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International Business

THE MANAGEMENT CONSORTIUM

@ Class room Study Material for private circulations only; all rights reserved with MA Burghate

International Business
STUDY MATERIAL AS PER UNIVERSITY SYLLABUS

First Edition: June 03 Second revised Edition: September 06 Third Revised Edition: 15 September 07 ALL COPYRIGHTS RESERVED WITH M A Burghate

THE MANAGEMENT CONSORTIUM (TMC), NAGPUR

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Preface
Recent development in the academic field of Management and Commerce studies, by way of introduction of semester pattern for evaluation of performance of the students has brought about dynamic changes. Students are now required to pursue new subjects and with deeper understanding than ever before. The curriculum now encircles vast number of topics leaving students with a dilemma of what to study, to what depth? & Where to search for the study materials. Books available are not comprehensive enough to cater the exact contents of university syllabus. Keeping the above enigma in mind, an attempt is made here to assist the students by way of providing working notes as per the curriculum with no commercial considerations. However, it is implicit that these are exam-oriented study material only and students are advised to attend regular classes and utilise reference books available in the library for in-depth knowledge.

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Dr. M.A. Burghate


HOD; Dr.Panjabrao Deshmukh Institute of Management Technology Research, Dhanwate National College, Nagpur

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Table of Contents

Chapter No.
1 2 3 4 5 6 7 8 9

Contents Globalization Indias Foreign Trade Service Export Including Software Exports Institutions in Export Promotion World Trade Organization (WTO) Role of Financial Institution And Export Finance Exchange Rate Convertibility Incoterms Explained Appendix: Question Papers

Page no.
5 32 58 70 88 127 140 153 165 171

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Chapter-1
Globalization
Globalization (or globalisation) in its literal sense is a social change, an increase in connections among societies and their elements. The term is applied to many social, commercial and economic activities. Depending on the context it can mean closer contact between different parts of the world (globalization of the world), such as increasing relations among members of an industry in different parts of the world (globalization of an industry); or it may refer to the negative exploitation aspects of globalization such as evasion of legal and moral standards by moving manufacturing or mining and harvesting practices overseas. It shares a number of characteristics with internationalization and is used interchangeably, although some prefer to use globalization to emphasize the erosion of the nation or national boundaries.

Meaning and definition of globalisation


International Monitory Fund defines globalisation as the growing economic interdependence of countries world wide thorough increasing volume and variety of cross border transaction in goods and services and of international capital flows and also through the more rapid and widespread diffusion of technology . Globalisation is an attitude of mind: - It is a mind set which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environment. International marketing or international investment does not amount to globalisation unless it is a result of global orientation. Companies, which have adopted a global outlook, stop thinking of themselves as national marketers who venture abroad and start thinking of themselves as global marketers. The top management and staff are involved in the planning of world wide manufacturing facilities, marketing policies, financial flows and logistical system. The global operating units report directly to the Chief Executive or Executive Committee, not to the Head of an International Division. Executives are trained in worldwide operations, not just domestic or international. Management is recruited from many countries, components and supplies are purchased where they can be detained at the least cost, and investments are made where the anticipated returns are the greatest. A truly global corporation views the entire world as a single market; it doesnt differentiate between domestic market and foreign markets. In other words, there is nothing like a home market and foreign market - there is only one market, the global market.

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Features of Globalisation
1. 2. 3. 4.

Operating and planning to expand business throughout the world. Erasing the differences between domestic market and the foreign market. Buying and selling goods and services from/to any country of the world. Establishing manufacturing and distribution facilities in any part of the world based on the feasibility and viability rather than national consideration. 5. Product planning and development are based on market consideration of the entire world. 6. Sourcing of factors of production and inputs like raw materials, machinery, finance, technology, human resources, managerial skills from the entire globe. 7. Setting the mind and attitude to view the entire glove as single market.

Stages of Globalisation/ Internationalisation


The internationalisation process generally includes fives stages. viz., domestic company, international company, multinational company, global company and transnational company. Now, we will study each stage of internationalisation in detail.

Stage 1: Domestic Company

Domestic company limits its operations, mission and vision to the national political boundaries. These companies focus its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyse the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic companies' unconscious motto is that, "if it is not happening in the home country, it is not happening," The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets.

Stage 2: International Company

Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalising their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. These companies select the strategy of locating the branch in the foreign markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalisation process of most of the global companies starts with this stage two process. Most of the companies follow this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constant and extends the operations to new countries. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries.
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Stage: 3 Multinational Company

Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in 1957. Toyopet was not successful in USA. Toyota could not sell these cars in USA as they were over priced, underpowered and built like tanks. Thus these cars were not suitable for the US markets. The unsold cars were shipped back to Japan. Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Toyota based on this experience designed new models of cars suitable for the US market. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product, price and promotion. This stage of multinational company is also referred to as multidomestic. Multidomestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets. Philips of Netherlands was a multidomestic company of this stage during 1960s. It used to have autonomous national organisations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based on global strategy. Global strategy was based on focusing the company resources to serve the world market. Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushita ' s strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer. Consequently Philips changed its strategy and created "industry main groups " in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D.

Stage 4: Global Company

A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. Similarly, Dr. Reddy, s Lab designs and produces drugs in India and markets globally. Thus Harley and Dr. Reddy's Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products in its retail organisation in USA. Thus gap is an example for global sourcing company. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and got competitive advantage.

Stage 5: Transnational Company

Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise, which links global resources with global markets at
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profit. There is no pure transnational corporation. However, most of the transnational companies satisfy many of the characteristics of a global corporation.

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Characteristic of a Transnational Company


The characteristics of a transnational company include: geocentric orientation, scanning or information acquisition, long-run visions etc. We discuss these characteristics in detail. (i) Geocentric Orientation: A transnational company is geocentric in its orientation. This company thinks globally and acts locally. This company adopts global strategy but allows value addition to the customer of a domestic country. This company allows adaptation to add value to its global offer. The assets of a transnational company are distributed throughout the world, independent and specialised. The R & D facilities of a transnational company are spread in many countries, but specialised in each country based on the local needs and integrated in world R & D project. Similarly, the production facilities are spread but specialised and integrated. In case of Caterpillar, manufacturing and assembly facilities are located in many countries. Components are shipped for assembly and the assembled product is shipped to the place of the customer. Units of the transnational corporation in different countries create and develop the knowledge in all functions and share among them. Thus knowledge and experience is shared jointly. Transnational gains power and competitive advantage by developing and sharing knowledge and experience. Development of dishwashing by using video camera by the French subsidiary of Colgate and sharing of the knowledge among all Colgate operating companies across globe is an example here. (ii) Scanning or Information Acquisition: Transnational companies collect the data and information worldwide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. These companies collect and scan the information regardless geographical and national boundaries. (iii) Vision and Aspirations: The vision and aspiration of transnational companies are global, global markets, global customers and grow ahead of other global/transnational companies. (iv) Geographic Scope: The transnational companies scan the global data and information. By doing so, they analyse the global opportunities regarding the availability of resources, customers, markets, technology, research and development etc. Similarly, they also analyse the global challenge and threats like competition from the other global companies, local companies of host countries, political uncertainties and the like. They formulate global strategy. Thus the geographic scope of a transnational company is not limited to certain countries in analysing opportunities, threats and formulating strategies. (v) Operating Style: Key operations of a transnational are globalised. The transnational companies globalise the functions like R & D, product development, placing key human resources, procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble, and key human resource activity of Colgate are the joint and shared activity of the units of these companies in various countries. (vi) Adaptation: Global and transnational companies adapt their products, marketing strategies and other functional strategies to the environmental factors of the market concerned. For example:-Mercedes Benz is a super luxury car in North America, luxury automobile in Germany, standard taxi in Europe. (vii) Extensions: Some products do not require any change when they are marketed in other countries. Their market is just extension. For example:- Casio calculators of Japan, Hero pens of China, and BlC's line of pens, butane lighters and razors. (vii) Creation through Extension: Transnational companies create the global brand through extending the product to the new market. Rothmans Cigarette extended its product to many European countries and African countries and created it as global
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and national basis. (ix) Human resource management policy:- The transitional companys human resource policy is not restricted by national political or legal constraints. It selects the best human resources and develops them regardless of nationality, ethnic group etc. But the international company reserves top and key positions for nationals. (x) Purchasing: Transnational company procures world-class material from the best source across the globe.

In practice, organisations evolve and Table 1 outlines a typology of terms, which describes the characteristics of companies at different stages in the process of evolving from domestic to global enterprises.

Table 1: Stages of domestic to global evolution


Management emphasis Focus Structure Stage one Domestic Domestic Domestic Stage two International Ethnocentric Extension International Stage three Stage four Multination Global al Polycentric Adaption Worldwide area Geocentric Extension Adaption creation matrix/mixe d

Marketing strategy Domestic

Management style Domestic Manufacturing stance Investment policy Mainly domestic Domestic

Centralised top down

Decentralised Integrated bottom up

Mainly domestic Host country Lowest cost worldwide Domestic used worldwide Against home country market share Mainly in each host country Cross subsidization

Performance evaluation

Domestic market share

Each host Worldwide country market share

Factors, which have led to Internationalisation


There have been many underlying forces, concepts and theories, which have emerged as giving political explanation to the development of international trade. Remarkably, despite the trend to world interdependency, some countries have been less involved than others. The USA, for example, has a remarkably poor export record. About 2000 US companies only account for more than 70% of US manufacturer's exports. This has been mainly due to its huge statewide domestic market, which is almost tantamount to "international trade", for example, Californian fruit being sold three thousand kilometers away in New Jersey. Japan has risen fast to dominate the export rankings, with countries of Africa struggling to make a significant mark, mainly because of their emphasis on exporting primary products.

