduce new products must be well financed so that they can stay afloat until their
products become a commercial success and (2) it is important to please initial customers,
since they will in turn influence many subsequent customers’ brand choices.
QUESTIONS

1. How is market selection determined?

2. What are the important foreign market strategies?

3. Explain the major factors which influence the consumer behaviour?

4. What is a Market Selection? Explain its step?

5. What is a market profile. Explain?

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 CHAPTER - V

FOREIGN TRADE POLICY AND ITS IMPACT

ON FOREIGN TRADE
OBJECTIVE

While increase in exports is of vital importance, foreign trade also facilitate those imports which
are required to stimulate the 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 foreign trade. This is
the context of the new Foreign Trade Policy. While increase in exports is of vital importance, we
have also to facilitate those imports which are required to stimulate the economy. Coherence and
consistency among trade and other economic policies is important for maximizing the contribution of
such policies to development.

BACKGROUND

The early years of second World War saw the beginnings of Foreign Trade Control in India.
Import Trade Control was introduced in 1940, as a war time measure. A Notification regarding this
was issued on May 20, 1940 under the Defence of India Rules. The primary objective of this
Notification was to conserve Foreign exchange resources and to restrict physical imports in order to
reduce the pressure on the limited available shipping space. Under the initial order only 68 commodities,
mainly consumer goods were brought under import control. Subsequently, as foreign exchange
resources became more and more scarce, import control was extended to other commodities as well.

At the end of the War, the Defence of India Rules lapsed. In September 1946, the Emergency
Provisions (Continuance) ordinance was promulgated with a view to continue the import trade control
provisions. Ultimately this was replaced by the Import and Export ( Control) Act, 1947 effective
from 25.3.1947. The Notifications issued under this Act from time to time were replaced by
consolidated order called Imports (Control) Order, 1955 and Export (Control) Order, 1977.

The Imports and Exports (Control) Act 1947, has 12 sections. This Act confers the following
powers on the central government.

a) powers to prohibit and control imports and exports.

b) powers to levy fees for issue and /or renewal of Licences, and

c) Powers to frame rules to enable implementation of the various controls imposed by the Act.

The Chief Controller of Imports and Exports (CCIE) was the chief of the organisation with
powers for issuing licences, adjudication of offences etc.
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 Imports (Control) order, 1955 provided for restriction on the import of certain goods by
issue of licence or customs clearance permit by CCIE and his subordinate officials, prescribing
condition for licences, providing for cancellation of licences etc. Exports (Control) order, 1977 brought
in restrictions on exports by providing for licences, conditions to be observed by the licence holders,
cancellation of licences etc.
There were several types of import licences like Open general licences, Specific licences
for capital goods and goods other than capital goods, Automatic licences, Supplementary licences,
REP licences, Advance/ Imprest licences, Additional licences and Replacement licences.
For export licensing exporters were classified as Established Exporters and New comers.
Open general licences, Quota licensing for established exporters and new comers, limited free licensing,
free licensing and ad hoc licensing were the different licences issued. In addition export of certain
items were canalised through canalising agencies like STC, MMTC etc.
On the whole, the Import Export field was one beset with regimentation and control. Free
activities by the trade were totally limited. The atmosphere was surcharged with controls and restrictions.
This Control regime brought about by the Import and Export (Control) Act, 1947 was
replaced by the Foreign Trade (Development and Regulations) Act 1992, with the change in the
economic policy in 1991 which focussed on liberalisation and globalisation of economy. The control
regime was replaced by a regulatory and development system. This was necessary for facilitating
imports and augmenting exports. The principal objectives of the new policy were:
(i) to encourage rapid and sustained export growth to generate higher net foreign exchange
earnings.
(ii) to facilitate availability of imported inputs for sustaining industrial growth including essential
imported capital goods for modernisation and technological upgradation.
(iii) to simplify and streamline procedures for import licensing and export promotion.
(iv) to promote efficient import substitution and self reliance; and
(v) to support indigenous Research and Development Institutions for building up scientific and
technological capability.
The emphasis was shifted from controls to development and regulation. This shift was a
significant landmark in India's economic history. A conscious effort was made to dismantle various
protectionist and regulatory policies and aid acceleration to the country's transition towards a globally
oriented economy.
Besides the above enactment, there are some other important legislations which control the
trade in certain items. For instance export of antiquities is regulated under the Antiquities and Art
Treasures Act 1972. The Narcotic Drugs and Psychotropic Substance Act, 1985 is another piece
of legislation to make stringent provisions for the control of Narcotic Drugs and related matters. Export

76
of Coffee is regulated by the Coffee Board under the Indian Coffee Act. Export of Tea is regulated
by the Tea Act 1953. There are also restrictions on the Import and Export of currency imposed by
the Foreign Exchange Management Act 1999. Several such pieces of legislation controlling international
trade are in existence.
The major concern of Government in the past was restriction on import with a view to
controlling deficit in Balance of Payments and protection of domestic industries against foreign
competition. Thus there was severe restriction on imports. Many items were prohibited for import;
many were subjected to licensing control; customs duties were also regulated for restricting imports.
The policy was characterised by an overtone of negativism.
With the economic liberalisation ushered in by the Govt. in 1991, the Exim policy and
regulatory controls underwent a sea change. The objective of the present policy is to develop and
regulate foreign trade by facilitating imports and augmenting exports.

THE FOREIGN TRADE AND DEVELOPMENT ACT, 1992

This Act, which replaced the Imports and Exports (Control) Act, 1947 came into force on
19th June, 1992. The emphasis of this Act was on development and regulation of foreign trade,
replacing restriction and control exercised by the previous Act. A conscious effort has been made to
dismantle the various protectionist and regulatory policies in order to accelerate the country's transition
towards a global oriented economy.
The objective of the Act is to provide for the development and regulation of foreign trade
by facilitating imports into and augmenting exports from India and for matters connected therewith or
incidental thereto.

Main Provisions of the Act

(i) The Act empowers the Central Govt. to make provisions for the development and regulation
of foreign trade by facilitating imports and increasing exports.
(ii) The Act also empowers the Central Govt. to make provisions for prohibiting, restricting or
otherwise regulating the import and export of goods as and when required. All goods which
are so regulated shall be deemed to be goods the import and export of which have been
prohibited under Sec.11 of the Customs Act, 1962.
(iii) The Act lays down that the Central Govt. may from time to time, formulate and announce
the exports and imports policy and may also amend the policy.
(iv) The Act provides for the appointment by Central Govt. of a Director General of Foreign
Trade (DGFT) for the purpose of the Act. The DGFT shall advise the Central Govt. in the
formulation of export and import policy and shall be responsible for carrying out the policy.
Before the ushering in of this Act, the corresponding incumbent of this post under the Imports
and Exports (Control) Act, 1947 was the Chief Controller of Imports and Exports (CCIE).

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 (v) The Act enjoins that no person shall make any import or export except under an importer
exporter code number (IEC number) granted by the DGFT or the officer authorised by him
in this behalf. The DGFT is empowered to cancel the IE Code number granted to any person
if there is a valid reason to do so and if there is reason to believe that any person has made
an export or import in a manner gravely prejudicial to the trade relations of India with any
foreign country or in any way detrimental to the interests of the country.
(vi) The DGFT or his subordinate officer authorised under the Act is empowered to suspend or
cancel a licence issued for export or import of goods in accordance with this Act for good
and sufficient reasons after giving the licence holder a reasonable opportunity of being heard.
(vii) When any contravention of any condition of the licence or letter of authority under which
any goods are imported is suspected any person authorised by the Central Government may,
search, inspect and seize such goods, documents, things and conveyances subject to such
requirements as may be prescribed.
(viii) Where any person, makes or abets or attempts to make any export or import in
contravention of any provisions of this Act, or any rules or orders made thereunder, or the
Export Import Policy, he shall be liable to a penalty of Rs. 10000/- or five times the value
of the goods involved whichever is higher.
(ix) The penalty imposed under the Act, if it is not paid , is recoverable as arrears of land revenue
and the IE code may be suspended by the Adjudicating authority till the penalty is paid.
(x) The remedial measures through appeal or revisions can be made to the Central Govt. within
45 days of the receipt of adjudication order.
(xi) In terms of the power vested in Central Govt. under Se. 19, comprehensive rules known as
Foreign Trades ( Regulations) Rules, 1993 have been issued laying own conditions and
provisions for grant of the licence, fee for the licence, suspension and cancellation of licences
etc.
NEW FOREIGN TRADE POLICY (2004-2009)
The Import-Export Trade (Control) Act 1947, which came into effect on 25.3.1947 had
laid out the rules and detailed procedures that are to be followed for both export and import. This
Act laid more emphasis on trade control. The trade control was achieved mainly through the medium
of licences and exporters and importers had to get approvals from regulatory bodies like the then
Chief Controller of Imports and Exports (now renamed as the Director General of Foreign Trade),
Reserve Bank of India (RBI), Central Excise and the Customs for various matters relating to export
and import. This was indeed a time consuming and laborious process. Over a period of time, the
above procedures underwent progressive changes albeit slowly.
A drastic change came about in 1992 when the Indian economy opened up to integrate
with the global economy. The Import – Export Trade (Control) Act was replaced by the Foreign

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Trade and Regulation Act 1992. The emphasis shifted from trade control to development of trade
and consequently the Indian economy. The Government also decided to have in force EXPORT-
IMPORT policies for 5 year periods at a time, (as against three years earlier) to provide stability to
the overall framework for exports and imports.
The EXPORT- IMPORT POLICY was for the period 2002-2007. Normally every year,
the Government makes certain changes and amendments in the policy based on the feedback from
the exporters through trade bodies like the Federation of Indian Export Organisations (FIEO) and
the Chambers of Commerce and also based on its own evaluation of the policy and the modifications
required for better success. The policy aimed at drastically improving India’s global trade share from
the state of 0.8% to 1% by the year 2007. Increase in exports is planned to be achieved through a
liberalised system which also encourages imports for export production. It is felt that the Indian
industry will be able to access better technologies from abroad and improve its quality standards to
meet international norms. The policy aimed to provide consumers with quality products at reasonable
prices, accelerate the country’s growth to a vibrant globally oriented economy and to enhance the
technological strength and efficiency of Indian agriculture, industry and services. The revised policy
effective from 28-01-2004 identifies engines of growth, provides extra power to them and tries to
build on areas of our core competence. This policy has now been replaced by the new Foreign Trade
policy 2004-2009 by the newly formed Ministry. Our exports stood at 21.93 billion USD for the
year 2004-2005 (April-July) as against 17.47 billion USD for the fiscal 2003-2004 (April-July). The
Government has formulated the new Foreign Trade Policy with a target to achieve 1.5% share of
global trade by 2009 i.e., to touch around $195 billion, assuming a compounded annual growth rate
of 10%.

The policy is formulated by the Ministry of Commerce and implemented through the office
of the Director General of Foreign Trade (DGFT), New Delhi. There are regional offices under the
DGFT, in almost all the States in India. These offices are headed either by the Joint Director General
of Foreign Trade (JDGFT) or by the Deputy Director General of Foreign Trade (DDGFT). The
new Foreign Trade Policy comes in four parts. They are:

(a) The Foreign Trade Policy (2004-2009) along with Hand book of procedures – Volume 1
which outlines the broad framework and rules.

(b) The Standard Input – Output Norms, (SION) (2004-2009)- Volume 2. This gives details
of the export product, unit of quantity of exports, inputs permitted and the quantity of each
item permitted against the given quantity of exports.

(c) The ITC (HS) classification of Export- Import items (2004-2009)-Volume 3 covers over
13,000 items.

(d) Handbook of DEPB Rates (2004-2009) – Volume 4.

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 Any one needing to import or export any item, must obtain an Importer-Exporter Code
Number (IEC No.) from the Regional Licensing Authority, namely the particular JDGFT/ DDGFT in
his location.

SPECIAL FOCUS INITIATIVES

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 for the agriculture, handlooms, handicraft, gems & Jewellery and leather and
marine sectors.
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.

MAJOR AREAS OF FOCUS IN NEW FOREIGN TRADE POLICY

i. Agriculture:
(a) A new scheme called the Vishesh Krishi Upaj Yojana (Special Agricultural Produce
Scheme) for promoting the export of fruits, vegetables, flowers, minor forest produce,
diary, poultry and their value added products has been introduced.
(b) Funds shall be earmarked under ASIDE for development of Agri Export Zones (AEZ)
(c) Deleted.
(d) Deleted.
(e) Capital goods imported under EPCG shall be permitted to be installed anywhere in
the AEZ.
(f) Import of restricted items, such as panels, shall be allowed under the various export
promotion schemes.
(g) Import of inputs such as pesticides shall be permitted under the Advance Licence for
agro exports.
(h) New towns of export excellence with a threshold limit of Rs.250 crore shall be notified.
ii. Handlooms:
(a) Specific funds would be earmarked under Market Access Initiative (MAI)/ Marketing
Development Assistance (MAD) Scheme for promoting handloom exports.
(b) Duty free import entitlement of specified trimmings and embellishments shall be 5%
of FOB value of exports during the previous financial year.
(c) Duty free import entitlement of hand knotted carpet samples shall be 1% of FOB
value of exports during the previous financial year.
(d) Duty free import of old pieces of hand knotted carpets on consignment basis for re-
export after repairs shall be permitted.

