Development of Export Trade with India

-Dr. M.P Singh & V.S Chopra -Center for Entrepreneur Development India

India’s Economy
Important trends
 Economic

uncertainty § Economic 1.3% to 7.9% compared to last year § prospects for GDP growth for 2008 and  Liquidity management 2009 are 7.9% and 6.9%, respectively • Borrowing limit from foreign branches from 25% to 50%  Inflation • Consumer Price Index (CPI) • Cash reserve ratio (CRR) -6.5% climbed to 9%  Currency • Commodity prices are slowing market • Injection of 1 trillion rupees into thedown Depreciated byto ease inflation12 months • this helps 24% in the last pressures  Labour market  Real estate market population is between the ages of 15 and 64 63.3%
30% or 340 million people, is below the age of 15 •Real estate demand, supported by middle class •Depressed by increasing interest rates so far

Foreign Trade policy 2009-14
Objective  TO double our percentage share of Global merchandise share.  Use trade expansion as an effective instrument of economic growth and employment generation Short term objective  To arrest and reverse the declining trend of exports and provide additional support.  Export target 15% till 2011 & There after 25%

Foreign Trade policy 2009-14
Strategies  Fiscal incentives  institutional changes  procedural rationalization  Diversification of exports Market  Improvement in infrastructure related to exports  Bringing down transaction cost  Refund of all indirect taxes  Special thrust to employment intensive sector viz Textile , leather , Handicrafts.  Directorate of trade remedy measures

FTP 2009-14 Highlights
 Technology

upgradation scheme
•EPCG zero duty scheme •Town of Export excellence •TUFS(technology upgradation fund scheme) for textile

 Focus  Focus

market Scheme product scheme
•Incentive raised from 1.25% to 3 % •Large no of new products have been included •26 new markets added •FMS incentive raised from 2.5 to 3% •Simplification of application

 Market

linked Focus product scheme

FTP 2009-14 Highlights
 MDA/MAI
Higher

allocation is being provided.

 Interest

subvention facility
2% interest rebate to 7 sp. Sector for employment generation

 Income  ECGC

tax exemption
100% to EOU / STPI units till 2011

assistance
•Cover extended from 90% to 95% till march 2011

FTP 2009-14 Highlights
 Value

addition of incentive recovery on write off.
Minimum 15% under advance authorization

 Waiver

Incentive not recoverable subject to certain condition Reduction in transaction cost Maximum fees reduced from Rs. 1.5 Lacs to Rs. 1 Lac.

 Directorate

of trade remedy measures
(for MSME’s)

Export process
Procurement of goods as per contract Export order Culminates into Packing
Inspection

Buyer Presentation of Docs to the Buyer Importer’s (Buyer’s) Bank

Shipment

Assembling Documents Invoice , packing list , transport document viz. Submit Documents Exporter’s (seller’s) Bank

Negotiation between Buyer and seller

Export process
Buyer Makes payment Importer’s (Buyer’s) Bank Collects the payment remit it to

Exporter’s (seller’s) Bank

Seller

Credit the sellers A/c after deducting their charges

Export order
 

Formation of export intl. Sale contract Structure of Export order.  Special condition Quality Quantity Price and payment terms Delivery and trade terms Documentation Invoice Insurance Transport document Bill of Exchange  General condition  Force majeure  Jurisdiction  Applicable Law  Penalty clause / liquidated damages

METHODS OF PAYMENTS
2. Shipment

Buyer (Importer)

1. Contract of Sale

Seller (Exporter)
3. Lodgment of shipping 7. Payment

5a. Payment

5b. Shipping documents

4. Shipping documents 6. Payment

Presenting Bank

Remitting Bank

Ucp 600

incoterms

incoterms

incoterms

Risk management

Risk
üRisk is the possibility of an unfortunate occurrence. üRisk is the possibility of loss. üRisk is a combination of hazards. üRisk is uncertainty of loss. üRisk is the tendency that actual results may differ from predicted results.

Difference Between Static and Dynamic Risks
Static Risks Dynamic Risks

2. These losses can be predicted. 3. These occur even if there is no changes in the economic environment. 4. These risks can be covered by insurance. 5. These risks do not benefit the society.

2. Dynamic risks are not easily predictable. 3. These result from changes in the economic environment. 4. These are not suitable for treatment by insurance. 5. These risks benefit the society.

Financial Risk This type of risk is concerned with financial loss. Losses due to nonfinancial risk cannot be measured in monetary terms. Non-financial Risk This type of risks may be during the selection of career, the choice of marriage partner, etc. These may or may not have any financial implications and are difficult to measure. Pure Risk Pure risk are those which have only two outcomes, i.e., loss or no loss. Whereas speculative risks involves the situation where is a possibility of gain .e.g. investment in shares. Fundamental Risks Fundamental risks are those risks which are there because of the problems relating to the major factors such as exchange of economic, social, cultural, and political.