International Business Approaches


International business approaches are similar to the stages of internationalisation or globalisation. Douglas Wind and Pelmutter advocated four approaches of international business.
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They are:

1. Ethnocentric Approach 3. Regiocentric Approach

2. Polycentric Approach 4. Geocentric Approach.

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1. Ethnocentric Approach
The domestic company normally formulates their strategies, their product design and their Operations towards the national markets, customers and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region. The executives at the head office of the company make the decisions relating to exports and, the marketing personnel of the domestic company monitor the export operations with the help of an export department. The company exports the same product designed for domestic markets to foreign countries under this approach. Thus, maintenance of domestic approach towards international business is called ethnocentric approach. Following Fig. makes the ethnocentric concept more clear. This approach is suitable to the companies during the early days of internationalisation and also to the smaller companies.

2. Polycentric Approach

Organisation Structure of Ethnocentric Company

The domestic companies, which are exporting to foreign countries using the ethnocentric approach, find at the latter stage that the foreign markets need an altogether different approach. Then, the company establishes a foreign subsidiary company and decentralises all the operations and delegates decision-making and policy making authority to its executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company. Company appoints the key personnel from the home country and all other vacancies are filled by the people of the host country.

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The executives of the subsidiary formulate the policies and strategies, design the product based on the host country's environment (culture, custom, laws, government policies etc) and the preferences of the local customers. Thus, the polycentric approach mostly focuses on the conditions of the host country in policy formulation, strategy implementation and operations.

Organisation Structure of Polycentric Company

3. Regiocentric Approach
The company after operating successfully in a foreign country, thinks of exporting to the neighbouring countries of the host country. At this stage, the foreign subsidiary considers the regional environment (for example, Asian environment like laws, culture, policies etc) for formulating policies and strategies. However, it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies. (See following Fig.)

Organisational Structure of Regiocentric Company 4. Geocentric Approach


Under this approach the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The headquarter coordinates the activities of the subsidiaries. Each subsidiary functions like an

Organization structure of geocentric approach


Independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc.

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Entry strategies
There are varieties of ways in which organisations can enter foreign markets. The three main ways are by direct or indirect export or production in a foreign country (see figure below).

Methods of foreign market entry I. Exporting


Exporting is the most traditional and well-established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required. The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country; however, this does not negate the need for a detailed marketing strategy.

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The advantages of exporting are: Manufacturing is home based, thus it is less risky than overseas based Gives an opportunity to "learn" overseas markets before investing in bricks and mortar Reduces the potential risks of operating overseas. The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages. For example, in the exporting of Indian horticultural products, the agents of Gulf flower auctions are in a position to dictate to producers.

Exporting methods include direct or indirect export.


a) In direct exporting the organization may use an agent, distributor, or overseas subsidiary, or act via a Government agency. b) Indirect methods of exporting include the use of trading companies (very much used for commodities like cotton, Soya, cocoa), export management companies, piggybacking and counter trade.

Indirect methods offer a number of advantages including:


Contracts - in the operating market or worldwide Commission sates give high motivation (not necessarily loyalty) Manufacturer/exporter needs little expertise Credit acceptance takes burden away from manufacturer.

i. Piggybacking
Piggybacking is an interesting development. The method means that organisations with little exporting skill may use the services of one that has. Another form is the consolidation of orders by a number of companies in order to take advantage of bulk buying. Normally these would be geographically adjacent or able to be served, say, on an air route. The fertilizer manufacturers of Zimbabwe, for example, could piggyback with the South Africans who both import potassium from outside their respective countries.

ii. Countertrade
By far the largest indirect method of exporting is countertrade. Competitive intensity means more and more investment in marketing. In this situation the organisation may expand operations by operating in markets where competition is less intense but currency based exchange is not possible. Also, countries may wish to trade in spite of the degree of competition, but currency again is a problem. Countertrade can also be used to stimulate home industries or where raw materials are in short supply. It can, also, give a basis for reciprocal trade. Estimates vary, but countertrade accounts for about 20-30% of world trade, involving some 90 nations and between US $100-150 billion in value. The UN defines countertrade as "commercial transactions in which provisions are made, in one of a series of related contracts, for payment by deliveries of goods and/or services in addition to, or in place of, financial settlement". Countertrade is the modem forms of barter, except contracts are not legal and it is not covered by GATT. It can be used to circumvent import quotas. Countertrade can take many forms. Basically two separate contracts are involved, one for the delivery of and payment for the goods supplied and the other for the purchase of and payment for the goods imported. The performance of one contract is
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not contingent on the other although the seller is in effect accepting products and services from the importing country in partial or total settlement for his exports. There is a broad agreement that countertrade can take various forms of exchange like barter, counter purchase, switch trading and compensation (buyback). For example, in 1986 Albania began offering items like spring water, tomato juice and chrome ore in exchange for a contract to build a US $60 million fertilizer and methanol complex. Information on potential exchange can be obtained from embassies, trade missions or the EU trading desks. Barter is the direct exchange of one good for another, although valuation of respective commodities is difficult, so a currency is used to underpin the item's value. Barter trade can take a number of formats. Simple barter is the least complex and oldest form of bilateral, non-monetarised trade. Often it is called "straight", "classical" or "pure" barter. Barter is a direct exchange of goods and services between two parties. Shadow prices are approximated for products flowing in either direction. Generally no middlemen are involved. Usually contracts for no more than one year are concluded, however, if for longer life spans, provisions are included to handle exchange ratio fluctuations when world prices change. Clearing account barter, also termed clearing agreements, clearing arrangements, bilateral clearing accounts or simply bilateral clearing, is where the principle is for the trades to balance without either party having to acquire hard currency. In this form of barter, each party agrees in a single contract to purchase a specified and usually equal value of goods and services. The duration of these transactions is commonly one year, although occasionally they may extend over a longer time period. The contract's value is expressed in non-convertible, clearing account units (also termed clearing dollars) that effectively represent a line of credit in the central bank of the country with no money involved. Clearing account units are universally accepted for the accounting of trade between countries and parties whose commercial relationships are based on bilateral agreements. The contract sets forth the goods to be exchanged, the rates of exchange, and the length of time for completing the transaction. Limited export or import surpluses may be accumulated by either party for short periods. Generally, after one year's time, imbalances are settled by one of the following approaches: credit against the following year, acceptance of unwanted goods, payment of a previously specified penalty or payment of the difference in hard currency. Trading specialists have also initiated the practice of buying clearing dollars at a discount for the purpose of using them to purchase saleable products. In turn, the trader may forfeit a portion of the discount to sell these products for hard currency on the international market. Compared with simple barter, clearing accounts offer greater flexibility in the length of time for drawdown on the lines of credit and the types of products exchanged. Counter purchase, or buyback, is where the customer agrees to buy goods on condition that the seller buys some of the customer's own products in return (compensatory products). Alternatively, if exchange is being organised at national government level then the seller agrees to purchase compensatory goods from an unrelated organisation up to a pre-specified value (offset deal). The difference between the two is that contractual obligations related to counter purchase can extend over a longer period of time and the contract requires each party to the deal to settle most or all of their account with currency or trade credits to an agreed currency value. Where the seller has no need for the item bought he may sell the produce on, usually at a discounted price, to a third party. This is called a switch deal. In the past a number of tractors have been brought into Zimbabwe from East European countries by switch deals.
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Compensation (buy-backs) is where the supplier agrees to take the output of the facility over a specified period of time or to a specified volume as payment. For example, an overseas company may agree to build a plant in Zambia, and output over an agreed period of time or agreed volume of produce is exported to the builder until the period has elapsed. The plant then becomes the property of Zambia. Khoury (1984) categorises countertrade as follows (see figure below) One problem is the marketability of products received in countertrade. This problem can be reduced by the use of specialised trading companies which, for a fee ranging between 1 and 5% of the value of the transaction, will provide trade related services like transportation, marketing, financing, credit extension, etc. These are ever growing in size.

Countertrade has disadvantages:


Not covered by GATT so "dumping" may occur Quality is not of international standard so costly to the customer and trader Variety is tow so marketing of wkat is limited Difficult to set prices and service quality Inconsistency of delivery and specification, Difficult to revert to currency trading - so quality may decline further and therefore product is harder to market.

Classification of countertrade
Shipley and Neale (1988) therefore suggest the following: Ensure the benefits outweigh the disadvantages Try to minimise the ratio of compensation goods to cash - if possible inspect the goods for specifications Include all transactions and other costs involved in countertrade in the nominal value specified for the goods being sold
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Avoid the possibility of error of exploitation by first gaining a thorough understanding of the customer's buying systems, regulations and politics, Ensure that any compensation goods received as payment are not subject to import controls.

Despite these problems, countertrade is likely "to grow as a major indirect entry method, especially in developing countries.

II. Foreign production


Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture, ownership and participation in export processing zones or free trade zones.

1.Licensing:

Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor". It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In Zimbabwe, United Bottlers have the licence to make Coke. Licensing involves little expense and involvement. The only cost is signing the agreement and policing its implementation. Licensing gives the following advantages: Good way to start in foreign operations and open the door to low risk manufacturing relationships Linkage of parent and receiving partner interests means both get most out of marketing effort Capital not tied up in foreign operation and Options to buy into partner exist or provision to take royalties in stock. The disadvantages are: Limited form of participation - to length of agreement, specific product, process or trademark Potential returns from marketing and manufacturing may be lost Partner develops know-how and so licence is short Licensees become competitors - overcome by having cross technology transfer deals and Requires considerable fact-finding, planning, investigation and interpretation. Those who decide to license ought to keep the options open for extending market participation. This can be done through joint ventures with the licensee.

2.Joint Ventures
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control over property rights and operation". Joint ventures are a more extensive form of participation than either exporting or licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz in food processing. Joint ventures give the following advantages: Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process
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Joint financial strength May be only means of entry and May be the source of supply for a third country. They also have disadvantages: Partners do not have full control of management May be impossible to recover capital if need be Disagreement on third party markets to serve and Partners may have different views on expected benefits. If the partners carefully map out in advance what they expect to achieve and how, then many problems can be overcome.