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 (e) New towns of export excellence with a threshold limit of Rs.250 crore shall be notified.
(f) Government has decided to develop a trade mark for Handloom on lines similar to
'Woolmark' and 'Silkmark'. This will enable handloom products to develop a niche
market with a distinct identity.
iii. Handicrafts:
(a) New Handicraft SEZs shall be established which would procure products from the
cottage sector and do the finishing for exports.
(b) Duty free import entitlement of trimmings and embellishments shall be 5% of the FOB
value of exports during the previous financial year. The entitlement is broad banded,
and shall extend also to merchant exporters tied up with supporting manufacturers.
(c) The Handicraft Export Promotion Council shall be authorized to import trimmings,
embellishments and consumables on behalf of those exporters for whom directly
importing may not be viable.
(d) Specific funds would be earmarked under MAI & MDA Schemes for promoting
Handicraft exports.
(e) CVD is exempted on duty free import of trimmings, embellishments and consumables.
(f) New towns of export excellence with a reduced threshold limit of Rs. 250 crore shall
be notified.
iv. Gems & Jewellery:
(a) Import of gold of 8 carat and above shall be allowed under the replenishment scheme
subject to the import being accompanied by an Assay Certificate specifying the purity,
weight and alloy content.
(b) Duty free import entitlement of consumables for metals other than Gold, Platinum shall
be 2% of FOB value of exports during the previous financial year.
(c) Duty free import entitlement of commercial samples shall be Rs. 3,00,000.
(d) Duty free re-import entitlement for rejected Jewellery shall be 2% of the FOB value
of exports.
(e) Cutting and polishing of gems and Jewellery shall be treated as manufacturing for the
purpose of exemption under Section 10A of the Income Tax Act.
v. Leather and Footwear:
(a) Duty free import entitlement of specified items shall be 5% of FOB value of exports
during the preceding financial year.
(b) The duty free entitlement for the import of trimmings, embellishments and footwear
components for footwear (leather as well as synthetic), gloves, travel bags and handbags

81
 shall be 3% of FOB value of exports of the previous financial year. The entitlement
shall also cover packing material, such as printed and non printed shoeboxes, small
cartons made of wood, tin or plastic materials for packing footwear.
(c) Machinery and equipment for Effluent Treatment Plants shall be exempt from basic
customs duty.
(d) Re-export of unsuitable imported materials such as raw hides & skins and wet blue
leathers is permitted.
(e) CVD is exempted on lining and interlining material notified at S.No.168 of Customs
Notification No.21/2002, dated 1-3-2002.
(f) CVD is exempted on raw, tanned and dressed fur skins falling under Chapter 43 of
ITC (HS).

vi. Optimum Development programme for Pragati Maidan

In order to showcase our industrial and trade powers to its best advantage and leverage
existing facilities to enhance the quantity of space and service, Pragati Maidan will be
transformed into a world-class complex with visitor friendliness ingress & engress system.
The complex utilization will be improved, increased and diversified. There shall be brand
new, state-of-the-art, environmentally-controlled, air conditioned exhibition areas, and
Permanent Exhibition Marts. In addition, a large Convention Centre to accommodate ten
thousand delegates will be developed, with multiple and flexible hall spaces, auditoria and
meetings rooms with hi-tech equipment. A year-round Food and Beverage destination will
be developed, with a large number of outlets covering all cuisines and pricing levels. There
will be a multi-level park to accommodate over nine thousand vehicles within the envelope
of Pragati Maidan.

vii. Package for Marine Sector

(a) Duty free import of specified specialised inputs/ chemicals and flavouring oils etc. to
be allowed to the extent of 1% of FOB value of preceding financial years export.
(b) To allow import of monofilament long line system for tuna fishing at a concessional
rate of duty.
(c) A self removal procedure for clearance of seafood waste to be applicable subject to
prescribed wastage norms.

BOARD OF TRADE

In order to achieve the desired objective of boosting India’s exports a Board of Trade has
been revamped to advice Government on relevant issues connected with Foreign Trade policy. The
board may be entrusted with functions like to advice Government in preparation and implementation

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of short term and long term plans, to review export performance of various sectors, to review policy
instruments and procedures for imports & exports etc. The board will meet at least once every quarter
and make recommendations to Government on issues related to trade. The Board of Trade will have
a secretariat and Budget Head and shall be serviced by the Department of Commerce.

EXPORTABILITY & IMPORTABILITY

Export/ Import shall be free except in cases where they are regulated by the provisions of
Foreign Trade policy or any other law for the time being in force. Export/Import to/from any country
will be valid unless otherwise specified. However, import/export of arms and related materials from/
to Iraq is prohibited. Every exporter or importer shall comply with the provisions of FTP and rules
and orders notified by the Government, terms and conditions of any licence/certificate/permission
granted to him. All imported goods shall be subject to domestic laws, rules, orders, regulations,
technical specifications etc. No import or export of rough diamonds shall be permitted unless the
shipment parcel is accompanied by Kimberley Process (KP) Certificate required under the procedure
specified by the Gem & Jewellery Export Promotion Council (GJEPC).
With the liberalisation policy in vogue, initially there were ‘Negative list of Imports’ &
‘Negative list of Exports’. These lists indicated the items that were prohibited, restricted and canalised.
However, details of individual items could not be given therein for obvious reasons and only Group
headings such as chemicals, consumer goods, fertilisers etc. were given. Since 1998 alongwith the
export import policy, the Commerce Ministry issues the ITC (HS) classification of Export - Import
Items indicating the policy in respect of each individual item of import & export on the lines of the
customs classification and Indian Trade classification which are based on the internationally accepted
‘Harmonized System of Nomenclature’.
In the ITC (HS) Classification Book, there are two Schedules, 1&2. Schedule 1 covers the
Import Policy. This Schedule contains XXI sections and 98 chapters, generally on the lines of the
Customs Tariff, which inturn is based on the internationally recognized Harmonized System of
Nomenclature.
The Policy in respect of each item is shown against it by one of the indications below:-
Free
Restricted – Any goods, the export/import of which is restricted under ITC (HS) may be
exported or imported only in accordance with a licence/certificate/permission or a public
notice in this behalf.
Prohibited – These items are not permitted to be exported/imported and export/import licence
will not be given in normal course.
Besides the above, for certain items e.g. Light Diesel Oil it is indicated ‘State Trading
Enterprises’ meaning that these are allowed to be imported by specified agencies only i.e. Indian Oil
Corporation.
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 Items freely importable can be imported by anyone and freely dealt with. But for the import
of restricted items, licence will have to be applied for and obtained from the DGFT.

RESTRICTION OF GOODS
In order to protect public morals, human, animal or plant life or health, patents, trade marks,
copyrights, to prevent deceptive practices, etc. restrictions are imposed for the import/export of goods.
For import/export of those goods for which restriction is imposed under ITC(HS) import and export
may be done in accordance with a licence/certificate/permission or a public notice issued in this behalf.

TERMS AND CONDITIONS OF A LICENCE/CERTIFICATE/PERMISSION

Every licence/certificate/permission shall be valid for the period specified in the licence/
certificate/permission and may contains terms and conditions prescribed by the licensing authority like
quantity, description and value of goods; actual user condition, export obligation, value addition to be
achieved and minimum export price. Violation of the above specified condition may result in penalty
in accordance with the Act or Regulation or Rules or Orders thereunder.

IMPORTER-EXPORTER CODE NO.

No import or export shall be made by any person without an Importer-Exporter Code (IEC)
number unless exempted. Every Application form with prescribed fee shall be submitted to the
jurisdictional licensing authority concerned. Each importer/exporter shall file an application as in 'Aayaat
Niryaat Form' to be accompanied by documents prescribed therein. The applicant shall furnish a self
addressed envelope of 40x15cm with postal stamp affixed on the envelope as follows for all the
documents required to be sent by speed post.
1. within local area – Rs. 20.00
2. upto 200km - Rs. 25.00
3. between 200 to 1000km - Rs. 30.00
4. beyond 1000kms - Rs. 50.00
Application for grant of IEC number shall be made in duplicate by the Registered/Head Office
of the applicant to the licensing authority under whose jurisdiction, the Registered office in case of
company and Head Office in case of others, falls in the 'Aayaat Niryaat Form'. The application must
be accompanied by
a. A self attested copy of PAN card.
b. Bank receipt (in duplicate)/Demand Draft evidencing payment of application fee of
Rs. 1000/-.
c. Certificate from the Banker of the applicant firm in the prescribed form.
d. Two declarations stating that the firm/company does not have any non resident interest and
the proprietor/partner/director of the firm or company is not associated with any company
or firm caution listed by RBI.
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 An IEC No allotted to an applicant will be valid for all its branches/divisions indicated in
the format of IEC. When an IEC number is lost or misplaced, the issuing authority may consider
requests for grant of a duplicate copy of IEC number, if accompanied by an Affidavit.
Each IEC holder shall furnish yearly details of import/exports made by him in the preceding
licensing year by 31st December.

APPLICATION FOR IMPORT AND EXPORT OF RESTRICTED ITEMS

An application for grant of a licence/certificate/permission for import or export of items
mentioned as restricted in ITC(HS) may be made in the form and to the licensing authorities.

IDENTITY CARD
To facilitate collection of licence/certificate/permissions and other documents, identity cards
may be issued to the proprietor/partners/directors and authorised employee of the importer and
exporter.

TRADE WITH NEIGHBOURING COUNTRIES

The Director General of Foreign Trade may issue, from time to time, such instructions or
frame such schemes as may be required to promote trade and strengthen economic ties with
neighbouring countries.

TRANSIT FACILITY
Transit of goods through India from or to countries adjacent to India shall be regulated in
accordance with the bilateral treaties between India and other countries.

TRADE WITH RUSSIA UNDER DEBT REPAYMENT AGREEMENT

In case of Trade with Russia under Debt Repayment Agreement, the DGFT may issue,
from time to time, such instructions or frame such schemes as may be required.

EXPORT OF ITEMS RESERVED FOR SSI SECTOR

Units other than small scale units are permitted to expand or create new capacities in respect
of items reserved for the small scale sector, subject to the condition that they obtain an Industrial
licence under the Industries (Development and Regulation) Act, 1951.
It is a condition of such licence that the manufacturer shall undertake export obligation as
may be specified by the Ministry of Industry and the licensee is required to furnish a Legal Undertaking
to the Directorate general of Foreign Trade in this behalf. The Directorate General of Foreign Trade
shall monitor the export obligation.

IMPORT UNDER ACTUAL USER CONDITION

Capital goods, raw materials, intermediates, components, consumables, spares, parts,
accessories, instruments and other goods, which are importable, without any restriction, may be
85
imported by any person. However, if such imports required a licence/ certificate/ permission the actual
user alone may import such goods unless the actual user condition is specifically dispensed with by
the Licensing Authority.

SECOND-HAND GOODS
All second-hands goods, excepting second hand capital goods, shall be restricted for imports
and may be imported only in accordance with the provisions of this Policy, ITC(HS), Handbook
(Vol.1), Public Notice or a licence/certificate/permission issued in this behalf. Import of second hand
capital goods including re-furnished/ re-conditioned spares shall be allowed freely.

IMPORT/EXPORT OF SAMPLES
No licence/certificate/permission shall be required for Imports of bona fide technical & trade
samples of items mentioned as restricted in ITC(HS) except vegetable seeds, bees and new drugs
by any importer. However, samples of tea not exceeding Rs.2000 (CIF) in one consignment shall be
allowed without a licence/certificate/permission by any person connected with Tea industry.
Duty free import of samples up to Rs.60000 for all exporters barring those in the gems and
Jewellery sector and Rs.300000 for those in the gems and Jewellery sector shall be allowed as per
the terms and conditions of Customs notification. Exports of bona fide trade and technical samples of
freely exportable item shall be allowed without any limit.

IMPORT OF SECOND HAND GOODS/WASTE SCRAP/SECONDS/RAGS

The following items may be imported without a licence/certificate/permission.
i. Any form of metallic waste, scrap, seconds and defectives, other than those which are of a
value below the value specified for any such items by a notification issued in this behalf, and
excluding hazardous, toxic waste, radio active contaminated waste/scrap containing radio
active material.
ii. Woolens rags/synthetic rags/shoddy wool in completely mutilated form subject to the condition
that mutilation must conform to the requirements as specified by the customs authorities.
iii. PET bottle/waste
iv. Import of all types of ships may be made without a licence/certificate/permission on the basis
of guidelines issued by Ministry of Shipping and as per the age/residual life norms prescribed
by the Ministry of Shipping.
Provided in case of import of metal scrap originating from a country affected by war, the
exporter shall furnish the following documents to the Customs at the time of clearance of goods:
(I) Pre-shipment inspection certificate in the prescribed format from any of the Inspection &
Certification agencies to the effect that:
(a) the consignment does not contain any type of arms, ammunition, mines, shells, cartridges,
radio active contaminated or any other explosive material in any form either used or
otherwise.
86
 (b) The imported item(s) is actually a metallic waste/scrap/seconds/defective as per the
internationally accepted parameters for such classification.
II. A copy of the contract between the importer and the exporter stipulating that the consignment
does not contain any type of arms, ammunition, mines, shells, cartridges, radio active
contaminated, or any other explosive material in any form either used or otherwise. In case any
agency wishes to be enlisted they may furnish an application to the office of the Director General
of Foreign Trade with the following documents:
(a) A brief on the activities of the agency, its history, membership, organizational structure,
man power etc.
(b) Infrastructural setup, logistics, testing labs etc. for carrying out the inspection of metallic
scrap.
(c) List of companies/agencies for which testing has been carried out.
DGFT will review the performance of the Inspection and Certification Agencies in on a
regular basis.

IMPORT OF SECOND HAND CAPITAL GOODS

Import of Second Hand Capital Goods including refurbished/reconditioned spares, shall be
allowed freely, subject to conditions for the following categories:
The import of second hand computers including personal computers and laptops are restricted
for imports. The import of refurbished/reconditioned spares will be allowed on production of a
Chartered Engineer certificate that such spares have a residual life not less than 80% of the life of the
original spare.
Notwithstanding the provisions of para 1.13, second hand computers, laptops and computer
peripherals including printer, plotter, scanner, monitor, keyboard and storage units can be imported
freely as donations by the following category of donees.
i. School run by Central or State Government or a local body.
ii. Educational Institution run on non-commercial basis by any organization.
iii. Registered Charitable Hospital.
iv. Public Library.
v. Public funded Research and Development Establishment.
vi. Community Information Centre run by the Central or State Government or local bodies.
vii. Adult Education Centre run by the Central or State Government or a local body or
viii. Organization of the Central or State Government or a Union Territory.
The imports under this sub-para would be subject to the condition that the goods shall not
be used for nay commercial purpose, is non-transferable and complies with all the terms and conditions
of the relevant Customs Rules and Regulations.

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IMPORT OF GIFTS
Import of gifts shall be permitted where such goods are otherwise freely importable under
this Policy. In other cases, a Customs Clearance Permit (CCP) shall be required from the DGFT.

PASSENGER BAGGAGE
Bonafide household goods and personal effects may be imported as part of passenger
baggage as per the limits, terms and conditions thereof in the Baggage Rules notified by the Ministry
of finance.
Samples of such items that are otherwise freely importable under this Policy may also be
imported as part of passenger baggage without a licence/certificate/permission.
Exporters coming from abroad are also allowed to import drawings, patterns, labels, price
tags, buttons, belts, trimming and embellishments required for export, as part of their passenger baggage
without a licence/certificate/permission.

IMPORT ON EXPORT BASIS

New or second-hand capital goods, equipments, components, parts and accessories,
containers meant for packing of goods for exports, jigs, fixtures, dies and moulds may be imported
for export without a licence/certificate/permission on execution of Legal Undertaking/Bank Guarantee
with the Customs Authorities provided that the item is freely exportable without any conditionally/
requirement of licence/permission as may be required under ITC (HS) Schedule II.

RE-IMPORT OF GOODS REPAIRED ABROAD

Capital goods, equipments, components, parts and accessories, whether imported or
indigenous, except those restricted under ITC(HS) may be sent abroad for repairs, testing, quality
improvement or upgradation or standardization of technology and re-imported without a licence/
certificate/ permission.

IMPORT OF GOODS USED IN PROJECTS ABROAD

After completion of the projects abroad, project contractors may import, without a licence/
certificate/permission, used goods including capital goods provided they have been used for at least
one year.