Business Risk It is concerned with possible reduction in business value from any source. Unexpected changes in future net changes in future net cash flows are major source of fluctuations in business value. (i) Price Risk : Price risk arises due to magnitude of cash flow due to changes in out put and input prices. Output price risk due to the risk of changes in the prices which may change due to the change in the demand for the goods (ii) Credit Risk : Credit risk arises because of the delay or failure in making promised payments by the customers and other parties. Credit risk is high in case of financial institutions, commercials banks, etc. Personal Risk Personal risks are the risks faced by individuals and families. There are number of personal risks like earning risk, medical expense risk, liability risks, physical assets risk, financial asset risk and risk of longevity.

risk associated with International trade
 Payment

Risk  Credit Risk  Transport related Risk  Exchange fluctuation Risk  Political Risk  Investment Risk  Product liability Risk  Legal Risk  Cultural Risk

Risk Management
 Risk

management is an integrated process of delineating specific areas of risk, developing a comprehensive plan, integrating the plan and conducting ongoing evaluation. management thus may be defined as “the identification”, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.”

 Risk

Points supporting risk
• • • • • • Before identification, in fact risk can be measured. Its evaluation is possible only after its impact. For risk management, systematic methods are required. For minimizing cost of handling risks, appropriate cost control devices should be applied. Risk management should focus on assets and earning capacity of the organization. Principles of risk management are applicable to all sectors of economy including service sector.

Characteristics of Risk Management
1. Risk management is a scientific approach to deal with the problems of pure risks. Risk management considers insurable and uninsurable risks and use suitable techniques for problems dealing with the problems dealing with all pure risks. Main emphasis of risk management is on reducing the cost of handling risk by using appropriate methods.

3.

5.

Significance of Risk Management
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. To evaluate the risks of the business. To evaluate the appropriate corporate polices and strategies. To effectively manage the people and process. To formulate plans and techniques to minimize the risks. To give advices and suggestions for handling the risks. To make the people aware about the various types of risks. To economize the handling of risks. To decide about which risks are to be avoided and which to be pursued according to analysis. To fix the sum assured under the policy and to decide on whether to insure or not. To select the appropriate to manage the risks.

Principles of Risk Management
1. Principle of identification of risk The firm and individuals may face various types of risks like the firm may face the risk from competitors because of which sales may go down. Risk may change in fashion or there may be risk of exceeding the cost. Principle of risk analysis After, identification of risks, the various from statistical techniques are utilized to analyze the risks to achieve the various objectives of risk management. Principles of assessment of risk Risk cost a lot. Thus, assessment of cost of risk is done so that that cost of risk may be reduced within control. Following factors are important to cost of risk: (i) Risk frequency. (ii) Money cost of risk. (iii) Human cost in terms of pain and sufferings.

5.

9.

4. Principle of corrective decision.
In risk management, decision making is a process of involving information, choice of alternative actions, implementation and evaluation that is directed to the achievement of objectives. Aspects of decision: (i) To retain the risk as it is which may be achieved with or without a reserve fund. (ii) To prevent the loss of risk. (iii) to transfer the risk through insurance, which involves selection of an insurer.

5. Principle of evaluation
This principle states that each available alternative has to be evaluated properly from all the angles, i.e. financial, market etc.

6.

Principle of alternative course action.
After evaluation a specific alternative is chosen which may give the desired result.

7. Principle of control of risk
Effective control is the basis to measure the effectiveness of performance at various levels of handling risk.

8. Principle of retention of risk
It is related with the decision of retention of risk.

9. Principle of risk transfer
Risk transfer means the transfer of financial effect of risk to other party.

Objectives of Risk Management
→ Protecting employees from accident. → Effective utilization of resources. → Minimizing cost of handling. → To maintain good relations with society and public.

Cost of Risk
Risk management decisions are based on estimates of cost of losses and thus the cost of risk.

Components of cost of risk 7. Cost of expected losses
The expected losses cover both direct and indirect losses. Direct losses include the cost of repairing or replacing damaged assets, the cost of paying workers, etc. Indirect losses include reduction in the net profits that result because of direct losses, such as the loss of normal profits and continuing extra expense.

12.

Cost of control loss
This cost covers the cost of increased precautions and limits on risky activity to reduce the frequency and severity of accidents and losses.

16.

Cost of financing
Cost of loss financing covers the cost of self insurance, the loading in insurance premiums, and the transaction cost of arranging, negotiating and arranging, negotiating and enforcing hedging arrangements and other contractual risk transfers.

4.

Cost of risk internal risk reduction methods
These are various risk management methods available like insurance hedging and other contractual risk transfers which reduce the uncertainty.

8.

Cost of residual uncertainty
The cost of uncertainty that remains (that is left over), once the firm has selected and implemented loss control, loss financing and internal risk reduction is called the cost of residual uncertainty.

Cost of price change risk
Cost of price change risk involves those factors in which pure risk and other risk, e.g. very important risk for the firms specially operating in the global environment is the risk of price change which may be due to exchange rate.

Types of risks which a firm faces. 4. Cost of risk and maximization of value firm.
Value of business to shareholders depends fundamentally on the expected, magnitude, timing and risk associated with future net cash flows that will be available to provide shareholders with a return on their investment

9.