3.Ownership:
The most extensive form of participation is 100% ownership and this involves the greatest commitment in capital and managerial effort. The ability to communicate and control 100% may outweigh any of the disadvantages of joint ventures and licensing. However, as mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more unstable the environment the less likely is the ownership pathway an option. These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather than discrete and can take many formats. Anderson and Coughlan (1987) summarise the entry mode as a choice between company owned or controlled methods - "integrated" channels - or "independent" channels. Integrated channels offer the advantages of planning and control of resources, flow of information, and faster market penetration, and are a visible sign of commitment. The disadvantages are that they incur many costs (especially marketing), the risks are high, some may be more effective than others (due to culture) and in some cases their credibility amongst locals may be lower than that of controlled independents. Independent channels offer lower performance costs, risks, less capital, high local knowledge and credibility. Disadvantages include less market information flow, greater coordinating and control difficulties and motivational difficulties. In addition they may not be willing to spend money on market development and selection of good intermediaries may be difficult as good ones are usually taken up anyway. Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on a few segments in a few countries - typical are cashew nuts from Tanzania and horticultural exports from Zimbabwe and Kenya - or concentrate on one country and diversify into segments. Other activities include country and market segment concentration - typical of Coca Cola or Gerber baby foods, and finally country and segment diversification. Another way of looking at it is by identifying three basic business strategies: stage one - international, stage twomultinational (strategies correspond to ethnocentric and polycentric orientations respectively) and stage three - global strategy (corresponds with geocentric orientation). The basic philosophy behind stage one is extension of programmes and products, behind stage, two is decentralisation as far as possible to local operators and behind stage three is an integration which seeks to synthesize inputs from world and regional headquarters and the country organisation. Whilst most developing countries are hardly in stage one, they have within them organisations which are in stage three. This has often led to a "rebellion" against the operations of multinationals, often unfounded.

4. Export processing zones (EPZ)


Whilst not strictly speaking an entry-strategy, EPZs serve as an "entry" into a market. They are primarily an investment incentive for would be investors but can also
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provide employment for the host country and the transfer of skills as well as provide a base for the flow of goods in and out of the country. One of the best examples is the Mauritian EPZ, founded in the 1970s. Organisations are faced with a number of strategy alternatives when deciding to enter foreign markets. Each one has to be carefully weighed in order to make the most appropriate choice. Every approach requires careful attention to marketing, risk, matters of control and management.

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CASE :-The Mauritian Export Processing Zone Since its inception, over 400 firms have established themselves in sectors as diverse as textiles, food, watches. And plastics. In job employment the results have been startling, as at 1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981 to 1986 and the added value has been significant- The roots of success can be seen on the supply, demand and institutional sides. On the supply side the most critical factor has been the generous financial and other incentives, on the demand side, access to the EU, France, India and Hong Kong was very tempting to investors. On the institutional side positive schemes were put in place, including finance from the Development Bank and the cutting of red tape. In setting up the export processing zone the Mauritian government displayed a number of characteristics which in hindsight, were crucial to its success. The government intelligently sought a development strategy in an apolitical manner It stuck to its strategy in the long run rather than reverse course at the first sign of trouble It encouraged market incentives rather than undermined them It showed a good deal of adaptability, meeting each challenge with creative solutions rather than maintaining the status quo It adjusted the general export promotion programme to suit its own particular needs and characteristics. It consciously guarded against the creation of an unwieldy bureaucratic structure.

III. International Franchising


Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a fast rate. Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the frarichisor. Under this agreement the franchisee pays a fee to the franchisor.

The franchisor provides the following services to the franchisee:


Trade marks Operating systems Product reputations Continuous support systems like advertising, employee training, reservation services, quality assurance programmes etc.

Basic Issues in Franchising -The franchisor has been successful in his home country. McDonald was successful in

USA due to the popular menu and fast and efficient services. -The factors for the success of the McDonald are later transferred to other countries. -The franchiser may have the experience in franchising in the home country before going for international franchising. -Foreign investors should come forward for introducing the product on franchising basis. Franchising Agreements: The franchising agreement should contain important
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items as follows -Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor -Franchisee should agree to adhere to follow the franchisor's requirements like appearance, financial reporting, operating procedures, customer service etc -Franchisor helps the franchisee in establishing the manufacturing facilities, services facilities, provides expertise, advertising, corporate image etc . -Franchisor allows the franchisee some degree of flexibility in order to meet the local tastes and preferences McDonald restaurants in Germany sell beer and McDonald restaurants in France sell wine also. Franchising is more popular in USA Fast food companies like McDonalds, Dairy Queen, Domino's, Pizza Hut, KFC have franchised restaurants worldwide. NIlT has the franchised computer training centres in entire India. Hotels like Hilton and Marriott, rental cars like Hertz and Avis also have international franchisees Like every mode, franchising also has advantages and disadvantages

Advantages and Disadvantages of Franchising

Advantages Franchiser can enter global markets with low investment and low risks. Franchisor can get the information regarding the markets, culture, customs and environment of the host country. Franchisor learns more lessons from the experiences of the franchisees, which he could not experience from the home countrys market. Franchisee can early start a business with low risk as he selects an established and proven product and operating system. Franchise gets the benefits of R&D with low cost. Franchisee escapes from the risk of product failure. Disadvantages International franchising may be more complicated than domestic franchising. McDonald taught the Russian farmers the methods of growing potatos to meet its standards. It is difficult to control the international franchisee. As on e of the French investor did not maintain the stores as per the standards. McDonald did revoke the franchise. Franchising agents reduce the market opportunities for both the franchisor and franchisee. Both the parties have the responsibilities to maintain product quality and product promotion. There is scope of misunderstanding between the parties. There is a problem of leakage of trade secrets.

IV.SPECIAL MODES
Some companies cannot make long-term investments or long-term contracts to enter foreign markets. Therefore, they may use specialised strategies. These specialised strategies include: -

1. Contract manufacturing 2. Turnkey projects 3. Management contract


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i. Contract Manufacturing

Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing. Nike has contracted with a number of factories in Southeast Asia to produce its athletic footware and it concentrates on marketing. Rata also contracted with a number of cobblers in India to produce its footware and concentrate on marketing. Mega Toys -a Los Angeles based company contracts with Chinese plants to produce Toys and Mega Toys concentrates on marketing.

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The advantages and disadvantages of contract manufacturing include: Advantages International business can focus on the part of the value chain where it has distinctive competence. It reduces the cost of production as the host countrys companies with their relative cost advantage produce at low cost. Small and medium industrial units in the host country can also develop as most of the production activities take in these units. The international company gets the locational advantages generated by the host countrys production. Disadvantages Host countrys companies may take up the marketing activities also, hindering the interest of the international company. Host countrys companies may not strictly adhere to the production design, quality standards etc. these factors result in quality problems, design problem and other surprises. The poor working countries in the host countrys companies affect the companys image. For example, Nike has suffered a string of blows to its public image because of reports of unsafe and harsh working conditions in Vietnamese factories churning our Nike footware.

ii. Management Contracts


The companies with low level technology and managerial expertise may seek the assistance of a foreign company. Then the foreign company may agree to provide technical and managerial expertise. This agreement between these two companies is called as management contract. A management contract is an agreement between two companies, whereby one company provides managerial assistance, technical expertise and specialised services to the second company of the argument for a certain agreed period in return for monetary compensation. Monetary compensation may be in the form of: A flat fee or Percentage over sales and Performance bonus based on profitability, Sales growth, etc.

Advantages and Disadvantages of Management Contract


Advantages Foreign company earns additional income without any additional investment, risks and obligations. Hilton Hotel provided these services to other hotels without additional investment and earned additional income. This arrangement and additional income allows the company to enhance its image in the investors and mobilize the funds for expansion. Management contract helps the companies to enter other business areas in the host country. The companies can act as dealer for the business of the host countrys business in the home country. Italys ENI(Ente Nazionale Indrocarburi) used its knowledge of European energy industry to help the Algerian national oil firm. Later the Algerian national firm requested the ENI to increase their business in European petroleum market. Under a management contract, ENI constructed network of Pipelines for the Algerian company to distribute petroleum in Europe. Disadvantages
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Sometimes the companies allow the companies in the host country even to use their trademarks and brand name. The host countrys companies spoil the brand name, if they do not keep up the quality of product service. The host countrys companies may leak the secrets of technology.

iii. Turnkey Project

Indonesian Government during 1974 invited global tenders for construction of a sugar factory in the country. Indonesia Government received the tenders from the companies of USA, UK, France, Germany and Japan. One of the Japanese Company quoted highest price compared to all other companies. Indonesian Government studied the quotation of this Japanese company. This quotation includes: development of the fields for growing sugarcane, development of seedlings, construction of sugar factory, roads, communication, power, water etc., connecting the factory, train the local people, development of the distribution channels in Indonesia, production of by-products and their market, plans for the export of surplus sugar etc. It also made a provision for the transfer of the factory along with the total package to the Indonesian Government and follow-up the activities after it is transferred to the Indonesian Government. . Indonesian Government was very much satisfied with the total package and invited the Japanese company to implement the project. The Japanese company and Indonesian Government entered an agreement for implantation of this project by the Japanese company for a price. This project is called 'Turnkey Project." A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing /business/service facility and turn the project over to the purchaser when it is ready for operation for a remuneration.

The forms of remuneration includes: A fixed price (firm plans to implement the project below this price) Payment on cost plus basis (i.e., total cost incurred plus profit) This form of pricing allows the company to shift the risk of inflation /enhanced costs to the purchaser. International turnkey projects included nuclear power plants, airports, oil refinery, national highways, railway lines etc. Hence they are large and multiyear projects. International companies involve in such projects include: Bechtel, Brown and Root, Hyundai Group, Kennengen, Friedrich Krupp GmbH. etc. The companies normally approach the host country's Governments or International Finance Corporation, Export-import Bank of USA and the like for financial assistance, as the turnkey projects require huge finances. The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T). The company builds the manufacturing/services facility, operates it for some time and then transfers it to the host country' s Government. In this approach, the contractor will not be paid the remuneration. Government of Gabon and the Electricity Supply Board International of Ireland and Campaginc Generale des Eaux of France agreed to establish electric supply system and water system in Gabon and operate for twentyfive years and then transfer the ownership of these projects to the Government of Gabon.