SALE ON HIGH SEAS

Sale of goods on high seas for import into India may be made subject to this Policy or any
other law for the time being in force.

IMPORT UNDER LEASE FINANCING

Permission of licensing authority is not required for import of new capital goods under lease
financing. However the condition of actual user or licence/certificate/permission, wherever required

88
under the Policy or Handbook, shall be applicable in case of import of capital goods under such
lease financing. The facility shall also be available under EPCG Scheme, EOU/SEZ scheme. The
domestic supplier of capital goods to eligible categories of deemed exports shall be eligible for the
benefits of deemed exports as given in paragraph 8.3 of the Policy even in such cases where the
supplies are under lease financing.

EXECUTION OF BG/LUT
Wherever any duty free import is allowed or where otherwise specifically stated, the importer
shall execute a Legal Undertaking (LUT)/Bank Guarantee(BG)/Bond with the Customs Authority before
clearance of goods through the Customs, in the manner as may be prescribed. In case of indigenous
sourcing, the licence/certificate/permission holder shall furnish LUT/BG/Bond to the licensing authority
before sourcing the material from the indigenous supplier/nominated agency.

EXEMPTION FROM BANK GUARANTEE

All the exporters who have an export turnover of at least Rupee 5 crore in the current or
preceding licensing year and have a good tract record of three years of exports will be exempted
from furnishing a BG for any of the schemes under the Policy and may furnish a LUT in lieu of BG.

IMPORT OF CHEQUE BOOKS/TICKET FORMS ETC.

Indian branches of foreign banks, insurance companies and travel agencies may import Cheque
books, bank draft forms and traveler’s Cheque forms without a Customs Clearance Permit. Similarly,
airlines/shipping companies operating in India, including persons authorized by such airlines/shipping
companies, may import passenger ticket forms without a Customs Clearance Permit.

IMPORT OF RECONDITIONED/SECOND HAND AIRCRAFT SPARES

Air India, Indian Airlines, Vayudoot, Pawan Hans Ltd. and scheduled domestic private
airlines, private sector/public sector companies and State Governments operating executive/training
aircraft or those engaged in the aerial spraying of crops and non scheduled airlines and charter service
operators will be eligible to import, without a licence/certificate/permission, reconditioned/second hand
aircraft spares on the recommendation of the Director general of Civil Aviation, Government of India.
Foreign airlines shall also be eligible to import without a licence/certificate/permission,
reconditioned/second hand aircraft spares on the recommendation of the Director General of Civil
Aviation, Government of India.

IMPORT OF REPLACEMENT GOODS

Goods or parts thereof on being imported and found defective or otherwise unfit for use or
which have been damaged after import may be exported without a licence/certificate/permission, and
goods in replacement thereof may be supplied free of charge by the foreign suppliers or imported

89
against a marine insurance or marine-cum-erection insurance claim settled by an insurance company.
Such goods shall be allowed clearance by the customs authorities without an import licence/certificate/
permission provided that:
a. The shipment of replacement goods is made within 24 months from the date of clearance of
the previously imported goods through the Customer or within the guarantee period in the
case of machines or parts thereof where such period is more than 24 months; and
b. No remittance shall be allowed except for payment of insurance and freight charges where
the replacement of goods by foreign suppliers is subject to payment of insurance and/or
freight by the importer and documentary evidence to this effect is produced at the time of
making the remittance.
The importer shall also have the option to claim refund of payment, if any, already made to
the foreign supplier, instead of obtaining replacement of goods referred to above.
In such cases, where the goods have been found short-shipped, short-landed or lost in transit
prior to actual import and/or detected as such at the time of customs clearance, import of replacement
goods will be permitted on the strength of the certificate issued by the customs authorities without an
import licence/ certificate/ permission.
Cases not covered by the above provisions will be considered on merits by the DGFT for
grant of licence/ certificate/ permission for replacement of goods for which an application may be
made in the prescribed format as given in the Policy.

TRANSFER OF IMPORTED GOODS

Goods which are importable without restriction, can be transferred by sale or otherwise by
the importer freely. Transfer of imported goods, which are subject to Actual User condition under
the Policy and have become surplus to the needs of the Actual User, shall be made only with the
prior permission of the licensing authority concerned. The following information alongwith supporting
documents shall be furnished with the request for grant of permission for transfer, to the licensing
authority concerned:
i. Reasons for transfer of imported material;
ii. Name, address, IEC number and industrial licence/certificate/permission/registration, if any,
of the transferee,
iii. Description, quantity and value of the goods imported and those sought to be transferred;
iv. Copies of import licence/certificate/permission and bills of entry relating to the imports made;
v. Terms and conditions of the transfer as agreed upon between buyer and the seller.
Prior permission of the licensing authority shall not, however, be necessary for transfer or
disposal of goods, which were imported with Actual User condition provided such goods are freely
importable without Actual User condition on the date of transfer.

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 Prior permission of the licensing authority shall also not be required for transfer or disposal
of imported goods after a period of two years from the date of import. However, transfer of imported
firearms by the importer/ licensee shall be permitted only after 10 years of the date of import with the
approval of the DGFT.

SALE OF EXHIBITS
(i) Sale of exhibits of restricted items, mentioned in ITC(HS), imported for an international
exhibition/fair organized/approved/sponsored by the India Trade Promotion Organization
(ITPO) may also be made, without a licence/certificate/permission, within the bond period
allowed for re-export, on payment of the applicable customs duties, subject to a ceiling limit
of Rs 5 lakhs (CIF) for such exhibits for each exhibitor.
However, sale of exhibits of items, which were freely imported shall be made, without a
licence/ certificate/ permission, within the bond period allowed for re-export on payment of
applicable customs duties.
(ii) If goods brought for exhibition are not re-exported or sold within the bond period due to
circumstances beyond the control of the importer, the customs authorities may allow extension
of the bond period on merits.

IMPORT OF OVERSEAS OFFICE EQUIPMENT

On the winding up of overseas offices, set up with the approval of the Reserve Bank of
India, used office equipment and other items may be imported without a licence/certificate/permission.

PRIVATE/PUBLIC BONDED WAREHOUSES FOR IMPORTS

Private/Public bonded warehouses may be set up in the Domestic Tariff Area as per the
terms and conditions of notification issued by Department of Revenue. Any person may import goods
except prohibited items, arms and ammunition, hazardous waste and chemicals and warehouse them
in such private/public bonded warehouses. Such goods may be cleared for home consumption in
accordance with the provisions of this Policy and against Licence/certificate/permission, wherever
required. Customs duty as applicable shall be paid at the time of clearance of such goods. If such
goods are not cleared for home consumption within a period of one year or such extended period as
the custom authorities may permit, the importer of such goods shall re-export the goods.

EXPORT OF PASSENGER BAGGAGE

Bonafide personal baggage may be exported either along with the passenger or, if
unaccompanied, within one year before or after the passenger’s departure from India. However, items
mentioned as Restricted in ITC(HS) shall require a licence/certificate/permission.

EXPORT OF GIFTS
Goods, including edible items, of value not exceeding Rs.5,00,000/- in a licensing year, may
be exported as a gift. However, items mentioned as restricted for exports in ITC(HS) shall not be
exported as a gift, without a licence/certificate/permission.
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EXPORT OF SPARES
Warranty spares, whether indigenous or imported, of plant, equipment, machinery, automobiles
or any other goods, except restricted under ITC(HS) may be exported along with the main equipment
or subsequently but within the contracted warranty period of such goods subject to approval of RBI.

THIRD PARTY EXPORTS

Third party exports shall be allowed under the Policy. Third party export means exports
made by an exporter or manufacturer on behalf of another exporter(s). In such cases export documents
such as shipping bills shall indicate the name of both the manufacturer exporter/ manufacturer and
third party exporter(s). The BRC, GR declaration, export order and the invoice shall be in the name
of the third party exporter.

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). Export of such goods imported
against payment in freely convertible currency would be permitted against payment in freely convertible
currency.
Goods, including those mentioned as restricted item for import(except prohibited items) may
be imported under Customs Bond for export in freely convertible currency without a licence/certificate/
permission provided that the item is freely exportable without any conditionality/requirement of licence/
permission as may be required under ITC(HS) Schedule II.

EXPORT OF REPLACEMENT GOODS

Goods or parts thereof on being exported and found defective/damaged or otherwise unfit
for use may be replaced free of charge by the exporter and such goods shall be allowed clearance
by the customs authorities provided, that the replacement goods are not mentioned as restricted items
for exports in ITC(HS).

EXPORT OF REPAIRED GOODS

Goods or parts, except restricted under ITC(HS) thereof on being exported and found
defective, damaged or otherwise unfit for use may be imported for repair and subsequent re-export.
Such goods shall be allowed clearance without a licence/certificate/permission and in accordance with
customs notification issued in this behalf.

PRIVATE BONDED WAREHOUSES FOR EXPORTS

Private/ Public bonded warehouses exclusively for exports may be set up in DTA as per the
terms and conditions of the notifications issued by Department of Revenue. Such warehouses shall
be entitled to procure the goods from domestic manufacturers without payment of duty. The supplies
made by a domestic supplier to the notified warehouses shall be treated as physical exports provided
the payments for the same are made in free foreign exchange.

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DENOMINATION OF EXPORT CONTRACTS
All export contracts and invoices shall be denominated either in freely convertible currency
of Indian rupees but the export proceeds shall be realised in freely convertible currency. However
export proceeds against specific exports may also be realized in rupees provided it is through a freely
convertible Vostro account of a non resident bank situated in any country other than a member country
of Asian Clearing Union (ACU) or Nepal or Bhutan. Additionally, the rupee payment through the
Vostro account must be against payment in free foreign currency by the buyer in his non resident
bank account. The free foreign exchange remitted by the buyer to his non resident bank (after deducting
the bank service charges) on account of this transaction would be taken as the export realization
under the export promotion schemes of this Policy.
Contracts for which payments are received through the Asian Clearing Union (ACU) shall
be denominated in ACU Dollar. The Central Government may relax the provisions in appropriate
cases. Export contracts and Invoices can be denominated in Indian rupees against EXIM Bank/
Government of India Line of Credit.

REALIZATION OF EXPORT PROCEEDS

If an exporter fails to realise the export proceeds within the time specified by the Reserve
Bank of India, he shall, without prejudice to any liability or penalty under any law for the time being
in force, be liable to action in accordance with the provisions of the Act, the Rules and Orders made
thereunder and the provisions of this policy.

REGISTRATION-CUM-MEMBERSHIP CERTIFICATE
Any person, applying for (i) a licence/certificate/permission to import/export, [except items
listed as restricted items in ITC(HS)] or (ii) any other benefit or concession under this policy shall be
required to furnish Registration-cum-Membership Certificate (RMC) granted by the competent authority
in accordance with the procedure specified in the Handbook (Vol.1) unless specifically exempted
under the Policy.

TRADE FACILITATION THROUGH EDI INITIATIVES

It is endeavour of the Government to work towards greater simplification, standardization
and harmonization of trade documents using international best practices. As a step in this direction
DGFT shall move towards in automated environment for electronic filing, retrieval and authentication
of documents based on agreed protocols and message exchange with other community partners
including Customs and Banks.

PERMISSION OF SERVICE TAX IN DTA

For all goods and services which are exported from units in Domestic Tariff Area (DTA),
remission of service tax levied shall be allowed.
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EXEMPTION FROM SERVICE TAX IN SEZ
Units in SEZ shall be exempted from service tax.

PAYMENT THROUGH ECGC COVER

In cases, where the export has been completed but the payment as not been realised from
the buyer, such exports shall be taken into account for the purpose of benefits under the Policy, provided
the payment has been realised by the Indian exporter through ECGC cover.

PAYMENT THROUGH GENERAL INSURANCE

In cases, where exports have been made and payment realized through the General Insurance
cover on account of transit loss or other circumstances, the amount of the insurance cover paid would
be treated as payment realized on account of exports under the various export promotion schemes.

DIRECT NEGOTIATION OF EXPORT DOCUMENTS

In cases, where the exporter directly negotiates the document (not through the authorised
dealer) with the permission of the RBI, he is required to submit the following documents for availing
of the benefits under the export promotion schemes:
a. Permission from RBI allowing direct negotiation of documents (however, this is not required
for status holders who have been granted a general permission).
b. Copy of the Foreign Inward Remittance Certificate (FIRC) as per Form 10-H of the Income
Tax department in lieu of, the BRC and
c. Statement giving details of the shipping bills/invoice against which the FIRC was issued.

EXHIBITS REQUIRED FOR NATIONAL AND INTERNATIONAL EXHIBITIONS OR

FAIRS AND DEMONSTRATIONS
Import/export of exhibits, including construction and decorative materials required for the
temporary stands of the foreign/Indian exhibitors at the exhibitions, fair or similar show or display for
a period of six months on re-export/re-import basis, shall be allowed without a licence/certificate/
permission on submission of a certificate from an officer of a rank not below that of an Under
Secretary/Deputy Director General of Foreign Trade to the Government of India in the Department
of Commerce/Directorate General of Foreign Trade or an officer of the Indian Trade promotion
Organization duly authorised by its Chairman in this behalf, to the effect that such exhibition, fair or
similar show or display, as the case may be,
(i) has been approved or sponsored by the Government of India in the Department of Commerce
or the India Trade Promotion Organization; and
(ii) is being held in public interest.
Extension beyond six months for re-export/ re-import will be considered by the Customs

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authorities on merit. Consumables such as paints, printed material, pamphlets, literature etc. pertaining
to the exhibits need not be re-exported/ re-imported.

RESTRICTED ITEMS REQUIRED BY HOTELS, RESTAURANTS, TRAVEL AGENTS,

TOUR OPERATORS AND OTHER CATEGORIES SPECIFIED
Items mentioned as restricted for imports in ITC(HS) required by hotels, restaurants, travel
agents and tour operators may be allowed against a licence/certificate/permission. Import licence/
certificate/permission shall be granted on the recommendation of the Director General, Tourism,
Government of India.
Hotels, including tourist hotels, recognized by the Director General of Tourism, Government
of India or a State Government shall be entitled to import licence/ certificate/ permissions upto a value
of 25% of the foreign exchange earned by them from foreign tourists during the preceding licensing
year. Such licence/ certificate/ permission shall be granted for the import of essential goods related to
the hotel and tourism industry.
Travel agents, tour operators, restaurants, and tourist transport operators and other units
for tourism, like adventure/ wildlife and convention units, recognized by the Director General of
Tourism, Government of India, shall be entitled to import licence/ certificate/ permission up to a value
of 10% of the foreign exchange earned by them during the preceding licensing year. Such licence/
certificate/ permission shall be granted for the import of essential goods which are restricted for imports
related to the travel and tourism industry including office and other equipment required for their own
professional use.