MaximizingNet Cash flow = Cash Inflow – Cash outflow value by minimizing the cost of risk.
Unexpected increases in losses that are not offset by cash inflows from insurance contracts, hedging, arrangements or other contractual risk transfers increase cash outflows and reduces generally cash inflows which will reduce the value of share of firm

Cost of Risk = Value without risk – Value with risk

Risk management of individuals and cost of risk
The concept of risk management is applicable to individual risk management decisions ,e.g. when choosing how to manage the risk of accidents from motor, an individual would consider the expected losses from accidents, possible loss control activities and loss financing alternatives, and the cost of these alternatives, and the cost of these benefits of gathering information.

Risk management information system (RMIS)
RMIS is designed to help the functions of risk management. These are software tools. RMIS emphasis upon management of insurance policies, exposure data, claims management, monitoring of safety and financial losses.

Uses of RMIS
8. 9. 10. For reporting For claim adjustment process review For examination about reasons of accidents.

Problems of RMIS
Ø Ø Ø Ø Ø Ø Ø Incompatibility of software Poor system documentation Impurity of data Lacks of service Obsolesce Inflexibility of system Problems of proprietary Remedies for the above problems: Clear and comprehensive specifications Need assessment in proper manner Reference checks, including on-site inspection Financial check Standard software configuration, such as DOS or Windows Internal access to system expert. Solid vendor account team.

Ø Ø Ø Ø Ø Ø Ø

Organization of risk management in business Risk management is becoming a very important function of management. In small organizations, the risks management is taken care of by the president or owner. In large organizations, risk management may be a separate department which may be handled by a separate risk manager or director of risk management Process of Risk Management 1. To define the objectives of the risk management 2. To identify all significant risks 3. To evaluate the potential frequency and severity of losses. 4. To develop and select and managing risks 5. To implements the methods chosen for risk management 6. To monitor the performance and suitability of the risks management methods and strategies on an ongoing basis.

Methods of Risk Management 3. Loss Control
Loss control are those which reduce expected cost of losses by reducing the frequency of losses and/or the severity losses that occur. 2.

Loss financing
Loss financing are the methods used to funds to pay for or offset losses that occur. It includes: a. Retention b. Insurance c. Hedging d. Other contractual risks transfers.

3.

Internal risk reduction
Business can reduce risks internally too through following: a. Diversification, and b. Investment in information.

Identification, Measurement And Control of Risks
The most important step for risk management is to identify the risks, i.e. to determine where the risks for the company lie. The risks may be various types like risk to property, fixed assets and property, other areas of potential loss like risk for the property which is borrowed or taken on lease or there may be some unusual risks like due to flood, earthquake or extra expense.

Type of Loss Direct losses

Property of Loss
1. What types of property are subject to damage or disappearance? 2. What are the factors responsible for loss? 3. What is the value of property be exposed to loss? 4. Will the property be replaced if it is lost? 7. Will the firm the firm have to raise external funds to replace uninsured property? 8. Assuming replacement, will the firm suspend or cut back operations after direct loss? 9. If the firm reduces or stops the operations, a. What would be the duration and how much normal profit could be lost? b. What operation expenses would continue even after suspension or slowdown

Liability losses
1. What property might be harmed by the firm (customers, suppliers and others)? 2. How these parties be harmed ? 3. What are the cost of defenses? 4. What is the cost of defenses?

Indirect Losses

7. Will revenues decline in response to decline in response to possible damage to the firm’s reputations? a. What is the potential magnitude of this loss. b. What is the actions might reduce the resulting indirect losses and what at cost? 2. Will products and services likely be abandoned or the products reinsured losses?

Type of Loss Indirect Losses

Property of Loss

Liability losses

3. Will the firm have to raise c. Will revenue losses continue after normal levels of production are resumed additional capital in the event that cash flows decline? and, if so, what actions might reduce these losses and at what cost? 4. If the firm continues operating at pre-loss levels, (a) what facilities or resources will be needed? (b) what would be the additional cost from using alternative facilities or resources. 4. Could large uninsured losses push the firm into financial distress?

Various other losses Losses to human resources.
Human resources losses refers to the losses in the value of firm due to injuries, disabilities, death retirement and turnover of workers. Because of contractual commitments and compulsory benefits, firms often compensate employees injuries, disabilities, death and retirement.

Losses of liability
Liability losses relate mainly to legal liability losses occur due to relationships with many parties like suppliers, customers, employees, costs associated with liability suits can impose substantial losses on firms.

Loss from external economic forces
This type of losses occur because of the changes in the prices of input or outputs.

Identification of Individual Earnings 1. Drop in family exchange
2. There may be drop in the earnings of family due to the death or disability of earning member or due to retirement. Medical expenses Due to the health risk, there is a big medical expenses, this risk can be covered by many ways.

8.

Personal liability
Individuals can be sued and held for damages inflicted on others. This risk is mainly for automobile.

Methods of risk identification.
Risk identification can be divided into two steps: (1) The risk perception that is liability to perceive that there is an exposure. (2) The identification of the operative cause or perils, coupled to the likely result.

Thank You
By: Dr. M P Singh V.S Chopra

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