V. MERGERS AND ACQUISITIONS


Domestic companies enter international business though mergers and acquisitions. A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. Alternatively, the domestic company may purchase the foreign company and acquires its ownership and control. Domestic business selects this mode of entering international business as it provides
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immediate access to international manufacturing facilities and marketing network. Otherwise, the domestic company faces serious problems in gaining access to international markets. For example, Coca- Cola entered Indian market instantly by acquiring the Parle and its bottling units. In addition, the domestic company through this strategy of mergers and acquisition may also get access to new technology or a patent right. Though mergers and acquisitions provide easy and instant entry to global business, it would be very difficult to appraise the cases of acquisitions and mergers. Some times it would be cheaper to a domestic company to have a green field strategy than by acquisitions. Sometimes mergers and acquisitions also result in purchasing the problems of a foreign company. The advantages and disadvantages of this strategy include:

Advantages and disadvantages of acquisition strategy

Advantages The company immediately gets the ownership and control over the acquired firms factories, employees, technology, brand names and distribution networks. The company can formulate international strategy and generate more revenues. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the economy of the host country. Disadvantages Acquiring a firm in a foreign country is a complex task involving bankers, lawyers, regulations, mergers and acquisition specialists from the two countries. This strategy adds no capacity to the industry. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. Labour problems of the host countrys company are also transferred to the acquired company.

International trade theory


Foreign trade is an age-old phenomenon. Beginning with Mercantilism, this topic presents the concepts of absolute and comparative advantage, factor proportions theory and country size and country similarity theories. It also discusses the international product life cycle and Porters determinants of national competitive advantage. Foreign trade (importing and exporting activities) is one means by which countries are linked economically. Two general types of trade theories pertain to international business. Descriptive theories deal with the natural order of trade; they examine and explain patterns of trade under laissez-faire conditions. Prescriptive theories deal with the question of whether governments should seek to alter the amount, composition and/or direction of trade. I. Mercantilism The concept of mercantilism (a zero-sum game) was popular from about 1500-1800; it purports that a countrys wealth is measured by its holdings of treasure (usually gold). To amass a surplus (a favourable balance of trade) a country must export more than it imports and then collect gold (and other forms of wealth) from countries that run a deficit (an unfavourable balance of trade). Neomercantilism represents the more recent policy of countries that try to run a favourable balance of trade in order to achieve some particular national objective via protectionism.
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ii. Absolute advantage In 1776 Adam Smith claimed the wealth of a nation consisted of the goods and services available to its citizens. His theory of absolute advantage holds that a country can maximize its own economic well being by specializing in the production of those goods it can produce more efficiently than any other nation and enhance global efficiency through its participation in (unrestricted) free trade. A. Natural Advantage A country may have a natural advantage in the production of particular products because of given climatic conditions; access to certain natural resources, the availability of needed labour forces, etc. B. Acquired Advantage An acquired advantage represents a distinct advantage in skills; technology and/or capital assets, thus yielding differentiated product offerings and/or cost-competitive homogeneous products. C. Resource Efficiency Example Real income depends on the output of goods as compared to the resources used to produce them. The production possibilities shows that by specializing and trading, two countries can have more than they would without trade, thus optimising global efficiency. iii. Comparative advantage In 1817 David Ricardo reasoned there would still be gains from trade if a country specialized in the production of those things it can produce most efficiently, even if other countries can produce those things even more efficiently. Put another way, Ricardos theory of comparative advantage holds that a country can maximize its own economic well-being by specializing in the production of those goods it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade. Ricardian Model Highlights Trade occurs due to differences in production technology. The Ricardian model is constructed such that the only difference between countries is in their production technologies. All other features are assumed identical across countries. Since trade would occur and be advantageous, the model highlights one on the main reasons why countries trade; namely, differences in technology. Trade is advantageous for everyone in both countries. Although most models of trade suggest that some people would benefit and some lose from free trade, the Ricardian model shows that everyone could benefit from trade. This can be shown using an aggregate representation of welfare or by calculating the change in real wages to workers. However, one of the reasons for this outcome is the simplifying assumption that there is only one factor of production. Even a technologically inferior country can benefit from free trade. This interesting result was first shown by Ricardo using a simple numerical example. The analysis highlights the importance of producing a country's comparative advantage good rather than its absolute advantage good. A developed country can compete against some low foreign wage industries. The Ricardian model shows the possibility that an industry in a developed country could compete against an industry in a less developed country even though the LDC industry pays its workers much lower wages.
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A. An Analogous Explanation of Comparative Advantage Would it make sense for the best physician in town, who also happens to be the most talented medical secretary, to handle all of the administrative duties of an office? No. The physician can maximize both output and income by working as a physician and employing a secretary. In the same manner, a country will gain if it concentrates its resources on the production of those products it can produce most efficiently. B. Production Possibility Example A country can simultaneously have a comparative advantage and an absolute disadvantage in the production of a given product. Assume that the United States is more efficient than Sri Lanka in the production of both wheat and tea. However, the United States has a comparative advantage in wheat production. By concentrating on the product in which it has the greater advantage (wheat) and letting Sri Lanka produce the product in which the U.S. is comparatively less efficient (tea), global output can be increased, and specialization and trade can benefit both countries. Some assumptions and limitations of the theories of specialization The theories of absolute and comparative advantage are based upon the economic gains from specialization, i.e., concentration on the production of a limited number of products. Each holds that specialization will maximize output and that subsequent trade will maximize consumer welfare. However, both theories make certain assumptions that may not always be valid. A. Full Employment Both theories assume that resources are fully employed. When countries have many un- or under-employed resources, they may seek to restrict imports in order to employ their own available workers and other assets. B. Economic Efficiency Objective Countries often pursue objectives other than economic efficiency. For example, they may intentionally avoid overspecialisation because of the vulnerability created by potential changes in technology and price fluctuations. C. Division of Gains Although specialization does maximize output, it is unclear how those gains will be divided. If one country perceives a trading partner as receiving too large a share of the benefits, it may choose to forego its relatively small gains in order to prevent the other country from receiving large gains. D. Two Countries, Two Commodities The world is comprised of multiple countries and multiple commodities. Nonetheless, the theories are still useful; economists have applied the same reasoning and demonstrated the economic efficiency advantages in multi-product and multi-country production and trade relationships. E. Mobility Neither the assumption that resources can move domestically from the production of one good to another and at no cost, nor the assumption that resources cannot move internationally, is entirely valid. Nonetheless, domestic mobility is greater than the international mobility of resources. Clearly, the movement of resources such as labour and capital is an alternative to trade. F. Statics and Dynamics Although the theories of absolute and comparative advantage consider gains at a given time (a static view), the relative conditions that surround a countrys advantage or disadvantage are dynamic (constantly changing). Thus one cannot assume future advantages will remain constant. E. Services Although the theories of absolute and comparative advantage were developed from the perspective of trade in commodities, much of the same reasoning can be applied
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to trade in services.

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The theory of country size

The theory of country size holds that large countries are more apt to have varied climates and natural resources, and therefore will generally be more nearly selfsufficient than small countries. Research based on country size helps explain the country-by-country differences regarding how much and what products will be traded through specialization that are not dealt with by the theories of absolute and comparative advantage. A. Variety of Resources Large countries are more apt to have varied climates and a greater assortment of natural resources than smaller countries, thus making the large countries more selfsufficient. B. Transport Costs Given the same types of terrain and modes of transportation, the greater the distance, the higher transport costs will be. Thus certain firms in large countries may face higher transportation costs in terms of serving their distant national markets than do their closer foreign competitors. C. The Size of the Economy and Production Scales Countries with large economies and high per capita incomes are more likely to produce goods that use technologies requiring long production runs. These countries develop industries to serve their large domestic markets, which in turn tend to also be competitive in export markets. On the other hand, given its capacity the technologically intensive company from a small nation may have a compelling need to sell abroad. In turn, this need would pull resources from other industries within the firms domestic market, thereby causing more national specialization than in a larger nation.

The factor-proportions theory

The Heckscher-Ohlin theory of factor endowment is useful in extending the concept of comparative advantage by bringing into consideration a nations endowment and cost of factors of production. The theory holds that a country will tend to export products that utilize factors of production relatively abundant in that nation. A. Land-Labor Relationship In countries with many people relative to the size of the available land, labour would be relatively (comparatively) cheap; thus those countries should concentrate on producing and exporting labour-intensive goods. B. Labour-Capital Relationship In countries where little capital is available for investment and where the amount of investment per worker is low, then low labour rates would also be expected. Again, those countries should concentrate on producing and exporting labour-intensive goods. (The fact that labour skills tend to vary across countries has led to international task specialization with respect to national production activities.) C. Technological Complexities Factor proportions analysis becomes complicated when the same product can be produced by different methods, such as with different mixes of labour and capital. Managers must consider the cost in each locale, based on the type of production that will minimize costs there. The product life cycle theory of trade Vernons international product life cycle (PLC) describes how the location of production and trade activities shifts as a product moves through its life cycle. A. Changes through the Cycle A great majority of the new technology that results in new products and production
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methods originates in industrial countries. 1. Introduction. Innovation, production and sales occur in the domestic (innovating) country. Because the product is not yet standardized, the production process tends to be relatively labor intensive, and innovative customers tend to accept relatively high introductory prices. 2. Growth. As demand grows, competitors enter the market. Foreign demand, competition, exports and often direct investment activities also begin to accelerate. 3. Maturity. Global demand begins to peak, production processes are relatively standardized and global price competition forces production site relocation to lower cost developing countries. 4. Decline. Market factors and cost pressures dictate that almost all production occur in developing countries. The product is then imported by the country where it was initially developed. B. Verification and Limitations of the PLC Theory Exceptions to the typical pattern of the international product life cycle would include: products that have very short life cycles, luxury goods, products that require specialized labor, products that can be differentiated and products for which transportation costs are relatively high. Country similarity theory Previously examined theories would lead one to conclude that the greater the dissimilarity among countries, the greater the potential for trade. However, the country similarity theory states that when a firm develops a new product in response to observed conditions in the home market, it is likely to turn to those foreign markets that are most similar to its domestic market when commencing its initial international expansion activities. A. The Economic Similarity of Industrial Countries So much trade takes place among industrialized countries because of the growing importance of acquired advantage (skills and technology). In addition, markets in most industrialized countries are large enough to support new product introductions and their subsequent variants across the life cycle. B. The Similarity of Location Countries that are near to each other enjoy relatively lower transportation costs than those that are more distant. While the disadvantages of distance may be overcome through innovative technology and marketing methods, such gains are difficult to maintain in the long run. C. Cultural Similarity Cultural similarity as expressed through language and religion is a major facilitator of the international trade and investment process. D. The Similarity of Political and Economic Interests Countries that agree politically and are economically similar are likely to encourage trade among themselves. In some circumstances at least, they may also discourage trade among countries with whom they disagree.