LABELS, PRICE TAGS AND LIKE ARTICLES FOR EXPORT PRODUCTS

Supplies, made by foreign buyers or procured by the exporters on the advice of foreign
buyers, of labels, price tags, hangers sizers, PVC boxes, eyelets, hooks and eyes and rivets to be
attached to the goods against specific orders placed by foreign buyers on Indian exporters, may be
imported without a licence/certificate/permission.

PROTOTYPES
Import of new/second hand prototypes/second hand samples may be allowed on payment
of duty without a licence/certificate/permission to an Actual User (industrial) engaged in the production
of or having industrial licence/letter of intent for research in the item for which prototype is sought for
product development or research, as the case may be, upon a self-declaration to that effect, to the
satisfaction of the customs authorities.

FREE OF COST EXPORTS

The status holders shall be entitled to export freely exportable items on free of cost basis
for export promotion subject to an annual limit of Rs. 10 lakh or 2% of the average annual export
realisation during the preceding three licensing years whichever is higher.

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GIFTS/SPARES/REPLACEMENT GOODS
For export of gifts, indigenous/imported warranty spares and replacement goods in excess
of the ceiling/period prescribed an application may be made to the Director General of Foreign trade.

FURNISHING OF RETURNS IN RESPECT OF EXPORTS IN NON PHYSICAL FORM

All the exports made in non-physical form by using communication links including high speed
data communication links, internet, telephone line or any other channel which do not involve the
Customs authorities has to be compulsorily reported on quarterly basis to the Electronic and Software
Export Promotion Council in the given format.
These provisions shall be applicable to all the exporting units located anywhere in the country
including those located in STP,SEZ,EHTP and under 100% EOU scheme.

DUTY FREE IMPORT OF R&D EQUIPMENT FOR PHARMACEUTICALS AND

BIO-TECHNOLOGY SECTOR
Duty free import of goods (as specified in the list 28 of Customs notification No.21/2002,
dated 1-3-2002, as amended from time to time) up to 25% of the FOB value of exports during the
preceding licensing year, shall be allowed to the manufacturer exporters having Research and
Development wing which is registered with the Department of Scientific and Industrial Research in
the Ministry of Science and Technology subject to fulfillment of condition number 53(ii) of the said
notification.
The eligible unit may furnish an application to the Regional Licensing Authorities under whose
jurisdiction the registered officer of company or head office of the firm is located. The Regional
Licensing Authority shall verify the application on the basis of the declaration given by the unit and
countersigned by Chartered Accountant.

RELOCATION OF INDUSTRIES
Plant and machineries would be permitted for import without a licence provided the
depreciated value of such relocation plant exceeds Rs. 25 crore.

OFFSETTING OF EXPORT PROCEEDS

Subject to the specific approval of the Reserve Bank of India, any payables, or equity
investment made by a licence holder under any export promotion scheme, can be used to offset
receipts of his export proceeds. In such cases, the offsetting would be equal to the realisation of the
export proceeds and the exporter would have to submit the following additional documents:
(a) Appendix 22D in lieu of the Bank Realisation Certificate
(b) Specific permission of the Reserve Bank of India.
The major other schemes in the new foreign trade policy are explained in brief below:

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EXPORT PROMOTION CAPITAL GOODS SCHEME (EPCG)
This scheme is designed to reduce the cost of export production by way of reduction/removal
of the duties incurred for importing capital goods, which will be used for pre-production, production
and post-production of goods, meant for export. The validity of the licence will be 36 months (other
than for spares which is coterminous with licence). Spares can be imported up to the end of export
obligation period. EPCG licence will be issued with a single port of registration for imports. Exports
can be done through any of the ports, permitted under the scheme.
Import of items permitted at Concessional rate of customs duties against export obligation
is as follows:
(a) Machinery or such machinery in Completely Knocked Down (CKD) / Semi-knocked Down
(SKD) manner.
(b) Computer Software Systems.
(c) Second Hand Capital Goods without age restriction.
(d) Components of such capital goods required for assembly or manufacture of capital goods
by the licence holder.
(e) Spares, tools, jigs, fixtures, dies and moulds.
(f) Spares, tools, spare refractories, catalyst & consumable required for the existing machinery
and plant.
The import of the machinery and above items is allowed at a concessional rate of duty of
5% advalorem. Additional Duty of Customs and Special Additional Duty are exempted. There is,
however, a condition that the importer has to achieve an export target of 8 times the duty saved on
capital goods imported under the scheme which should be fulfilled over a period of 8 years from the
date of issue of the licence. If the licence is for Rs.100 crores or more, the export obligation is to be
fulfilled over a period of 12 years. Any firm/ company acquiring a unit which is under BIFR will be
allowed 12 years for fulfillment of export obligation if rehabilitation package is silent on Export
Obligation (EO) extension period. Similar facility is provided for revamping of small scale SSI units
also. For units in Agro Export Zone, a period of 12 years reckoned from the date of issue of the
licence would be permitted for the fulfillment of export obligation.

DUTY EXEMPTION SCHEMES

Duty exemption schemes enables duty free import of inputs required for export production.
An advance licence is issued under the duty exemption scheme.

Advance Licence
The Advance licence will be issued for physical exports to a manufacturer exporter or
merchant exporter with supporting manufacturer(s).
Under the Duty Exemption Schemes, which have been in existence for a number of years

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now, raw materials and other inputs for the production of goods for export can be imported free of
duty making normal allowance for wastage. In addition import of fuel, oil, energy catalyst etc, which
are consumed in the course of their use and attain the export product are also allowed under this
scheme. Duty free import of mandatory spares up to 10% of the CIF value of the licence which are
required to be exported/ supplied with the resultant product may also be allowed. As mentioned above
(in para I.3), licences known as Advance Licence are issued for the following purpose:
(a) Physical exports
(b) Intermediate supplies
(c) Deemed exports.
The Advance licences for import of Raw materials, Components etc. are issued on the
basis of certain standards. The government has already published such standards (norms) in respect
of many items. These are known as standard input output norms (SIONs). These norms provide the
details of export products, unit/ quantity for exports, import items permitted and the quantity of each
item permitted for import per unit export. Let us take a typical entry as follows for better understanding.
Sl.No. Export Item Export Qty. Import Item Quantity Allowed
A 1560 Copier paper 1Kg. 1. Bleached Sulphate 0.330 Kg.
Pulp
2. Gum Rosin 0.010 Kg.

The norms above prescribe the quantity of the two raw materials required to produce 1
Kg. of paper.
Let us assume that the exporter has got an export order for 1000 kg. of copier paper. He
then applies to the JDGFT for an advance licence using which he can import (1) 1000 x 0.330 kg.
i.e.330 kg. of bleached sulphate pulp and (2) 1000 x 0.010 kg. i.e. 10 kg. of gum rosin. With this,
the exporter will have an export obligation of 1000 kg. of copier paper within 18 months.
These licences are subject to Actual User conditions. Imports under such licences (except
for deemed exports) are exempt from Basic Customs Duty, Additional Customs Duty, Anti-dumping
Duty and Safeguard Duty. Imports under Advance licence for deemed exports are exempted from
Basic Customs Duty and Additional Customs Duty only. However, for supplies to EOU/ SEZ/ EHTP/
STP under such licences Anti-dumping Duty and Safeguard Duty shall also be exempt.
Licence / material imported are not transferable. Such licences are issued with positive value
addition. But for which payments are not received in freely convertible currencies, it shall be subject
to value addition as prescribed (33%). The value addition for this purpose shall be calculated as under
A is the FOB value of the export realised/ FOR value of the supply effected.
B is the CIF value of the imported inputs covered by the licence plus any other imported
materials used on which the benefit of duty drawback is being claimed.

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DUTY REMISSION SCHEME
Duty Remission Scheme enables post export replenishment/ remission of duty on inputs used
in the export product. Duty Remission Scheme consists of :
(a) Duty Free Replenishment Certificate (DFRC)
(b) Duty Entitlement Passbook Scheme (DEPB).

Duty Free Replenishment Certificate (DFRC)

DFRC is issued under duty remission scheme.
DFRC is issued to a manufacturer-exporter or merchant-exporter for the import of inputs
used in the manufacture of goods without payment of basic customs duty. However, they are subject
to payment of additional customs duty (equivalent to excise duty for the same item in India) at the
time of import. Exports under this scheme can be done from any of the ports specified. DFRC will
be issued with single port of registration, which will be the port from where the export has been
effected. DFRC is issued only for those export products for which Standard Input-Output Norms
(SIONs) have been published. In respect of SIONs which are subject to ‘actual user’ condition or
where the export proceeds have not been realized at the time filing application or for import of fuel
under the general norms, DFRC shall be issued with actual user condition for these inputs. DFRC is
issued for a period of 24 months from the date of issue and DFRC and or the material(s) imported
against it will be freely transferable. DFRC issued under ‘actual user’ condition or the material(s)
imported against it shall not be transferable. They are subject to minimum value addition norms of
25% except for Gem & Jewellery sector for which separate norms have been prescribed. Duty Free
Replenishment Certificate may be issued in respect of exports for which payments are received in
non-convertible currency. Such exports shall, however, be subject to value addition specified in the
Foreign Trade Policy. The export products, which are eligible for modified VAT are also eligible for
CENVAT Credit. However, non-excisable, non-dutiable or non-CENVAT products will be eligible
for drawback at the time of exports in lieu of additional customs duty to be paid at the time of import.

Duty Entitlement Passbook scheme (DEPB)

For exporters who do not want to go through the licensing route, an optional facility is
available under DEPB. The objective of DEPB Scheme is to neutralize the incidence of customs
duty and special additional duty on the import content of the export product. The neutralisation is
provided by way of grant of duty credit against export product. The holder of DEPB will have the
option to pay additional customs duty, if any, in cash as well.
DEPB is one of the most attractive schemes available to the exporter. Exporters intending
to avail this scheme should file the DEPB shipping bill in blue colour, with the customs, at the time of
export. The exporter is allowed to file application for DEPB with the JDGFT, within a period of 180
days from the date of export or within 90 days from the date of realisation whichever is later, in respect

99
of shipments for which the claim has been filed. The applicant can file one or more applications but
limited to a maximum of 25 shipping bills in one application. All the shipping bills in any one application
must relate to exports made from one Custom House only. This limitation will not be applicable when
filed through EDI mode. The passbook is issued with the credit amount specified. For example, if the
credit rate for Agarbattis (Item No. 533) is 3% and the exporter has applied for DEPB against 12
shipping bills, with the total FOB value being Rs.10 lakhs, the passbook is issued with credit as Rs.
30,000. The passbook holder can import any item which is freely importable except capital goods.
The credit can be utilised for payment of customs duties and special additional duties. The holder of
DEPB has the option to pay additional customs duty, if any, in cash as well. Countervailing duty paid
in cash can be offset by availing CENVAT credit or drawback as per rules. DEPBs issued against
exports for which payments have been realised/exports against irrevocable letter of credit, are
transferable. If payment against exports has not been received at the time of filing the application for
DEPB, the same is issued on non-transferable basis. Upon subsequent realisation of payment, the
DEPB can be endorsed transferable. DEPB offers wider flexibility to the exporter as he can import
a range of items and not just the raw materials prescribed for his product in the input-output norms.
The passbook valid for 12 months and the materials imported under the scheme are freely transferable
and the scheme enjoys good premium. While validity of a licence including DFRC is considered with
reference to the date of shipment of the goods, for DEPB these have to be valid on the date of
presentation for debit of duty involved.

If the DEPB credit for a product is 10% or more, the amount of credit against each such
export product shall not exceed 50% of the Present Market Value (PMV) of the goods. At the time
of export, the exporter shall declare on the shipping bill that the benefit under the DEPB scheme
would not exceed 50% of the PMV.

DUTY DRAWBACK

Duty Drawback on goods manufactured in India and exported means the rebate of the duty
suffered on purchase of raw materials. Such raw materials may either be procured from abroad or
from local sources. In the former case, the raw materials imported are subject to import duties. Items
purchased locally are subject to excise duty. These duties in turn increase the cost of the final product.
In order to reduce or eliminate the effect of the duties, the Government of India has implemented the
Duty Drawback Scheme. Refund of duties through this scheme will help the Indian exporter to price
his product more competitively in the international market.

Drawback is basically divided into two categories as per Section 74 and 75 of the Customs
Act 1962.

1. Section 74 allows drawback on re-export of products imported into India under payment
of duty.

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 2. Section 75 relates to drawback on export of finished products for which duty paid inputs
have been used.
Drawback under Section 75 is applicable for physical exports, re-exports and deemed
exports. The rates of drawback which have been fixed and are applicable to all exporters are known
as “All Industry Rates”. These rates are provided in the drawback schedule published by the drawback
cell of the Customs and the new rates are effective from 29th January, 2004. There will be revisions
from time to time.
Payment against exports has to be received within 180 days in the case of eligible products.
Drawback will not be paid if the amount of drawback against a particular export is less than Rs.50.
No drawback will be determined where the rate of drawback will be less than 1% of the FOB value
thereof, except where the amount is not less than Rs. 500 for each shipment. The market price of the
item exported should not be less than the amount of drawback due. Drawback will be paid on the
total FOB value of the exports including agency fee in foreign exchange, if applicable.
It may be noted that duty drawback is only a refund of the average amount of duty paid on
raw materials used for export production. This may not be the exact amount of the duties suffered by
a manufacturer. For example, the All Industry Rate of Drawback for carrom board is 7.5% of FOB
value. A particular manufacturer may be paying only 7.0% duty whereas another party might be paying
7.9% duty since he may be using better quality raw materials or the prices of his suppliers may be
higher. If All Industry Rates of Duty Drawback has not been announced for a particular product or if
it is less than four fifth of the actual duty paid by the manufacturer, he can apply to the Jurisdictional
Commissionerate of Central Excise for getting a separate brand rate fixed. Rules 6(1)(a) and 7(1)
cover these two cases. In the former case the rate of drawback thus fixed is called “Brand Rate”
and in the latter case, “Special Brand Rate”.
So far applications for fixing brand rate and special brand rate were sent directly to the
DBK Directorate at Delhi, along with prescribed statements giving details regarding importation of
inputs, inputs produced and inputs in stock. But this had led to enormous delay and bottlenecks to
exporters. In order to avoid this, Govt. decided to delegate the work of Brand Rate fixation to the
Jurisdictional Central Excise Commissionerate of the manufacturing unit and the applications in duplicate
are to be submitted within 60 days of the ‘let export’ date of the first shipping bill. Delay upto 30
days may be generally condoned by the commissioner. In addition, the applications in duplicate are
also to be filed with Divisional Assistant Commissioner or Deputy Commissioner of Central Excise.
Head Quarters DBK unit will acknowledge immediately on receipt of the applications. The
verification is to be completed by the divisional officer with in 15 days of the receipt of the applications
in the head quarters. The Brand rate is to be fixed within a period of 10 days of receipt of the
verification report.
The power to fix Special Brand Rate is also delegated to the Jurisdictional Commissioner
of Central Excise.
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 Exporters who wish to claim drawback are required to open a bank account in any bank.
They should then intimate the name and address of the bank and their account number to the drawback
department of the custom house which handles their export documents, at the time of shipment.
The brand rates and special brand rates as mentioned above are fixed on the basis of specific
applications from individual manufacturer exporters/ exporters and may vary from one party to another.
It was briefly mentioned above that Section 74 of the Customs Act deals with drawback on
re-export of imported goods on which duty had been paid at the time of import. In such cases of re-
export, the goods should be easily identifiable as the items originally imported. Proof of this and the
duty paid should be produced before the customs at the time of export. Such re-export should take
place within two years from the date of import. The items that have been imported should not have
been put to use before re-export. If they have been put to use, the rate of drawback will come down
further.