Degree of dependence

Theories of independence, interdependence and dependence help explain world trade patterns and countries trade policies. Realistically, countries are located along a continuum between the two extremes. A. Independence Under conditions of independence, a country would not rely on other countries for any goods, services, or technologies. B. Interdependence One way a country can limit its vulnerability to foreign changes is through
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interdependence, i.e., the development of trade relationships on the basis of mutual need. Each country depends about equally on the other as a trading partner, so neither is likely to cut off supplies or markets for fear of retaliation from the partner nation.

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C. Dependence Many developing countries are dependent (rely on) on the sale of one primary commodity, or on one country as a primary customer and/or supplier. In addition, emerging economies largely depend on production processes that compete on the basis of low-wage inputs.

Strategic trade policy

Governments have long debated their roles in affecting the acquired advantage of production within their borders. From the standpoint of national competitiveness, the issue revolves around the development of successful industries. The two basic approaches to strategic trade policy are (a) alter conditions that will affect industry in general or (b) alter conditions that will affect a targeted industry.

Why companies trade internationally

Regardless of the advantages a country may gain by trading, international trade will not ordinarily occur unless companies within that country have competitive advantages and perceive that international opportunities are greater than domestic ones. A. The Porter Diamond In addition to the four determinants of national competitive advantage that are set forth in the Porter diamond, the roles of chance and government are also critical. Usually all four determinants need to be favorable if a given national industry is going to attain global competitiveness. 1. Demand Conditions. The nature and size of demand in the home market lead to the establishment of production facilities to meet that demand. 2. Factor Conditions. Resource availability (inputs, labor, capital and technology) contributes to the competitiveness of both firms and nations that compete in particular industries. 3. Related and Supporting Industries. The local presence of internationally competitive suppliers and other related industries contributes to both the cost effectiveness and strategic competitiveness of firms. 4. Firm Strategy, Structure and Rivalry. The creation and persistence of national competitive advantage requires leading-edge product and process technologies and business strategies. B. Points and Limitations of the Porter Diamond The existence of the four favorable conditions often represents a necessary but not a sufficient condition for the development of a particular national industry. Even when abundant, resources are ultimately limited, thus firms must make choices regarding their pursuit of existing opportunities. Further, given the ability of firms to gain market information and production inputs from abroad, the absence of any of the four conditions within a country may be overcome by their existence internationally.

Companies role in trade

International trade occurs because of the completion of mutually satisfactory transactions between or among importers and exporters. A. Strategic Advantages of Exports The strategic advantages of exports include the utilization of excess capacity (that in turn leads to improved economies of scale and cost competitiveness), the potential profitability due to the nature of demand and government policies found in foreign markets, as well as overall business risk minimization. B. Strategic Advantages of Imports The strategic advantages of imports include lower-cost, higher-quality products,
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product line differentiation and expansion opportunities and overall business risk minimization.

Ethical dilemma

Values, Free Global Trade and Production StandardsA Hard Trio to Mix The debate over laissez-faire versus activist government trade policies is generally a heated one because different country values underlie differing views and government policies. The argument for free trade policy is based on the achievement of global economic efficiency, but the associated social and environmental values may differ across countries and cultures. Ethical questions center on whether (a) All countries should have similar production standards and (b) firms should be permitted to locate production activities in countries whose lower standards allow them to realize lower costs.

Looking to the future

Companies Adjust to Changing Trade Policies and Conditions Firms have greater opportunities to pursue global strategies and capture economies of scale by serving markets in more than one country from a single base of production if those countries have relatively few restrictions on foreign trade and investment activities. Current issues concern the future of trade relationships between industrialized and developing countries, as well as the concept of national sovereignty. At least four factors might cause merchandise trade to become relatively less significant in the future: The growing tide of protectionist sentiment The possibility of more efficient country-by-country production Increasingly flexible and efficient small-scale production methods The rapid growth of services as a portion of production and consumption within the industrialized nations.

FAQ Write notes on:


Strategies of globalization: Stages in globalization: -The next logical question is how companies go global. It may be stated that globalization does not take place overnight. It proceeds through several state of internationalization. There are at least four stages in globalization process. Companies at the first stage of globalization have only passing dealings with foreign individuals and organizations. At this point for example a company might content itself with executing overseas orders that he come in without any serious marketing. Domestic company: -Most international companies have their origin as domestic companies. The competition of domestic company essentially is ethnocentric. A purely domestic company operates domestically because it never considers the alternative of going international. The growing stage one company. When it reaches growth limits in its primary marker, diversifies into new markets, products and technologies instead of focusing on penetrating international markets. However, if factors like domestic market constraints, foreign market prospects increasing competition etc. make the company reorient its strategies to tap foreign market potential, it would be moving to the next stage in the evolution. A domestic company may extend its products to foreign markets by exporting licensing and franchising. The company however is primarily domestic and the orientation essentially is ethnocentric. In many instances, at the beginning exporting indirect. The company may develop a more serious attitude towards foreign business and move to the next stage of development, i.e. international company.
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International company: - International Company is normally the second stage in the development of company towards the transnational corporation. The orientation of the company is basically ethnocentric and the marketing strategy is extension i.e. the marketing mix developed for the market is extended into the foreign markets. International companies normally rely on international division structure for carrying out the international business. Multinational company: - When the orientation shifts from ethnocentric to polycentric the international company becomes multinational in other words when a company decides to respond to mark differences it evolves into a stage three multinational that pursues a multidomestics. The focus of the state three company is multinational or in strategic terns, multidomestic. The marketing strategy of the multinational company is adaptation. In multinational companies each foreign subsidiary is managed as if it were independent city-state. The subsidiaries are part of an area structure in which each country is part of a regional organization that reports to world head quarters. Global companies: - According to Keegan, global company represents stage four and transnational company stages five in the evolution of companies. However, several people use these terms synonyms and by global corporation they refer to the final state in the development of corporation. According to Keegan, the global company will have either a global market source from the home or a single company will have either a global markets source from the home on a single country to supply these markets, or it will focus on domestic market and source from the world in supply its domestic channel. However, according to the interpretation of some others all strategies product development production, marketing etc. will be global in respect of the global corporation. The transnational corporation is much more than a company with sales investment and operations in many countries. This company, which is increasingly cominating mark and industries around the world, is and integrated world enterprises that links global resource with global markets at a profit. Globalization strategies: Analysis for international strategy: - Any planning should start with a clear definition of the business for which the strategy is being formulated. The next stage involves both internal and markets analysis. Internal analysis: -Not every company can pursue a global strategy. Before embarking on the globalization journey, a company has to consider the following. (1) Availability of resources (2) Adequate manpower and cross-cultural expertise (3) Products applicability across markets (4) Organizational readiness. Market/competitive analysis: -Once the company decides that it is ready for expansion; it needs to consider the target markets. The planning process needs to focus on a broad range of markets. A markets attractiveness can be measured using. (1) Global size (2) Market growth rate (3) Number of competition (4) Nature of competition (5) Government regulation (6) Political, legal and social factors (7) Economic stability (8) Infrastructure. The main advantage of these analyses is that they provide a marketer with tools to balance risks, plan and allocate resources and gain economics of scale. Global strategy formulation: -Strategy formulation involves decisions about target markets, the extent of penetration and competitive strategy to be employed. The country market choice: - When choosing marketed, the firms should chalk out a market expansion plan, which not only looks at the markets attractiveness, but also at the resource allocation among them. The basic alternatives available to a marketer are concentration on a small number of markets and diversification into a relatively large number of markets. Some markets exhibit high and stable growth rates
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concentration would yield best results here. In some cases where demand for a product is strong worldwide diversification is a better option. The following factors are considered before choosing a country market. (1) The stand-alone attractiveness of the market (2) its strategic importance in a global context (3) Possible synergies. Choice of competitive strategy: - The marketer has three alternatives known as the generic strategic propounded Michel porter. These firms the basic foundations of the firms strategy and modifications and updates are done as and when required they are: (1) Cost leadership: - The marketer aims to offer a similar product or service at a lower cost then what competitions are offering. (2) Differentiation: - The strategy attempts to leverage the uniqueness of the product or any other related activity like after-sales service. (3) Focus: - A focus strategy emphasis on a single market or a single industry segment. However, the orientation could then be towards either differentiation or cost-leadership. Segmentation: - A marketer has to first decide the base for segmentation and arrive a grouping substantial enough to merit segmentation. In addition to the normal bases for segmentation like demographics and psychographics, marketer needs to look at the following for international market segmentation. Environmental bases: - (1) Geographic variables (2) Political variables (3) Economic variables (4) Cultural variables. Marketing Mix bases: - (1) Product related (2) Promotion related (3) Price related (4) Distribution related. Globalization driving forces: - A firms decision to globalize its operations is mainly driven by (1) Market factor: - The market factor facilitating globalization is: (a) Seamless integration of markets, facilitated by rapid advances in technology. (b) Similar educational backgrounds, income levels, lifestyles and aspirations of customers across markets. (c) Customer exposure to international trends. (d) Product designs that can meet similar demand conditions throughout the world. (e) The presence of global and regional channels. (f) Saturation of local markets. (g) Increasing source of capital. (h) The metamorphosis of Internet as a prominent communication and distribution channel. (2) Cost factor: - The global marketplace allows for both economies of scale and scope the companies that pursue globalization can leverage the synergies due to cross-border transaction, foreign exchange disparity and multiple resources. Also, the advantage of avoiding cost inefficiencies and duplication of effort add to the picture. (3) Environmental factor: - Factors like increasing wealth and mobility of customers acceleration in flow of information across borders, the remove of physical trade, fiscal and technical barrier are all promoting globalization. (4) Competitive factor: -With economics opening up many companies are taking advantage and expanding into foreign markets. The marketplace is crowded and the competition intense. Whether a company decides to go global or not, it is subject to global competition. Therefore, companies increasingly are finding that they themselves have to expand into global market to survive. Five Cs driving globalization: Customers: - Internationalization of the media has led to the globalization of the consumer. This has presented an unparallel opportunity for industries to globalize individual needs and preferences, and create global brands. The net has made the consumers more aware and they are demanding the best products, more variety, and
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at the most competitive prices. Businesses will not survive, unless they exceed the expectations of consumers. Competition: - The complexity of products leads to an increased reliance on a variety of sophisticated critical technologies. Most companies cannot hope to lead the market in all of them. They are forced to outsource several of their components from a set of dispersed sources. Costs: - Automation reduces the incidence of the variable costs of labour, but increasing the fixed costs. These can be recovered only through economics of scale from a larger market base. This pressure drives companies to globalize. Currency: - Companies try to offset the impact to currency volatility the cross caused by the fall in value of one currency will then be made up by a corresponding rise in the value of a currency in another region. Country: - Companies seek to get closer to their customer by developing a strong base in the countries that are their key market. Only truly global companies can achieve global localization i.e. be as much of an insider as a local company, and yet accomplish the benefits of world-scale operations. Points to ponder while going global: - The first step while setting up international operations is to integrate corporate strategy to the international strategy. The points to be considered are (1) are the businesses and corporate strategies focused on creating stakeholders value? (2) Do the objectives include providing customer satisfaction and creation value? (3) Are other functions integrated with the marketing functions as part of value creation process? (4) Is the marketing strategy global in its scope? (5) Are the products viewed as a part of an integrated product and service offering aimed satisfying the customer benefit? (6) Is information technology an integral part of the marketing strategies? (7) Does the marketing effort constitute innovative practices not used previously? (8) Are marketing strategies based on development of long-term relationship with clients? (9) Are strategies alliances foe comarketing activities being formed? (10) Is there sufficient focus of attention and resources on message effectiveness and value-based pricing? (11) What are the similarities and differences between target markets?

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Chapter-2
Trends in Indias Foreign Trade
Indias exports of merchandise goods during 2003-04 are valued at US $ 63.5 billion recording a growth rate of 20.4% in dollar terms. With this, the target of 12% fixed for 2003-04 has been exceeded. India has achieved this in spite of an appreciating rupee during the period, global slow down, Iraq War etc. The major sectors of exports that have witnessed high export growth (10% and above), during 2003-04 include Engineering goods (35%), Gems & Jewellery (16.4%), Sports goods (28.6%), Chemical & related products excluding Residual chemicals & Allied products (24.6%), Petroleum products (36.6%), Wheat (40.6%), Processed foods (27.4%), Oil meals (131.7%), Manmade textiles made-ups etc (28.2%) and Electronic goods (34.4%). During the same period, exports to EU, constituted about 21.8% of Indias exports and registered a growth rate of 19.9 % in dollar terms. Asia and Oceania accounted for nearly 46% of Indias exports. Exports to this region witnessed a growth rate of 29.4%. Within this region, exports to China have seen a growth rate of 49.8% and this is over and above a very high growth rate in 2002-03. The growth rate of Indias exports to China was 106% in 2002-03. China and Hong Kong together accounted for about 10% of Indias exports. The single largest destination of Indias exports in this region, United Arab Emirates, accounted for 8% of Indias exports. Exports to this country have grown at a rate of 52.7%. Indias exports to Africa region that accounted for about 6% of our total exports witnessed a growth rate of 25.6%. Exports during April August, 2004-05 are valued at US$ 27551.63 million which is 26.08 % higher than the level of US$ 21852.48 million during April August, 2003- 04. Imports AprilAugust 2004-05 are valued at US$ 37137.75 million which is 30.42% higher than the level of US$ 28474.44 million during April-July 2003-04. An export target of 16% corresponding to a level of $ 73.4 billion has been fixed for the year 2004-05 which is higher than the target of 12% for the last two years. This will help exports to reach a level of $ 150 billion in 2009-10. Indian exports had crossed the $ 50 billion mark in 2002-03 and $60 billion mark in 2003-04. Now with the 16% target, exports should cross the $ 70 billion target in 2004-05. Indias total economic engagement with the world today, as pointed out by countrys Commerce Minister Kamal Nath, tops $350 billion, which reflects Indias growing significance in international trade. Our tariffs are coming down to ASEAN levels, our FDI regime is increasingly liberal, our domestic laws are TRIPS-compliant, Indian Commerce minister asserts. But trade barriers are there and they now exist in developed countries in more subtle forms of NTBs and SPS regulations: the non-tariff barriers to trade, often in the guise of health or environmental or social concerns are the new instruments of discrimination which we have to fight against. India's core concerns and interests have been addressed in the WTO Hong Kong Ministerial Declaration, with enough negotiating space for future work leading to modalities for negotiations in the coming months. The text has positive development content, but this needs to be built upon and fully realized. Government will continue to engage various stakeholders in each of the areas to ensure the best result which will fully protects our farmers, industry, and our overall national interests, an unambiguous Kamal Nath put forth.
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With the on-going changes in world demography, with the greying of populations in the developed world India has an edge over others in terms of the skilled and technologically qualified manpower. India in next ten years will have a workforce larger than even China. With a right blend of IT, biotech and pharma manufacturing, India could be the key destination for knowledge process outsourcing (KPO) and engineering process outsourcing (EPO) along with business process outsourcing (BPO), so feels countrys Commerce minister. Indias first ever-long term Foreign Trade Policy (2004-09) is considered as a roadmap for the development of countrys foreign trade. The FTP has started paying good dividend: merchandise trade grew at the rate of 26 percent in the first year followed by 25 percent in the second year (2005-06).To achieve main objective of the FTP to give a massive push to exports while generating employment, ten key strategies have been chalked out: (i) Unshackling of controls and creating an atmosphere of trust and transparency; (ii) Simplifying procedures and bringing down transaction costs; (iii) 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; (iv) Facilitating development of India as a global hub for manufacturing, trading and services; (v) Identifying and nurturing special focus areas which would generate additional employment opportunities, particularly in semi-urban and rural areas; (vi) 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; (vii) Avoiding inverted duty structures and ensuring that our domestic sectors are not disadvantaged in the Free Trade Agreements/Regional Trade Agreements/Preferential Trade Agreements entered into in order to enhance our exports; (viii) Upgrading the infrastructural network related to the entire Foreign Trade chain, to international standards; (ix) Revitalizing the Board of Trade by redefining its role; and (x) Activating Indian Embassies as key players in the export strategy and linking the Commercial Wings abroad through an electronic platform for real time trade intelligence. Along with this, to give a push to employment generation in export-related sectors two new schemes have been introduced: Focus Product Scheme & Focus Market Scheme. FPS is to give a thrust to the manufacture and export of certain industrial products which could generate large employment per unit of investment compared to other products whereas the main objective of FMS is to penetrate markets to which Indias exports were comparatively low and which Indian exporters had perhaps been neglecting due to high freight costs and undeveloped networks but which were markets of the future. In rupee terms, Indias merchandise exports were Rs.445657.97 crore in fiscal 20052006 registering 23.15 percent increase over exports in previous fiscal (2004-05). In $ terms, exports during financial 2005-2006 stood at $ 100.6 billion which was 24.71 percent higher than the $ 80.67 billion achieved in previous financial year. Indias imports in fiscal 2005-2006 totaled $ 140.23 billion representing an increase of 31.52 percent over the level of imports valued at $ 106.63 billion in 2004-2005. In Rupee terms, the imports increased by 29.80 percent. Oil imports during fiscal 2005-2006 increased by 46.84 percent valued at US $ 43.844 billion compared with US $ 29.858 billion in the previous financial year. Non-oil imports in 2005-2006 are estimated at US $ 96393.39 million up 25.56 percent over such imports valued at US $ 76772.23 million in fiscal 2004-2005. The trade deficit for fiscal 2005-2006 is estimated at US $ 39.630 billion, which is higher than the deficit at US $ 25.958 billion during financial year 2004-2005.
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Current Status

Exports during the first four months (April-July, 2006) of the current fiscal during are valued at US $ 37.707 (provisional) signifying 34.03 percent increase over $ 31.223 billion (provisionally revised) during the comparable period in 2005. In rupee terms, the exports were Rs.172542.53 cores (provisional) during April-July, 2006, which is 40.71 percent higher than provisionally revised level of Rs. 136088.91 crore (provisional) in comparable period in 2005. Imports during first four months of the current fiscal stood at US $ 54.424 billion (provisional) , which is 29.24% higher than the level of US $ 45.598 billion (provisionally revised) during April-July 2005. In rupee terms, the imports were Rs. 248925.88 crore (provisional) which is 35.6% higher than provisionally revised level of Rs. 198735.76 crore during April- July 2005. Oil imports during April-July 2006 are valued at US $ 18.533 billion which is 43.23 percent higher than oil imports valued at US $ 12.940 billion in the corresponding period last year. Non-oil imports during AprilJuly 2006 are estimated at US $ 35.890 billion, which is 9.90 percent higher than the level of such imports valued at US $ 32.658 billion in April- July 2005.