EXPORT ORIENTED UNITS (EOUS) / ELECTRONICS HARDWARE TECHNOLOGY

PARKS (EHTPS) AND SOFTWARE TECHNOLOGY PARKS (STPS) SCHEME / BIO-
TECHNOLOGY PARKS (BTPS) SCHEME
Any industrial unit capable of offering a major share of its production or services (as per
norms explained in detail below) for exports, can seek approval under these schemes. An Export
Oriented Unit (EOU) can be set up anywhere in the country. Software Technology Parks (STPs)
and Electronics Hardware Technology Parks (EHTPs) are designated areas for the setting up of export
oriented software and electronic hardware units respectively. Under the schemes units can be set up
for manufacturing of goods, including repair, remaking, reconditioning, re-engineering and rendering
of service. Units for trading cannot be set up under the scheme. STP and EHTP complexes can be
set up by the Central Government, State Government, Public or Private sector undertakings or any
combination thereof, duly approved by the Inter-Ministerial Standing Committee (IMISC) in the
Ministry of Communication and Information Technology (Department of Information Technology).
Applications for setting up units under EOU scheme may be submitted in triplicate to the Development
Commissioner of Special Economic Zone (SEZ) concerned. Approvals under EOU scheme other
than proposals for setting up of unit in the services sector [except R&D software and IT enabled
services, or any other service activity as may be delegated by Board of Approval (BOA)] will be
approved or rejected by the Unit Approval Committee within 15 days. In other cases, approval will
be granted by the Development Commissioner after clearance by Board of Approval.

SPECIAL ECONOMIC ZONES

Special Economic Zones (SEZs) are specifically designated duty free area, deemed to be
foreign territory for the purposes of trade operations and duties and tariffs. Goods and services going
into SEZ from Domestic Tariff Area(DTA) will be treated as exports and goods from SEZ to DTA
will be considered as imports. These units can be set up for manufacture of goods and rendering of
services.
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 Application for setting up a unit in SEZ other than for setting up of unit in the services sector
(R&D software and IT enabled services, trading or any other service activity as delegated by Board
of Approval) will be approved or rejected by the Unit Approval Committee within 15 days. In other
cases, the power is vested with BOA. Proposals for setting up units in SEZ requiring industrial licence
will be granted approval by the Development Commissioner after obtaining clearance from SEZ Board
of Approval and Department of Industrial Policy and promotion within 45 days on merits. SEZ unit
can import all goods including capital goods (new or second hand) required for its activities without
payment of duty except prohibited items. Raw materials for making capital goods for use within the
unit can be imported. Inputs can be procured from bonded warehouse in DTA without payment of
duty. Import from DTA all types of goods without payment of duty for creating central facility in SEZ,
sourcing of gold/ silver/ platinum from nominated agencies in the DTA and import of goods and services
from DTA for setting up, operation and maintenance of units without payment of duty are permissible
for these units. A SEZ can be set up in the public, private or joint sector or by State Government.
SEZ units should be a positive Net Foreign Exchange Earner.

ASSISTANCE TO STATES FOR INFRASTRUCTURE DEVELOPMENT OF EXPORTS

(ASIDE)
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.

MARKET ACCESS INITIATIVE (MAI)

The Market Access Initiative (MAI) scheme is intended to provide financial assistance for
medium term export promotion efforts with a sharp focus on a country and product.
The financial assistance is available for Export Promotion Councils, Industry and Trade
associations , Agencies of State Governments , Indian Commercial Missions abroad and other eligible
entities as may be notified from time to time,. A whole range of activities can be funded under the
MAI scheme. These include market studies, setting up of showroom/ warehouse, sales promotion
campaigns, international departmental stores, publicity campaigns, participation in international trade
fairs, , brand promotion, registration charges for pharmaceuticals and testing charges for engineering
products etc. Each of these export promotion activities can receive financial assistance from the
Government ranging from 25% to 100% of the total cost depending upon the activity and the
implementing agency.
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MARKETING DEVELOPMENT ASSISTANCE (MDA)

The Marketing Development Assistance (MDA) Scheme is intended to provide financial

assistance for a range of export promotion activities implemented by export promotion councils, industry
and trade associations on a regular basis every year. As per the revised MDA guidelines with effect
from 1st April, 2004 assistance under MDA is available for exporters with annual export turnover
upto Rs 5 crores. These include participation in Trade Fairs and Buyer Seller meets abroad or in
India, export promotion seminars, etc. Further, assistance for participation in Trade Fairs abroad and
travel grant is available to such exporters if they travel to countries in one of the four Focus Areas,
such as , Latin America, Africa, CIS Region, ASEAN countries, Australia and New Zealand. For
participation in trade fairs, etc, in other areas financial assistance without travel grant is available.

TOWNS OF EXPORT EXCELLENCE

A number of towns in specific geographical locations have emerged as dynamic industrial

clusters contributing handsomely to India’s exports. It is necessary to grant recognition to these industrial
clusters with a view to maximizing their potential and enabling them to move higher in the value chain
and tap new markets. Selected towns producing goods of Rs. 1000 crore or more will be notified as
Towns of Exports Excellence on the basis of potential for growth in exports. However for the Towns
of Export Excellence in the Handloom, Handicraft, Agriculture and Fisheries sector, the threshold limit
would be Rs 250 crores. Common service providers in these areas shall be entitled for the facility of
the EPCG scheme. The recognized associations of units will be able to access the funds under the
Market Access Initiative scheme for creating focused technological services. Further such areas will
receive priority for assistance for rectifying identified critical infrastructure gaps from the ASIDE scheme.

BRAND PROMOTION AND QUALITY

The Central Government aims to encourage manufacturers and exporters to attain

internationally accepted standards of quality for their products. The Central Government will extend
support and assistance to Trade and Industry to launch a nationwide programme on quality awareness
and to promote the concept of total quality management.

TEST HOUSES

The Central Government will assist in the modernisation and upgradation of test houses and
laboratories in order to bring them at par with international standards

QUALITY COMPLAINTS/ DISPUTES

The Regional Sub-Committee on Quality Complaints (RSCQC) set up at the Regional Offices
of the Directorate General of Foreign Trade shall investigate quality complaints received from foreign
buyers. The guidelines for settlement of quality complaints, in particular, and such other complaints.

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TRADE DISPUTES AFFECTING TRADE RELATIONS
If it comes to the notice of the Director General of Foreign Trade or he has reason to believe
that an export or import has been made in a manner that
(i) is gravely prejudicial to the trade relations of India with any foreign country; or
(ii) is gravely prejudicial to the interest of other persons engaged in exports or imports;
(iii) has brought disrepute to the country;
The Director General Foreign Trade may take action against the exporter or importer
concerned in accordance with the provisions of the Act, the Rules and Orders made thereunder and
this Policy.

STAR EXPORT HOUSES

Merchant as well as Manufacturer Exporters, Service Providers, Export Oriented Units
(EOUs) and Units located in Special Economic Zones (SEZs), Agri Export Zone (AEZ’s), Electronic
Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio Technology Parks
(BTPs) shall be eligible for applying for status as Star Export Houses.
Category Performance (in rupees)
One Star Export House 15 crore
Two Star Export House 100 crore
Three Star Export House 500 crore
Four Star Export House 1500 crore
Five Star Export House 5000 crore

Note 1
Units in Small Scale Industry/Tiny Sector/Cottage Sector, Units registered with KVICs/
KVIBs, Units located in North Eastern States, Sikkim and J&K, Units exporting handloom/
handicrafts/hand knotted or silk carpets, exporters exporting to countries in Latin America/CIS/sub-
Saharan Africa as listed in Appendix-9, units having ISO 9000 (series)/ ISO 14000 (series) /
WHOGMP/HACCP/SEI CMM level-II and above status granted by agencies listed in Appendix-6,
exports of services and exports of agro products shall be entitled for double weightage of exports
made for grant of Star Export House status.
Exports made on re-export basis shall not be counted for the purpose of recognition.
Exports made by a subsidiary of a limited company shall be counted towards export
performance of the limited company for the purpose of recognition only if the limited company has a
majority share holding in the subsidiary company.
A Star Export House shall be eligible for the following facilities -
(i) Licence/ certificate/ permissions and Customs clearances for both imports and exports on
self-declaration basis.
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 (ii) Fixation of Input-Output norms on priority within 60 days;
(iii) Exemption from compulsory negotiation of documents through banks. The remittance,
however, would continue to be received through banking channels;
(iv) 100% retention of foreign exchange in EEFC account;
(v) Enhancement in normal repatriation period from 180 days to 360 days.
(vi) Entitlement for consideration under the Target Plus Scheme
(vii) Exemption from furnishing of Bank Guarantee in Schemes under the Policy.
All status certificates issued or renewed on or after 01.09.2004 shall be valid from 1st April
of the licensing year during which the application for the grant of such recognition is made upto 31st
March, 2009, unless otherwise specified. On the expiry of such certificate, application for renewal of
status certificate shall be required to be made within a period as prescribed in the Handbook (Vol.1).
During the said period, the star export house shall be eligible to claim the usual facilities and benefits.

SERVICES EXPORTS
Services include all the 161 tradable services covered under the General Agreement on Trade
in Services where payment for such services is received in free foreign exchange. A list of services is
given in Appendix-10 of Handbook (Vol.1). All provisions of this Policy shall apply mutatis mutandis
to export of services as they apply to goods, unless otherwise specified. Service exporters are required
to register themselves with the Federation of Indian Exporters Organization. However, software
exporters shall register themselves with Electronic and Software Export Promotion Council.
In order to give proper direction, guidance and encouragement to the Services Sector, an
exclusive Export Promotion Council for Services shall be set up.
The Services Export Promotion Council shall:
(i) Map opportunities for key services in key markets and develop strategic market access
programmes for each component of the matrix.
(ii) Co-ordinate with sectoral players in undertaking intensive brand building and marketing
programmes in target markets.
(iii) Make necessary interventions with regard to policies, procedures and bilateral/ multilateral
issues, in co-ordination with recognized nodal bodies of the services industry.

SERVED FROM INDIA SCHEME

The objective is to accelerate the growth in export of services so as to create a powerful
and unique ‘Served From India’ brand, instantly recognized and respected the world over.
All Service providers who have a total foreign exchange earning of at least Rs.10 lakhs in
the preceding or current financial year shall be eligible to qualify for a duty credit entitlement. For
individuals who are service providers, the total foreign exchange earned criteria would be Rs.5 lakhs
in the preceding financial year. Payments received from EEFC account shall not be counted for benefits

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under this scheme. All Service providers (other than hotels and restaurants) shall be entitled to duty
credit equivalent to 10% of the foreign exchange earned by them in the preceding financial year. Hotels
of one-star and above (including managed hotels and heritage hotels) approved by the Department
of Tourism, and other Service providers in the tourism sector registered with the Department of
Tourism, shall be entitled to duty credit equivalent to 5% of the foreign exchange earned by them in
the preceding financial year.
Stand-alone restaurants will be entitled to duty credit equivalent to 20% of the foreign exchange
earned by them in the preceding financial year.
Note: In the case of one and two star hotels and stand-alone restaurants, the foreign
exchanged earned through International Credit Cards and sources as may be notified only shall be
taken into account for the purposes of computation of duty credit entitlement under the scheme.
Duty credit entitlement may be used for import of any capital goods including spares, office
equipment and professional equipment, office furniture and consumables, provided it is part of their
main line of business. In the case of hotels and stand-alone restaurants, the duty credit entitlement
may also be used for the import of food items and alcoholic beverages. The entitlement and the goods
imported shall be non-transferable.

HEALTHCARE & EDUCATION

In order to enable Healthcare and Educational Institutions to have world-class state-of-the-
art infrastructure, service providers in these sectors shall, as for other service sectors, be entitled to
duty credit equivalent to 10% of the foreign exchange earned by them in the previous financial year.
The foreign exchange turnover for Healthcare Institutions would include amounts earned through medical
treatment, surgery, testing, consultancy and health care provided by the institution. The foreign exchange
turnover for Educational Institutions would include amounts earned through the courses and consultancy
provided by the institution. In either case, it will not include foreign exchange remittances through any
other source including equity participation, donations etc. The capital goods and the consumer goods
imported under the duty free entitlement shall have a nexus with the activities of the healthcare or
educational institutions concerned

TARGET PLUS SCHEME

The objective of the scheme is to accelerate growth in exports by rewarding Star Export
Houses who have achieved a quantum growth in exports. High performing Star Export Houses shall
be entitled for a duty credit based on incremental exports substantially higher than the general annual
export target fixed (Since the target fixed for 2005-06 is 17 %, the lower limit of performance for
qualifying for rewards is pegged at 20% for the current year).
All Star Export Houses (including Status Holders as defined in para 3.7.2.1 of Exim Policy
2002-07) which have achieved a minimum export turnover in free foreign exchange of Rs 10 crores
in the previous licensing year are eligible for consideration under the Target Plus Scheme.

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 The entitlement under this scheme would be contingent on the percentage incremental growth
in FOB value of exports in the current licensing year over the previous licensing year, as under:
Percentage incremental growth Duty Credit Entitlement (as a % of
the incremental growth)
20% and above but below 25% 5%
25% or above but below 100% 10%
100% and above 15% (of 100%)

APPLICANT COMPANIES
Companies which are Star Export Houses as well as part of a Group company shall have
an option to either apply as an individual company or as a Group based on the growth in the Group’s
turnover as a whole. If a Group company chooses to apply based on the export of one or more of
its individual Star Export House companies, the entitlement would be calculated considering the export
performance of the applicant company during the previous licensing year and current licensing year.
It shall be necessary that the adjusted export performance of all the Star Export House companies of
the Group during the current licensing year does not fall below the combined performance of all Star
Export House companies of the Group in the previous licensing year. In case the Group chooses to
apply based on the overall growth in Group’s turnover (i.e. the turnover of all the Star Export House
companies), any one of the Star Export House companies of the Group may file an application on
behalf of all the Star Export House companies of the Group.
The following exports shall not be taken into account for calculation of export performance
or for computation of entitlement under the scheme:
(a) Export of imported goods or exports made through transshipment.
(b) Export turnover of units operating under SEZ/EOU/EHTP/STPI/ BTP Schemes or products
manufactured by them and exported through DTA units.
(c) Deemed exports (even when payments are received in Free Foreign Exchange and payment
is made from EEFC account).
(d) Service exports.
(e) Rough, uncut and semi polished diamonds and other precious stones.
(f) Gold, silver, platinum and other precious metals in any form, including plain and studded
jewellery.
(g) Export performance made by one exporter on behalf of another exporter.