Trade balance
The trade deficit for first four months of current fiscal is estimated at US $ 16716.74 million (provisional), which is higher than the deficit of US $ 13.974 billion (provisional) during comparable period in 2005-06. India's Foreign Trade (2005-06)
(In US$ million) April 2005 - March 2006 EXPORTS 2004-05* 2005-06 Year-on change over 2001-02 IMPORTS 2004-05* 2005-06 Year-on change over 2001-02 TRADE BALANCE 2004-05* 2005-06 *Final figures as given by DGCI&S
Source: Federal ministry of Commerce, India

80672.41 100606.92 24.71 106630.51 140237.65 31.52 -25958.10 -39630.73

India's exports to major trade partners


(In US$ million)

YEAR COUNTRY USA 19992000 20002001 20012002 200304 2004-05 13265.60 3651.33 3544.69

8533.88 9305.12

8513.3 11490. 8 11 2366.3 3261.8 6 3

Hong Kong 2551.59 2640.86 UK

2246.62 2298.71 2160.8 3023.2


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8 Japan Germany UAE Belgium Italy Russia 1702.91 1794.48 1802.27 1907.57 2148.26 2597.52 1380.94 1470.56 1163.84 1308.75

7 1977.59 2644.10 7098.14 2442.09 2160.83 597.43 1518.06 1586.18 1609.11 3795.51 996.36 687.03 856.07 79247.05

1510.4 1709.3 4 0 1788.3 2544.5 6 7 2491.8 5125.6 0 1 1390.6 1805.7 3 3 1206.5 1729.4 3 1

951.44 889.01 798.19 713.76

Netherland 1289.1 886.47 880.09 863.88 s 2 Banglades h France Singapore Malaysia Australia Thailand 643.63 935.04 1002.8 919.57 1020.01 945.00 691.17 877.11 972.31 1740.7 5 1280.8 9 2124.8 4

434.99 608.15 773.70 892.77 406.63 405.89 418.03 584.30 456.71 530.12 633.14 831.69

Total (Incl. 37598.6 44560.2 43826. 63842. others) 0 9 93 97 Source: Federal ministry of Commerce, India

India's imports from major trade partners


(In US$ million)

YEAR COUNTRY USA Belgium UK Switzerlan d Japan Germany UAE Australia Singapore 19992000 20002001 20012002 200304 2004-05 6291.49 4566.29 3431.35 5817.92 3005.96 3868.31 4581.96 3561.10 2582.16

3629.5 3015.0 3149.63 5034.86 2 0 3474.8 2870.0 2763.01 3975.92 9 5 2727.8 3167.9 2563.21 3234.35 6 2 2620.7 3160.1 2870.76 3312.75 3 4 2355.3 1842.1 2146.45 2667.69 2 9 1866.6 1759.5 2028.11 2918.58 3 9 2138.8 658.98 915.09 2059.85 4 1079.3 1062.7 1360.10 2649.24 3 6 1506.4 1463.9 1304.09 2085.38 4 1

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Italy Korea (Rep.) France Russia

744.05 723.58 704.79 1071.04 1210.1 893.76 1141.37 2829.19 2 737.04 640.81 844.26 1090.23 617.47 516.66 535.51 959.63

1322.77 3194.09 1380.70 1265.38 758.94 107066.11

Netherland 445.45 437.53 466.47 535.56 s Total (Incl. 47212. 50536. 51413.7 78149.6 others) 07 46 9 2 Source: Federal ministry of Commerce, India

Product Group-wise India's Exports


(In US $ million)

COMMODITIES Plantations Marine Products Ores & Minerals Leather & Manufactures Sports Goods

2003-04 592.64 1328.72 2368.73 2163.04 99.12

2004-05 621.42 6033.94 1267.53 4193.44 2289.23 13705.44 98.10 12677.21 14587.37 1804.06 49.17 12017.46 6792.14

Agriculture & allied 5406.70

Gems and Jewellery 10573.38 Chemicals and allied 9960.12 products Engineering goods Electronic goods Project goods Textiles 10516.45 1804.92 84.13 12204.71

Petroleum products 3568.44 & others

Source: India's mid-term export policy (2002-07)

Export promotion measures


The new Export-Import (EXIM) Policy unveiled by the government on March 31, 2002 set the pace for export promotion measures not only during 2002-03 but for the entire period of the next five years coinciding with the Tenth Five Year Plan. The export promotion strategy zeroed in on export market diversification as one of its policy planks with special focus on hitherto untapped regions like sub-Saharan Africa and the Commonwealth of Independent States (CIS). The Policy contained several farreaching components to take Indias exports on a steady growth trajectory. These included, among others, removal of all import curbs or quantitative restrictions (QRs), save a few sensitive items reserved for exports through state trading enterprises, a farm-to-port approach for exports of agricultural products, special thrust on cottage sectors and handicrafts and beefed up Assistance to States for Infrastructural Development for Exports (ASIDE). Apart from these specific booster measures, the government also rationalised and simplified procedures in respect of various export promotion schemes with a view to cutting down unwanted hassles and bringing down the transaction cost to industry and trade tangibly. A brief description of the policy initiatives to boost exports is given below.
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New Initiatives for the Special Economic Zones (SEZs) Offshore Banking Units (OBUs) have been permitted under the SEZ Scheme. This should help some of these zones to emerge as financial nerve centres of Asia. Units in SEZ would be permitted to undertake hedging of commodity price risks, provided such transactions are undertaken by the units on stand-alone basis. This will impart security to the returns of the unit. It has also been decided to permit External Commercial Borrowings (ECBs) for tenure of less than three years in SEZs. This should provide opportunities for accessing working capital loan for these units at internationally competitive rates.

Export Promotion Council for EOUs


The Export Promotion Council for Export Oriented Units (EOUs) was set up and operationalised in January 2003. This has been done in response of the long felt need of the EOUs for separate Export Promotion Council. The Council has started functioning with immediate effect. The EPC for EOUs would specifically cater to the needs of EOU/SEZ Sector which has over 2300 operational EOUs/SEZ units spread all over the country providing direct employment to over 7 lakh people and having 13% share in the national exports. The Council has set an ambitious road map to achieve and contribute 25% of the national export through manufacturing exports by the year 2007. In the next couple of years this sector is looking for achieving 10 billion US dollars exports. The Council also has plans to organise Seminars on issues pertaining to EOUs in different states. To start with, the Council plans to organise such Seminars at Hyderabad, Jaipur and Delhi.

1. Initiatives for the Agriculture Sector


Export restrictions like registration and packaging requirements have been removed on Butter, Wheat and Wheat products, Coarse Grains, Groundnut Oil and Cashew to Russia. Quantitative and packaging restrictions on wheat and its products, Butter, Pulses, grain and flour of Barley, Maize, Bajra, Ragi and Jowar were already removed on 5th March, 2002. Other recent policy initiatives which may have a positive impact on exports are given below:o Restrictions on export of all cultivated (other than wild) varieties of seed, except Jute and Onion have been lifted. o To promote export of agro and agro based products, 20 Agri Export Zones have been notified. o In order to promote diversification of agriculture, transport subsidy is to be made available for export of fruits, vegetables, floriculture, poultry and dairy products. o 3% special DEPB rate has been proposed for primary & processed foods exported in retail packaging of 1 kg or less.

2.New Policy Initiatives for the Cottage Sector and the Handicrafts
Given the importance of the cottage sector and handicrafts in Indias exports, the following policy initiatives were announced in the Exim Policy, some of which have already been given effect to:An amount of Rs. 5 crores under Market Access Initiative (MAI) has been earmarked for promoting cottage sector exports coming under the KVIC. The units in the handicrafts sector can also access funds from MAI scheme for development of website for virtual exhibition of their product. Under the Export Promotion Capital Goods (EPCG) scheme, these units will not be required to maintain average level of exports, while calculating the Export Obligation.
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These units shall be entitled to the benefit of Export House status on achieving lower average export performance of Rs.5 crores as against Rs. 15 crores for others; and The units in handicraft sector shall be entitled to duty free imports of an enlarged list of items as embellishments upto 3% of FOB value of their exports.

3. Export Promotion Measures for the Small Scale Industry


Yet another milestone in 2002 in the quest for pushing export products of heritage value was the enhancement of export capabilities of the small scale sector, which accounts for about 50 per cent of the countrys exports. These capabilities were strengthened through a programme for Special Focus on Cottage Sector and Handicrafts including promotion of cotton sector exports under Khadi & Village Industries commission, access to funds from Market Access Initiative (MAI) for units in the handicrafts sector and benefits of export house status at a lower average export performance. Analogous benefits would be extended to industrial cluster towns with export potential like Tirupur (hosiery), Panipat (woollen blankets) and Ludhiana (woolen knitwear). Some of the important initiatives for fostering clusters/pockets of excellence for exports are given below: Common service providers in these areas shall be entitled for facility of EPCG scheme. These units will also not be required to maintain average level of exports, while calculating the export obligation. The recognised associations of units in identified clusters with export potential like Tirupur, Panipat, Ludhiana, etc., would be able to access the funds under the Market Access Initiative scheme for creating focused technological services and marketing abroad. Such areas will receive priority for assistance for identified critical infrastructure gaps from the scheme on Central Assistance to States. Entitlement for Export House status will be given at Rs. 5 crores instead of Rs.15 crores for others.