IMPORTS ALLOWED
The Duty Credit may be used for import of any inputs, capital goods including spares, office
equipment, professional equipment and office furniture provided the same is freely importable under
ITC (HS), for their own use or that of supporting manufacturers. Agricultural products listed in Chapter

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1 to 24 of ITC (HS) except as may be notified from time to time, shall not be permissible for imports
under this scheme.

CENVAT/ DRAWBACK
Additional Customs Duty/ Excise Duty paid in cash or debit under target plus shall be adjusted
as CENVAT Credit or Duty Drawback as per rules framed by the Department of Revenue.

VISHESH KRISHI UPAJ YOJANA

(SPECIAL AGRICULTURAL PRODUCE SCHEME)
(1) The objective of the scheme is to promote export of fruits, vegetables, flowers, minor forest
produce, dairy, poultry and their value added products, by incentivising exporters of such
products.
(2) Exporters of such products shall be entitled for duty credit scrip equivalent to 5% of the
FOB value of exports for each licensing year commencing from 1st April, 2004. However
diary, poultry and their value added products shall qualified for benefits in respect of the
exports made on or after 1st April, 2005.The scrip and the items imported against it would
be freely transferable.
(3) 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).
(4) 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.
(5) 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.
(6) 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.

FREE TRADE & WAREHOUSING ZONES

The objective is to create trade-related infrastructure to facilitate the import and export of
goods and services with freedom to carry out trade transactions in free currency. The scheme envisages
creation of world-class infrastructure for warehousing of various products, state-of-the-art equipment,
transportation and handling facilities, commercial office-space, water, power, communications and
connectivity, with one-stop clearance of import and export formality, to support the integrated Zones
as ‘international trading hubs’. These Zones would be established in areas proximate to seaports,
airports or dry ports so as to offer easy access by rail and road.

STATUS
The Free Trade & Warehousing Zones (FTWZ) shall be a special category of Special
Economic Zones with a focus on trading and warehousing.

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ESTABLISHMENT OF ZONE
1. Proposals for setting up of FTWZs may be made by public sector undertakings or public
limited companies or by joint ventures in technical collaboration with experienced
infrastructure developers. The proposals shall be considered by the Board of Approval in
the Department of Commerce. On approval, the developer will be issued a letter of
permission for the development, operation and maintenance of such FTWZ.
2. Foreign Direct Investment would be permitted upto 100% in the development and
establishment of the zones and their infrastructural facilities.
3. The proposal must entail a minimum outlay of Rs.100 crores for the creation and
development of the infrastructure facilities, with a minimum built up area of five lakh sq.mts.
4. The developer shall be permitted to import duty free such building materials and equipment
as may be required for the development and infrastructure of the zone. Such equipment and
materials as are sourced from the DTA shall be considered as physical exports for the DTA
suppliers.
5. Once it has developed the FTWZ, the developer shall also be permitted to sale/lease/rent
out warehouses/workshops/office-space and other facilities in the FTWZ to traders/exporters.

MAINTENANCE OF ZONE
The developer shall itself or through suitable special purpose arrangements, ensure a reliable
mechanism for the proper maintenance of the common facilities and security of the FTWZ.

FUNCTIONING
(i) The scheme envisages duty free import of all goods (except prohibited items, arms and
ammunitions, hazardous wastes and SCOMET items) for ware housing. As far as bond
towards customs duty on import is concerned, the units would be subject to similar provisions
as are applicable to units in SEZs.
(ii) Such goods shall be permitted to be re-sold/re-invoiced or re-exported. Re-export shall be
permitted without any restrictions. However export of SCOMET (Special Chemicals,
Organisms, Materials, Equipments, Technologies) items shall not be permitted except with
the permission of Inter-Ministerial Committee.
(iii) These goods shall also be permitted to be sold in the DTA on payment of customs duties as
applicable on the date of such sale. Payment of duty will become due only when goods are
sold/delivered to DTA and no interest will be charged as in the case of bonded warehouses.
(iv) Packing or re-packing without processing, and labeling as per customer or marketing
requirements could be undertaken within the FTWZ.
(v) The maximum period that goods shall be permitted to be warehoused within the FTWZ will
be two years, after which they shall necessarily have to be re-exported or sold in the DTA.

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 On expiry of the two year period, customs duties as applicable would automatically become
due unless the goods are re-exported within such grace period, not exceeding three months,
as may be permitted

ENTITLEMENT OF UNITS
(i) Income Tax exemption as per 80 IA of the Income Tax Act.
(ii) Exemption from Service Tax.
(iii) Free foreign exchange currency transactions would be permitted.
(iv) Other benefits mutatis mutandis as applicable to units in SEZs.

NFE CRITERIA
Units in FTWZs shall be net foreign exchange earners. Net foreign exchange earning shall
be calculated cumulatively for every block of five years from the commencement of warehousing and/
or trading operations as per formula. applicable for SEZ units.

STATE TRADING
The role of Government in foreign Trade is not confined to import and export controls, export
promotion and measures for import substitution. Direct participation in the business of import and
export through its agencies like the State Trading Corporation of India (STC), the Metals and Minerals
Trading Corporation of India (MMTC) and the Mica Trading Corporation of India (MITCO) is also
an activity in which Govt. is engaged in specified areas. These activities account for a sizeable portion
of India’s foreign trade.
STC was established in 1956 to deal with bilateral trading partners in East European
countries. The objectives of STC are:
(i) To help reduce the difficulties experienced in expanding trade with centrally planned countries;
(ii) To help maintain quantitative regulation of imports and equilibrium in the prices of
commodities;
(iii) To provide finance for organised production and boost exports of small scale sector;
(iv) To check unhealthy competition in international markets;
(v) To organise integrated development and production, transport and port facilities in respect
of bulk commodities;
(vi) To promote production of non traditional items and open up new fields for export of traditional
items;
(vii) To undertake internal trade if situation warrants it;
(viii) To ensure adequate and regular supplies at reasonable and stable prices of essential
commodities to meet local demand;
(ix) To effect exports and imports at more favourable prices through increased bargaining power;
(x) To stimulate the production of essential agricultural and industrial commodities by means of
prize and other incentives;

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 (xi) To facilitate import of goods under foreign aid programmes;
(xii) To facilitate implementation of trade agreements and barter deals; and
(xiii) To act as a vehicle for the implementation of Government’s policies.
The STC has some subsidiaries such as Projects and Equipments Corporation, Cashew
Corporation of India, Handicrafts and Handlooms Exports Corporation of India, Central Cottage
Industries Corporation.
The MMTC established in 1963 as a subsidiary of STC was later made independent of
STC. Subsequently it was made a general trading House instead of confining to minerals and metals
trading.
Canalised trade has been the main stay of these trading houses. With the new Exim policy,
the scope of canalisation has substantially reduced. In this context, Government has clarified that the
objectives of public sector trading organisations would be reoriented to enable their emergence as
international trading houses capable of operating in a competitive global environment and to serve as
effective instruments of public policy and providing adequate support to small scale cottage industries.

EXPORT DOCUMENTATION AND EXPORT PROCEDURES

The exporting activity involves several commercial and regulatory procedures. These
procedures also involve considerable documentation requirements. Besides documentation pertaining
to the commercial aspects of export business, there are documentation requirements of a regulatory
nature like excise clearance, custom clearance, foreign exchange control etc.
The export documentation involves the preparation of specified number of copies of
prescribed documents. Recently different forms used in export documentation have been standardised
and aligned.
An outline of the important steps in exporting and the important documents required are
given below:
Before an Export transaction begins some preliminary steps have to be taken.

A. EXPORT PROCEDURE

1. I.E.Code
Every person (an individual, a firm or a company) desiring to engage himself/itself in export/
import activities requires an Importer Exporter Code issued by the office of the D.G.F.T. This code
number should be indicated in the various export/import documents submitted to Govt. authorities
like Customs, Central Excise etc.

2. Membership cum Registration

Membership to certain bodies such as Export Promotion Councils, Commodity Boards and
Export Development Authorities for various products/commodities will help the exporters in different

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ways. It is also desirable that exporters become members of local chambers of Commerce, Productivity
Council and/or other trade promotional organisations recognized by the Ministry of Commerce and
Industry. Membership to these will be helpful in many matters including obtaining certificate of origin
etc. For any benefit or concession under EXIM policy, an exporter is required to register himself
with the appropriate Export Promotion Authority and obtain a Registration Cum Membership
Certificate (RCMC). An exporter may obtain RCMC from any one EPC relating to his main business.
If the export products are not covered by any EPC, the RCMC thereof may be issued by the regional
licensing authority. For getting exemption from the sales tax on export goods the exporter should be
registered with the Sales Tax Authorities of the concerned state.
There are various stages of preshipment process to be followed:

3. Inquiry and Offer

Inquiry means a request from a prospective importer, for information regarding availability
of goods and terms of sale. It may contain details such as full description of goods, size, weight,
other distinguishing features, delivery date and method and above all price per unit. If the inquiry is
from an unknown source, some investigations may be made to know the financial position of the
buyer, either by means of bankers reference or by trade reference or through regular inquiry agencies.
Care should be taken before finalising the deal. Establishing an effective dialogue with the overseas
buyer is important. The communication should be clear, elegant, precise and business like. Since the
foreign buyer would be interested to know the details of the exporter, it is advisable to send him the
exporter’s profile introducing him clearly and explicitly.
The exporter would have to make an offer. An offer is a proposal in which the exporter
submits his quotation and other details. The offer when accepted by the foreign buyer becomes an
order. The offer is made in the form of a proforma invoice, which is an invoice sent in advance to the
buyer before the shipment is effected. Often the buyer opens letter of credit on the basis of proforma
invoice. Once the negotiations are completed and the terms and conditions are acceptable to the buyer
and seller, the buyer may place an order with the exporter. The exporter should immediately confirm
the order by sending his acceptance. For the confirmation of the order the proforma invoice is usually
sent in triplicate to the buyer and the buyer is asked to send two copies duly signed by him. The
exporter should send one copy again to the importer with exporter’s signature to confirm the
acceptance of the order. A confirmatory letter should also be insisted upon by the exporter so that
the buyer’s commitment becomes complete.
The confirmation takes the form of a contract. The contract contains details of goods, their
quantity, quality, price, delivery schedule, packing, marking, terms of payment, licence, insurance,
documentary requirements etc.
The Exporter is required to make himself sure that the item sought to be exported is not a
prohibited item and if the item requires a licence, to obtain it before finalising the contract.

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 If the Exporter needs any preshipment financial assistance, he should take necessary steps
to obtain it.

4. Production/ Procurement of Goods

Once the order is confirmed, the exporter should take necessary steps to ensure the timely
availability of goods of the required specifications in order to execute the export order.

As soon as the export order is confirmed, the exporter should contact the shipping companies
having sailing for the port to which goods have to be exported and book the required shipping space.
The work relating to booking space may also be entrusted to reliable clearing and forwarding agencies.

On the exporter’s application or on the application of the freight broker on behalf of the
exporter, the Shipping Company issues acceptance of the space.

There are two kinds of acceptance:

Shipping Advice and Shipping order

In the Shipping advice, the shipping company is not bound to accept the cargo since it is
only an intimation to party, that the goods will be accepted on board the ship. But when Shipping
order is issued, the Shipping Company binds itself to accept the cargo. On failure, the shipping company
may be sued for damage/loss. The Shipping order, is an instruction by the Shipping company to the
master of the carrying vessel that the goods from the exporters as per details furnished should be
accepted on board. The original is given to the exporter and a copy is sent to the master of the vessel.

5. Packing and Marking

Once the goods are ready, they are packed and marked as per shipping instructions. The
Bureau of Indian Standard have prescribed packing standards for certain items. The British Standard
Packing Code, published by the British Standard Institution and the Exporters Encyclopedia published
in USA give detailed instruction on packing methods of different types of commodities.

6. Quality Standard and Pre-shipment Inspection

The goods for export should be quality goods. If the quality of goods is not satisfactory, it
will not only affect the image of the exporter, but of the whole nation. It is therefore of primary
importance that the goods exported should conform to quality standards. The Export (Quality control
and Inspection) Act 1963 empowers government to issue a notification about the commodities brought
under the compulsory quality control and preshipment inspection scheme. Once a commodity is so
notified it cannot be exported unless it is covered by a certificate of export worthiness from the Export
Inspection Agency authorised for the purpose. Specified categories of exporters can avail the self
certification scheme.
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7. Excise Clearance

Central Excise duty is completely exempted on all products exported. Excisable goods may
be either exported in bond or under claim for refund of excise duty paid. In the case of export under
bond, goods are allowed to be exported without payment of duty on execution of a bond, with sufficient
security/surety for a sum equivalent to the Central Excise duty chargeable on the goods. The bond
will be cancelled on showing the proof of export. In the case of export under claim for rebate of
duty, the duty is first paid and a rebate/refund is claimed for the entire amount of duty paid after the
export is effected and on production of proof of export.

8. Customs Formalities

Goods may be shipped out of India only after clearance through Customs. Clearance through
customs involves certain procedures. For the purpose the services of a Custom House Agent may be
availed. Export is effected through Customs on filing a document called Shipping Bill. Along with the
Shipping bill, the additional documents required to be filed are the following:

(1) Declaration regarding the truth of statement made in the Shipping bill.
(2) Invoice.
(3) GR form.
(4) Export Licence if required.
(5) Quality control Inspection Certificate whenever required.
(6) Original contract or the correspondence leading to contract.
(7) Letter of credit, if called for.
(8) Packing list.
(9) A.R.E.1 Form.
(10) Any other documents called for.

The Customs authorities scrutinise the shipping Bills and other documents and if prima facie
satisfied about the exportability and value of the goods, pass the Shipping Bill subject to a physical
examination by the dock/Air customs staff. The shipping bill passed finally by the customs after granting
an order called “Let Export” is presented to the cargo supervisor of the steamer and then shipped on
board under Customs supervision.

There is a facility for Customs inspection of the goods at the factory by which the Customs
Appraiser or the Superintendent of Central Excise checks the consignment at the factory itself and
seal the packages/container after checking. The seals are verified by the Preventive officer of Customs
before the goods are actually shipped, with a right to examine and verify again in case foul play is
suspected.

Electronic filing of documents for export is being introduced in all ports to reduce transaction
costs and transparency in the matter.
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9. Exchange Control Formalities

An exporter who exports his goods out of India, is required to satisfy the Reserve Bank of
India about the payment received for the goods from the overseas buyer. The provisions of the Foreign
Exchange Management Act, 1999 require all the exporters to:
(a) make-declaration in the prescribed form to the Commissioner of Customs that foreign
exchange representing the full export value of the goods has been or will be realized within
the period specified by R.B.I.
(b) Negotiate all shipping documents through authorised dealers.
(c) Receive payments through approved methods and
(d) Surrender the foreign exchange received from exports through authorised dealers in exchange
for Indian rupees.
The sale proceeds in foreign exchange have to be realised within 6 months or such extended
period that the Reserve Bank of India may permit. If not realised, the exporter is liable for penal
action by the enforcement authorities of the R.B.I.

The exporter has to file certain forms specified by R.B.I. to the Customs authorities which
contain the full value of the goods exported, the names and particulars of importers, their bankers,
deduction by way of commission etc.

10. Insurance

The goods under export should be insured against risks of maritime perils. The actual
modalities of insurance depend on the terms of contract for sale. Marine insurance in India is
undertaken by the four subsidiaries of the General Insurance Corporation of India; The National
Insurance Co., The New India Assurance Co., The Oriental Fire and General Insurance Co. and
General Insurance Co.

The Export Credit Guarantee Corporation (ECGC) covers certain export risks, which are
not covered by the General Insurance. A detailed discussion on this is available elsewhere in this module.

11. Shipment
Goods may be exported by sea, air or land:

To obtain permission of the Port authorities for moving the goods to the port area prior to
shipment, it is necessary to present a Cart Ticket or Vehicle Ticket to the gate officials at the port
gate. When goods are to be loaded on a vessel in midstream, the Cargo has to be loaded in boats
for being taken along with the vessel. In such cases, the goods kept in port custody has to be sent to
the ships in barges under a document called “boat note” signed by the Customs officials and port
trust officials as custodian.

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 Charges have to be paid to the Port authorities for the use of the Port sheds. These charges
vary from Port to Port.
The final permission to load the cargo on board has to be obtained from the Preventive
officer of the Customs Department. This permission is called ''the allow loading'' order by making an
endorsement on the duplicate copy of the shipping bill. The ship's cargo supervisor will accept cargo
for loading only after the ''allow loading'' permission is issued by the Customs Preventive officer.
After the cargo is placed on board, the master of the vessel issues what is called a “Mate’s
Receipt” which contains information about the name of the vessel, berth, date of shipment, description
of goods, marks and numbers, condition of cargo and quantity received on board etc.
The shipping company after collecting the freight for the cargo, issues what is called Bill of
Lading, duly signed by an authorised person of the Shipping Company. The Bill of Lading gives the
exporter title to the goods shipped on the vessel. The Bill of Lading may be a clear or a claused one.
A claused B/L bears adverse endorsement such as one case damaged etc.
When shipment is made through Inland Container Depots (ICDS), the shipping bill is filed
in the export section of the ICD in case the Cargo is a full container load (FCL) and at a container
Freight station in case the cargo is less than the container Load (LCL). In addition to the normal
information given on the shipping bill, the exporter should also mention the Port of exit and serial
number of the Containers. At the exit port, the container will be allowed to be exported under
Preventive Supervision on verification of seals without further examination.
Shipping by Air has become quite popular, of late especially for commodities of a perishable
nature, high cost, low bulk, seasonal etc. Air Shipment ensures quick delivery. Other advantages are
quicker payment, less risks of pilferage and damage.
Shipping by post is also resorted to. The export of goods by post is either as gift or for
commercial purposes. It is the responsibility of the sender to ensure that the goods sent by the parcel
is covered by proper export licence, wherever necessary. The fact that the parcel is accepted by the
post office is not a guarantee that the requirements of export licensing control have been fulfilled.
Imports and Exports through courier mode have registered healthy rate of growth in recent
years. For regulating such exports and imports the government has framed the Courier import and
exports (clearance) regulations 1998. At present the facility of courier clearance is available at customs
airports in Mumbai, Delhi, Chennai, Calcutta, Bangalore, Hyderabad, Ahmedabad, Jaipur, Trivandrum
and Land customs stations at Petrapole and Gojadanga. Under this scheme the courier goods are
cleared through a fast track mode on observances of simple formalities by courier companies.
Examination of the parcels is kept to a minimum and clearance is allowed on the basis of scrutinising
of documents. The duty, where liable, is paid by the courier companies on behalf of importer/exporter
before clearing the parcel. The weight limit for import of goods through couriers is fixed at 70 Kgm.
There is no weight limit for exports of goods through courier. Only authorised registered couriers are
allowed this facility.
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12. Shipment by Land
The procedure for export of goods by land to neighbouring countries is more or less similar
to the one laid down for exports by sea. The export goods whether sealed or not at the exporter’s
factory premises are presented to the Land Customs Officer, along with ARE 1 forms ( Original and
Duplicate). After allowing the export of the consignment, suitable endorsements are made in these
forms by the Land customs officers and duplicates returned to the exporter. The exporter can submit
the claim for excise rebate to the Commissioner of Central Excise from whose jurisdiction the goods
were despatched for export.

13. Negotiation of Documents

After Shipping the Consignment, the Exporter should arrange to obtain payment for the
exports by negotiating the documents through the bank. The documents normally consist of Letter of
Credit, Commercial invoice, GRI form, Certificate of origin, Marine Insurance Policy and Bill of Lading.
The bank would forward the documents to the buyer’s bank for the realization of the amount due.

B. EXPORT DOCUMENTATION

Aligned Documentation System

From August 1991, the Government of India have adopted the internationally accepted
procedure for export documentation. This is called the Aligned Documentation System based on U.N.
Layout key. This was first adopted by Sweden in 1956 and progressively most other member countries
of the U.N. have adopted the system. Under this system, all required information is covered on a set
of standard forms ensuring that identical information occupy the same position in each form. The pre
shipment documents are broadly of two types. They are (a) Commercial Documents and (b) Regulatory
Documents. These include 16 commercial Documents and 9 regulatory documents.

B.1 Commercial Documents

The Commercial documents are those which are required for effecting physical transfer of
goods and their title from the exporter to the importer and the realization of sale proceeds.
14 out of the 16 commercial documents have been standardised and aligned one to another.
Shipping order and Bill of Exchange could not be brought within the fold of the aligned documentation
system because of their very different data elements and having little in common with the others.
The Commercial documents may be classified into Principal documents and Auxiliary
documents.

(I) Principal Documents

(i) Commercial Invoice
(ii) Packing list
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 (iii) Bill of Lading
(iv) Combined Transport Document
(v) Certificate of Inspection/Quality control
(vi) Insurance Certificate/policy
(vii) Country of origin
(viii) Bill of Exchange and shipment Advice.

(II) Auxiliary Documents

(i) Proforma Invoice
(ii) Intimation for importation
(iii) Shipping Instruction
(iv) Insurance Declaration
(v) Shipping order
(vi) Mate Receipt
(vii) Application for Certificate of origin.
(viii) Letter to Bank for collection/Negotiation of documents.

B 2. Regulatory Documents
Regulatory export documents are those which have been prescribed by different Government
Departments/Bodies in compliance with the requirement of rules and regulations under the various
laws governing export trade, in the pre-shipment stage of an export transaction.
On the whole there are nine such documents. They are:
(i) Invoice under Central Excise Rules.
(ii) ARE 1 form under Central Excise Rules.
(iii) Shipping Bill/Bill of Export.
(iv) Exchange control Declaration GR form/PP form.
(v) Export Application-Port Trust.
(vi) Receipt for payment of Port Charges.
(vii) Vehicle Ticket.
(viii) Freight Payment Certificate.
(ix) Insurance Premium Payment Certificate.
The different commercial and regulatory documents may be classified into:
(a) Documents related to goods
(b) Documents related to shipment
(c) Documents related to payment
(d) Documents related to inspection
(e) Documents related to Excise
(f) Documents related to Foreign Exchange Management Act.

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(a) Documents Related to Goods

(i) Invoice
An Invoice is the seller's bill for merchandise and contains particulars of goods such as
price per unit, total quantity, total value, packing, specifications, terms of sale, identification marks,
bill of lading number, name and address of the importer, destination, name of vessel etc.
Some importing countries insist that the invoice should be signed by the importing country’s
consul located in the exporter’s country. Such invoices signed by the consul are known as consular
invoices. The purpose behind the consular invoice is to enable the authorities of the importing country
to collect accurate information about volume, value, quantity, grade, source etc. of its imports for the
purpose of assessing import duties correctly and for statistical data collection.
There are special invoice forms for exports to certain countries like the USA, Canada and
Australia. Special customs invoices are also required by some countries like Uganda, Tansania, Mexico,
Sudan etc. The special invoice forms for various countries may be obtained from recognized Chambers
of Commerce.

(ii) Packing Note and List

Packing note refers to the particulars of the contents of an individual pack.
Packing list is a consolidated statement of the contents of a number of packs.
Packing Note should include the packing note number, date of packing, the name and
address of importer and the contents of the goods in terms of quantity and weight. Packing List should
include itemwise details.
No particular form has been prescribed for the packing note or packing list.

(iii) Certificate of Origin

Certificate of origin is a Certificate specifying the country of origin/production of the goods.
Customs authorities in some countries insist on such a certificate before the clearance of goods and
assessment to duty. This is essential when there is a preferential tariff. The Certificate of origin may
be obtained from the local Chamber of Commerce or Export Promotion Councils.

(b) Documents related to shipment

(i) Mate Receipt

A mate receipt is a receipt issued by the Commanding officer of the ship when the cargo is
loaded on board and contains information regarding the name of the ship, date of shipment, berth,
description of packages, marks and numbers, condition of cargo at the time of receipt on board etc.
Mate receipt is first given to the Port Trust authorities so that all the Port dues are paid by
the exporter correctly.
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 Bill of Lading is prepared by the Shipping agents on the strength of the mate receipt.

(ii) Shipping Bill

Shipping Bill is the statutory document on the basis of which the goods are exported. It
contains all particulars of the exporting goods such as the name of the vessel, master/agents, flag, the
port to which the goods are destined, the country of final destination, the exporter's name and address,
details of packages, marks and numbers, quantity, value, fob price etc.

There are four types of shipping Bills.

(i) Dutiable Shipping Bill for goods having export duty

(ii) Free Shipping Bills for goods having no duty
(iii) Drawback Shipping Bills for claiming Drawback of duty
(iv) Ex-bond duty Bills where goods are shipped from bond.

(iii) Cart/Vehicle Ticket

It is a gate pass prepared by the exporter containing details of export cargo carried by the
vehicle which transports the cargo to the wharf. The driver of the vehicle should carry this ticket for
presentation at the gate to the wharf along with shipping and Port documents. The gate officer of the
Port inspects the vehicle with the vehicle ticket before allowing the export goods to enter the wharf.

(iv) Certificate of Measurement

Freight is charged either on the basis of weight or measurement. When it is charged on the
basis of weight, the declared weight of the exporter may be accepted. However, a certificate of
measurement from the Chamber of Commerce or other approved organization may be obtained by
the Shipper and given to the Shipping Company for calculating the freight. This Certificate contains
necessary details to correlate the goods with the Shipping documents.

(v) Bill of Lading

The Bill of Lading is a document wherein the shipping company gives its official receipt of
the goods shipped and at the same time contracts to carry the cargo to the port of destination. It is a
document of title to the goods and is freely transferable by endorsement and delivery.

Its purpose is three fold. It is a document of title. It is a receipt from the Shipping Company.
It is also a contract for the carriage of goods for transport.

There are clear Bill of Lading and Claused Bill of Lading depending on whether the goods
have been received intact or in damaged condition.

A Bill of Lading which has been held too long before being passed on to the bank or the
consignee is called a stale Bill of Lading.
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 When freight is paid in advance at the time of shipment, B/L is marked Freight prepaid; if
the freight is to be collected from the consignee on arrival of the goods, the Bill of Lading is marked
“freight to collect”.

(vi) Air Way Bill

An Air Way Bill, also called, an Air Consignment Note, is a receipt issued by an airline for
the carriage of goods.
Shipping Companies and Air line Companies issue their own Bill of Lading.

(c) Documents Relating to Payment

(i) Letter of Credit

A letter of credit is a document containing the guarantee of a bank to honour drafts drawn
on it by an exporter, provided the beneficiary fulfils the stipulated conditions.

(ii) Bill of Exchange

Bill of Exchange is an “instrument in writing containing an unconditional order signed by the
maker, directing a certain person to pay a certain sum of money to or to the order of, a certain person
or to the bearer of the instrument”.
There are five important parties to a bill of exchange.
The Drawer: Drawer is the person who has issued the bill. He is the creditor to whom
the money is owed.
The Drawee is the person to whom the bill is addressed or against whom the bill is drawn.
Drawee is the debtor who owes the money to the drawer.
The payee is the person to whom the bill is payable. The bill can be drawn payable to the
drawee or his bank.
The endorser of a bill is the person who has placed his name and signature at the back of
the bill, signifying he has obtained title to the bill and payment is due to him on his own account or on
account of the original payee.
The Endorsee is the person to whom the bill is endorsed. The Endorsee can obtain payment
from the drawee.
There are four types of bill of exchange:
(a) Sight Bill of Exchange: It is one which is required to be paid by the drawer immediately
on presentation of the bill.
(b) Usance Bill of Exchange: In the case of Usance Bill of Exchange there is statutory period
called the tenor. Payment is to be made only on the maturity of the bill.

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 (c) Clean Bill of Exchange: A Bill of exchange not accompanied by the shipping documents
is known as a clean bill of exchange. In respect of the clean B/E documents are sent to the
consignee directly and he can take delivery of the goods on the arrival at the port of
destination.
(d) Documentary Bill of Exchange: This is accompanied by the relative shipping documents
such as the bill of lading, marine insurance policy, commercial invoice, certificate of origin
etc.
The documents accompanying the bill are delivered to the importer by the bank only upon
acceptance or payment of the bills. The former is called against acceptance and the latter documents
'against payment'. Normally it is the Documentary Bill that is used in foreign trade transaction.
Upon shipment of the goods, the exporter may draw a B/E on the importer or on the bank
acting for the importer. The exporter usually draws the bill payable to his own order or to that of
bank. He then endorses the bill and sells it to or discounts it at his bank. In this way the exporter
receives the money immediately upon the shipment of the goods. The bank sends the bill and the
documents to its foreign branch or correspondent bank which upon arrival promptly notifies the importer
and presents the bill to him for payment or acceptance. Until the importer has accepted the Bill or
made arrangements for payment, he cannot receive the bill of lading which is his title to the goods.

(iii) Trust Receipt

If the importer is unable to take possession of the documents by making payment on the
Documentary Bill of Exchange following the arrival of goods, the goods may be made available to
the importer by the bank under an arrangement by which the importer signs a trust receipt. Under
this arrangement the importer is allowed to sell the imported goods by acting as agent of the bank.
But the bank retains the ownership of the goods until the importer has made full settlement. All sums
received from the sale of goods must be credited to bank until the settlement is made.

(iv) Letter of Hypothecation

A letter of hypothecation is a document signed by the customer conveying to a banker the
full ownership of the goods at the port of destination in respect of which he has made advances either
by loan or by acceptance or negotiation of bill of exchange. The letter of hypothecation pledges the
documents of title with the banker as security for an advance and gives the bank power to sell the
goods.

(v) Bank Certificate of Payment

It is a certificate issued by the Negotiating bank of the exporter, certifying that the bill
concerning particular consignments has been negotiated and that the proceeds received in accordance
with exchange control regulations in the approved manner.

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(d) Documents Relating to Inspection
Certification of Inspection- It is a certificate issued by the Export Inspection Agency certifying
that the consignment has been inspected as required under the Export (Quality Control and Inspection)
Act, 1963 and satisfies the conditions relating to quality control and inspection as applicable to it and
is certified exportworthy.

(e) Documents Relating to Excisable Goods

(i) Invoice
Invoice is the approved Central Excise document for the removal of excisable goods from
a factory or warehouse. If goods are cleared from the factory or warehouse without an invoice it will
be an offence under the Central Excise Act. It is the document indicating the legal removal of goods
from the factory or warehouse where payment of Central Excise duty is guaranteed.

(ii) A.R.E.1 forms

These are meant for the removal of excisable goods for the purpose of export by Sea or by
Post.

(f) Documents relating to Foreign Exchange Management Act

The Reserve Bank has in terms of Foreign Exchange Management (Export of Goods and
Services) Regulations 2000 prescribed the following forms for declaration of goods/software.
(i) Form GR
(ii) Form SDF
(iii) Form PP
(iv) Form SOFTEX
The Declaration in Form GR/SDF shall be submitted in duplicate to the Commissioner of
Customs. After verifying and authenticating the declaration form, the Commissioner shall forward
the original to the nearest office of R.B.I. and hand over the duplicate to the exporter for submitting
it to the authorised dealer (bank).
The Declaration in P.P. form shall be submitted in duplicate to the authorised dealer named
in the form. The authorised dealer shall after countersigning the form, hand over the original to the
exporter who shall submit it to the postal authorities through which the goods are being despatched.
The Postal authorities after the despatch of the goods forward the form to the R.B.I.
The Declaration Form in SOFTEX in respect of computer software and audio/video/television
software shall be submitted in triplicate to the designated officials of the Department of Electronics of
Government of India at the Software Parks of India (STP) or at the Free Trade Zones in India.
After certifying all the 3 copies of the SOFTEX form the said official shall forward the original directly
to the nearest R.B.I. office and return the duplicate to the exporter. The triplicate shall be retained by
him for his records.

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 On realization of the export proceeds, the authorised dealer shall after due certification submit
the duplicate of the GR/SDF/PP/SOFTEX form as the case may be to the nearest branch of the
R.B.I.

EXPORT CREDIT GUARANTEE CORPORATION

Payments for export are open to risk, even at the best of times. The risks have assumed
large proportions today due to the far reaching political and economic changes that are sweeping the
world. An outbreak of war or civil war may block or delay, the payment for goods exported. A coup
may also bring about the same result. The commercial risks of the foreign buyer going bankrupt or
losing his capacity to pay may also result in non payment of the price of goods exported. Political
and economic uncertainties are other factors.
Export credit insurance is designed to protect exporters from the consequences of the payment
risks both political and commercial and enables them to expand their overseas business without fear
of loss. Export credit insurance also seeks to create a favourable climate in which the exporters can
hope to get timely credit facilities from banks at home. For this purpose, the export credit insurer
provides guarantee to banks to protect them from the risk of loss in granting various types of financial
facilities to exporters.
In order to provide export credit insurance support to Indian exporters, the Government of
India set up the Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed into
Export Credit and Guarantee Corporation Ltd. (ECGC) in 1964. The Corporation’s name was again
changed to the present Export Credit Guarantee Corporation of India Ltd. in 1983. ECGC is a
company wholly owned by Government of India functioning under the administrative control of the
Ministry of Commerce and is managed by a Board of Directors representing Government, Banking,
Insurance, Trade, Industry etc. The details of schemes are in chapter II.

Foreign Trade and Balance of Payments of India

A country’s economy is reflected by the growth and composition of exports and imports.
Structural changes in the economy can affect the direction, composition and magnitude of the country’s
trade with the rest of the world.
In the last 5 decades, India’s economy has undergone a metamorphic change in almost all
sectors. And this change is reflected in India’s international trade too.
India’s export performance was quite poor compared to the world export in general and
also with the export performance of other developing countries, although in the early fifties, India’s
economic position was better than many other countries. India had a relatively broad-based industrial
structure and a good export market in commodities such as tea, jute, cotton textiles and spices.
However, for want of an effective export strategy, India failed to make a mark in the export trade.
This failure was responsible for the gradual decline of India’s position in the international market.

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 While the Peoples Republic of Korea could achieve spectacular export growth and increase
the Export - GDP ratio from less than 2% in 1961 to over 35% in 1988, India’s exports have been
stagnating at about 5% of the GDP. India’s Export GDP rates compared poorly with several other
developing countries too. For instance in 1990, this ratio was 24% for Indonesia, 11% for Mexico,
16% for Pakistan and 17% for China. A high export GDP rate is generally associated with economic
development. Despite the long term effort to boost exports, the stagnation of India’s exports around
5% of the GDP is a reflection of the failure of export development.
However India could more or less maintain favourable terms of trade until the onslaught of
the oil prices in the 1970’s. The hike in oil price resulted in the deterioration in India’s terms of trade.
It may thus be seen that the growth of India’s exports has been quite poor compared to
many other developing countries. While most other developing nations have achieved commendable
progress in economic growth through economic policy reforms and other measures, India could not
make any progress due to its conservative policies.
It is heartening to note that in recent years, the growth rate of exports generally remained
at high levels. By 1995-96 export growth rate was considerably higher than the import growth rate.
There was however, a slump during 1997-99. During 1998-99, exports grew by 3.75% and imports
by nearly 8%. And this trend continued in the years 2000 and 2001 also. It is hoped that with the
policy of promoting exports by various export promotion schemes recently launched, on the Chinese
model, India will be able to show a credible economic growth ere long.

Major Exports
India has achieved considerable diversification in exports, both product wise and countrywise.
The growth of non traditional exports deserves special mention.
In 1960-61 engineering goods, iron and steel, iron ore and chemicals contributed to only a
fifth of India’s total exports. The above items along with non traditional items, gem and jewellery,
marine products and leather today make about half of India’s export earnings. Two decades back
this share was only about a third.
In recent years ready made garments have come to the forefront in exports, next to gem
and jewellery. The traditional items continue to play significant role in the export sector. These items
include tea, jute, tobacco, coffee, sugar, cashew kernels, spices etc.

Major Imports
Petroleum and lubricants occupy, the first place in the import bill. These products which
accounted for 6% of total imports in 1960-61 and 8% in 1970-71 shot up 43 % in 1980-81. Even
today this is the single item accounting for the largest share in the import bill.
The import liberalization with a view to export developments and industrial modernization
has been responsible for the import of capital goods.

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 Pearls and precious stones imported for export processing, account for a large share of import
bill.
Other important items in terms of value are edible oils, fertilizers, fertilizer materials, chemicals,
iron and steel, cereals, pulses and non ferrous metals.
India’s imports have been, by and large, only essential items of mass consumption or for
export production and industrial development.
Trade balance is a major determinant of the balance of payments. Trade deficit causes balances
of payments deficits for India. However the effects of trade deficit have been mitigated to a considerable
extent by invisible surplus. One of the important reasons for the balance of payments problem was
the decline in the role of invisible surplus in financing trade deficit. India has shown deficit except for
brief spells.
India has experienced balance of payments problem in 29 out of 35 years since the beginning
of second five year plan. The main reason for this was poor export performance.
During the Third Five Year plan, India was mostly free from BOP problem because of the
large sterling balance India had at the time of Independence which could be drawn to meet the payment
obligation. In 1950-51, the reserves amounted to about 158% of the machandise imports. By 1957-
58, the reserves had come down to about 1/3 of the levels of 1950 -51. Several problems developed
since then necessitating aid from Aid India Consortium and drawals from IMF. Import controls also
were intensified. Rupee was devalued in 1966 in a bid to improve the trade and payments position.
Though the position improved slightly between 1968-69 and 1977-78, the overall position was not
encouraging.
Contrary to expectations, Indian economy coped remarkably well and the period 1976-77
to 1979-80 saw a sharp turnaround in India's balance of payments position. Reserves increased from
Rs. 600 crores in 1974-75 to Rs. 5160 crores in 1979-80. During this period the export growth
was good. This apart, there was a drastic improvements in the net invisibles mainly on account of
heavy inflow of emigrant remittance.
This golden period did not last long. With the second oil price spurt, trade deficit burgeoned
from Rs. 2200 crores in 78-79 to Rs. 6200 crores in 80-81. Emigrant remittances also declined.
Trade deficits continued to increase.
Invisible surpluses have largely financed a large part of Indian’s trade deficits. There was
steep fall in this since 1980. By 1990-91, it dropped to about 13% compelling the nation to take
increasing recourse to external borrowings for meeting payment obligations. With a trade surplus of
Rs. 104 crores in 1992-93, India became optimistic . But the fourfold increase in the international
crude oil price in 1993-94, was a bolt from the blue.
This falling trend in respect of net invisibles was caused by the adverse trends in the invisible
payments on the one hand and invisible receipts on the other. The rise in invisible payments has been

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chiefly contributed by accumulation of interest and service payments on foreign loans and credits.
To sum up, the BOP problem was mainly due to:
(i) Large Trade deficit;
(ii) Fall in invisible surplus caused by;
(a) Sharp increase in invisible payments due to increase in debt service.
(b) Set back in invisibles receipts mainly emigrant remittances.
(iii) Declining role of concessional external finance.
The economic liberalisation introduced in 1991, however, brought about significant changes
in the economy. Noticeable structural changes came about in the economic front paving way for the
stable and sustainable balance of payments.
A remarkable improvement could be discerned in the ratio between the Export Bill and
Import Bill. Inflow of invisible receipts increased considerably. Together, these changes brought about
a sharp reduction in the ratio of the current deficit to GDP.
The economy has started looking up. The exports are on the rise. NRI foreign remittances
show steady increase. The capital account has also shown significant structural changes.

CONCLUSION
India is well on the way in the path of economic growth. The year 2001 has been very
satisfactory as far as the export sector was concerned. India has attained an export growth which is
double the rate of world exports. The conducive environment created by policy instruments of the
Govt. has played its due role in reinstalling the economy. Time has come for the replacement of export
pessimism and export bias with export consciousness immediately and export led growth ultimately.
Government has announced establishment of Special Economic Zones and to give State Governments,
to Private Sector, and Government Sector the permission to set up SEZs. This is the first time that
State Government have been given a major role in export promotion activities. Prime place has been
indicated for the promotion of agricultural exports. The EXIM Policy schemes like Duty Exemption
Scheme and Export Promotion Capital Goods Scheme are being made applicable to the agro sector
as well. Under the scheme of Market Access Initiative, Government proposes to assist the industry
in research and development, market research, specific market and product studies, warehousing and
retail marketing infrastructure in selected countries and direct market promotion activity through media
advertising and buyer-seller meets. A Business cum trade Facilitation Centre and Trade Portal have
been decided to be set up in Pragati Maidan, Delhi in order to build a comprehensive information
base and easy accessibility to information for exporters and importers from abroad, in a single place
through a user friendly portal.

SUMMARY

The new Policy envisages merchant exporters and manufacturer exporters, business and
industry as partners of Government in the achievement of its stated objectives and goals. Prolonged
and unnecessary litigation vitiates the premise of partnership. In order to obviate the need for litigation

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and nurture a constructive and conducive atmosphere, a suitable Grievance Redressal Mechanism
will be established which, it is hoped, would substantially reduce litigation and further a relationship
of partnership.

The dynamics of a liberalized trading system sometimes results in injury caused to domestic
industry on account of dumping. When this happens, effective measures to redress such injury will be
taken.

Unshackling of controls and creating an atmosphere of trust and transparency to unleash the
innate entrepreneurship of our businessmen, industrialists and traders.

Simplifying procedures and bringing down transaction costs.

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.

Facilitating development of India as a global hub for manufacturing, trading and services.

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.

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.

Avoiding inverted duty structures and ensuring that our domestic sectors are not disadvantaged
in the Free Trade Agreements/Regional Trade Agreements/Preferential Trade Agreements that we enter
into in order to enhance our exports.

Upgrading our infrastructural network, both physical and virtual, related to the entire Foreign
Trade chain, to international standards.

Revitalising the Board of Trade by redefining its role, giving it due recognition and inducting
experts on Trade Policy.

Activating our Embassies as key players in our export strategy and linking our Commercial
Wings abroad through an electronic platform for real time trade intelligence and enquiry dissemination.

QUESTIONS
1. What is the objective of the Foreign Trade and Development Act, 1992?
2. Explain the main provisions of the Foreign Trade and Development Act, 1992?
3. Describe the new Foreign Trade Policy (2004-2009)?
4. What are the major areas of focus of the Policy?
5. Describe Vishesh Krishi Upaj Yojana?

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 MODEL QUESTION PAPER

National Institute of Business Management

Chennai - 020

FOURTH SEMESTER MBA

Subject : International Trade Management

Time : 3 hours Marks : 100

Section A

I Answer all questions. Each question carries 2 marks :-

1. Define Export.
2. What is Dumping?
3. What are the functions of Foreign Exchange Market?
4. Which are the primary goals of ECGC?
5. What is UNCTAD?

5x2=10 marks
Section B

II Answer all questions. Each question carries 6 marks :-

1. Which are the different types of ‘Exports’?
2. What is Comparitive Cost Theory?
3. Which are the different features which distinguish foreign trade from domestic trade?
4. Which are the methods of payments in International Trade?
5. What are the aims of World Bank?
5x6=30 marks
Section C

III Answer any three questions. Each question carries 20 marks :-

1. Explain the important Environmental Factors.
2. Explain the factors determining terms of Trade.
3. Describe the obligations of buyer and seller in CFR contract.
4. Explain major areas of focus in New Foreign Trade Policy.
5. Give an out line of the important steps in Export Procedures.
3x20=60 marks