4. Commodity Specific Initiatives in the EXIM Policy


In addition to the above, certain additional policy measures have been taken / are proposed to be taken during the year to facilitate / promote export of specific commodities. These are given below: Leather-- Duty free imports of trimmings and embellishments upto 3% of the FOB value hitherto confined to leather garments, has been extended to all leather products. Textiles-- Sample fabrics permitted duty free within the 3% limit for trimmings and embellishments. a.10% variation in GSM is allowed for fabrics under Advance Licence. b. Additional items such as zip fasteners, inlay cards, eyelets, rivets, eyes, toggles, velcro tape, cord and cord stopper are included in input output norms. c.Duty Entitlement Passbook (DEPB) rates for all kinds of blended fabrics are permitted. Such blended fabrics are to have the lowest rate as applicable to different constituent fabrics. Gems & Jewellery a. Customs duty on import of rough diamonds is being reduced to 0%. Import of rough diamonds is already freely allowed. b. Licensing regime for rough diamond is being abolished. This should help the country emerge as a major international centre for diamonds. c. Value addition norms for export of plain jewellery has been reduced from 10% to 7%. Export of all mechanize unstudded jewellery is now allowed at a value addition of
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3% only. Having already achieved leadership position in diamonds, efforts will be made for achieving quantum jump on jewellery exports as well. d. Personal carriage of jewellery is to be allowed through Hyderabad & Jaipur airport as well. Electronic hardware -- The Electronic Hardware Technology Park (EHTP) scheme is being modified to enable the sector to face the zero duty regimes under ITA (Information Technology Agreement)-1. The units shall be entitled to following facility: --No other export obligation for units in EHTP. -- Supplies of ITA I items having zero duty in the domestic market to be eligible for counting of export obligation. Chemicals and Pharmaceuticals --All pesticides formulations are to have 65% of DEPB rate of such pesticides. --Free export of samples is permitted without any limit. --Reimbursement of 50% of registration fees is allowed for registration of drugs. Project goods -- Free import is allowed on equipment and other goods used abroad for more than one year.

5. Facilities for Status Holders


According to the Exim Policy announcements status holders have been made eligible for the following new/special facilities: Licence/Certificate/Permissions and Customs clearances for both imports and exports on self-declaration basis; Fixation of Input-Output norms on priority; Priority Finance for medium and long term capital requirement as per conditions notified by RBI; Exemption from compulsory negotiation of documents through banks. The remittance, however, would continue to be received through banking channels; 100% retention of foreign exchange in Exchange Earners Foreign Currency (EEFC) account; Enhancement in normal repatriation period from 180 days to 360 days. Exporters are often faced with increasing costs due to high cost of fuel. To deal with this problem, it has been decided to rebate fuel costs in Standard Input Output Norms (SIONs) for all export products. This is expected to enhance the cost competitiveness of exports.

Other Measures in the Exim Policy: Import/Export of samples is to be liberalised for encouraging product upgradation. Penal interest rate for bonafide defaults is to be brought down from 24% to 15%. No penalty is to be imposed for non-realisation of export proceeds in respect of cases covered by ECGC insurance package. No seizure is to be made of stock in trade as this disrupts the manufacturing process affecting delivery schedule of exporters. Foreign Inward Remittance Certificate (FIRC) is to be accepted in lieu of Bank Realisation Certificate for documents negotiated directly. Optional facility will be available to exporters to convert from one scheme to another scheme. In case the exporter is denied the benefit under one scheme, he shall be entitled to claim benefit under some other scheme. Newcomers are to be entitled for licences without any verification against execution of Bank Guarantee.

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6. Diversification of Markets
Business Centre is to be set up in Indian missions abroad for visiting Indian exporters/businessmen. ITPO portal is to host a permanent virtual exhibition of Indian export product. North Eastern States, Sikkim and Jammu & Kashmir Transport subsidy is to be given for exports from units located in North East, Sikkim and Jammu & Kashmir so as to offset the disadvantage of being far from ports. Re-location of industries. To encourage re-location of industries to India, plant and machineries would be permitted to be imported without a licence, where the depreciated value of such relocating plants exceeds Rs. 50 crores.

7.Rationalisation of Export Promotion Schemes


Apart from the above measures, the Government has also rationalised several provisions of some existing export promotion schemes with a view to remove unwanted hassles and bring down the transaction cost of industry and trade. Major rationalisation measures taken during the year for the existing schemes are given below: (a) Advance Licence Duty Exemption Entitlement Certificate (DEEC) book has been abolished. Redemption is now on the basis of Shipping bills and Bank Realisation Certificates. Advance Licence for Annual Requirement scheme has been withdrawn. The exporters can avail Advance Licence for any value. Mandatory spares are now allowed in the Advance Licence upto 10% of the CIF value. (b) Duty Free Replenishment Certificate (DFRC) Technical characteristics are to be dispensed with for purpose of audit. (c) Duty Entitlement Passbook (DEPB) Value cap exemption granted on 429 items is to continue. Market Value (PMV) verification would not be undertaken except on specific intelligence. Same DEPB rate for exports are to be whether as CBUs or in CKD/SKD form. Reduction in rates only after due notices. DEPB for transport vehicles to Nepal in free foreign exchange. DEPB rates for composite items to have lowest rate applicable for such constituent. (d) Export Promotion Capital Goods (EPCG) EPCG licences of Rs.100 crores or more to have 12 year export obligation (EO) period with 5 year moratorium period. EO fulfillment period extended from 8 years to 12 years in respect of units in agriexport zones and in respect of companies under the revival plan of BIFR. Supplies under Deemed Exports to be eligible for export obligation fulfillment along with deemed export benefit. Re-fixation of EO in respect of past cases of imports of second hand capital goods under EPCG Scheme.

8.Central Assistance to States for Developing Export Infrastructure (ASIDE) and other Allied Activities
Adequate and reliable infrastructure is essential to facilitate unhindered production, cut down the cost of production and make exports internationallycompetitive. While the responsibility for promotion of exports and creating the necessary specialised infrastructure has largely been undertaken by the Central Government so far, it is increasingly felt that the States have to play an equally important role in this endeavour. The role of the State Governments is critical from the point of view of
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boosting production of exportable surplus, providing the infrastructural facilities such as land, power, water, roads, connectivity, pollution control measures and a conducive regulatory environment for production of goods and services. It is, therefore, felt that coordinated efforts by the Central Government in cooperation with the State Governments are necessary for development of infrastructure for export promotion. Department of Commerce had been implementing, through its agencies, schemes for promotion and facilitation of export commodities and creation of infrastructure attendant thereto. The Export Promotion Industrial Parks Scheme (EPIP), Export Promotion Zones scheme (EPZ), and the Critical Infrastructure Balancing Scheme (CIB) were implemented to help create infrastructure for exports in specific locations and to meet specific objectives. However, it was felt that the general needs of infrastructure improvement for exports were not met by such schemes. Therefore, with a view to optimizing the utilization of resources and to achieve the objectives of export growth through a coordinated effort of the Central Government and the States, a new scheme has been drawn up by merging the earlier schemes. The objective and main features of the new Scheme are given below: Objective The objective of the scheme is to involve the states in the export effort. States do not perceive direct gains from the growth in exports from the State. Moreover, the States do not often have adequate resources to participate in funding of infrastructure for exports. The new scheme, therefore, intends to establish a mechanism for seeking the involvement of the State Governments in such efforts through assistance linked to export performance. Salient Features of the Scheme The new scheme provides an outlay for development of export infrastructure which will be distributed to the States according to a pre-defined criteria. The existing EPIP, EPZ and CIB schemes stand merged with the new scheme. The scheme for Export Development Fund (EDF) for the North East and Sikkim (implemented since 20002001) also stands merged with the new scheme. After this merger, the ongoing projects under the schemes shall be funded by the States from the resources provided under the new scheme. The specific purposes for which the funds allocated under the Scheme can be sanctioned and utilised are as follows: Creation of new Export Promotion Industrial Parks/Zones (including Special Economic Zones (SEZs)/Agri-Business Zones) and augmenting facilities in the existing ones. Setting up of electronic and other related infrastructure in export conclave. Equity participation in infrastructure projects including the setting up of SEZs. Meeting requirements of capital outlay of EPIPs/EPZs/SEZs. Development of complementary infrastructure such as roads connecting the production centres with the ports, setting up of Inland Container Depots and Container Freight Stations. Stabilising power supply through additional transformers and islanding of export production centres, etc., Development of minor ports and jetties of a particular specification to serve export purpose. Assistance for setting up common effluent treatment facilities. Projects of national and regional importance. Activities permitted as per EDF in relation to North East and Sikkim. The outlay of the scheme will have two components. 80% of the funds (State component) shall be earmarked for allocation to the States on the basis of the
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approved criteria. The balance 20% (central component), and amounts equivalent to un-utilised portion of the funds allocated to the States in the past year(s), if any, shall be retained at the central level for meeting the requirements of inter-state projects, capital outlays of EPZs, activities relating to promotion of exports from the NER as per the existing guidelines of EDF and any other activity considered important by the Central Government from the regional or the national perspective. The export performance and growth of exports from the State will be assessed on the basis of the information available from the office of the Director General of Commercial Intelligence & Statistics (DGCIS). The office of the DGCIS will compile the State-wise data of exports from the Shipping Bills submitted by the exporter. The Shipping Bill form provides a column in which the exporter will enter the name of the State/UT from where the export goods have originated. There shall be a State Level Export Promotion Committee (SLEPC) headed by the Chief Secretary of the State and consisting of the Secretaries of concerned Departments at the State level, and a representative of the States cell of the Department of Commerce (DoC) and the Joint Director General of Foreign Trade posted in that State/region and the Development Commissioners of the SEZ/EPZ in the State. SLEPC will scrutinise and approve specific projects and oversee the implementation of the Scheme. An allocation of Rs. 1725 Crores has been made for this scheme. For the entire period of the 10th Five Year Plan of which Rs 330 crores is budgeted in the financial year 2002-2003. The funds are disbursed directly to a Nodal Agency nominated by the State Government where it is kept in a separate head in the accounts of the Nodal Agency.

9. Export Enhancement and Export Studies Market Access Initiative


The prevailing macro-economic situation with emphasis on exports requires obtaining greater market intelligence, promoting and facilitating direct access to major retail markets in focus countries for focus products, promotion of branded products and a greater involvement of State Governments in export promotion. A Scheme on Export Enhancement and Export Studies has been already been in operation. The scope of this scheme has now been expanded to include Export Enhancement and Export Studies Market Access Initiative with the following additional objectives: a) Identifying the priorities of research relevant to the Department of Commerce and sponsoring research studies consistent with the priorities. b) Arranging for wide dissemination and discussions on the results of such studies. c) Supporting EPCs/Trade Promotion Organizations for market survey/studies for selected products in the chosen countries to generate data for promotion of exports from India. d) Assisting exporters and EPCs for participation in international departmental store promotion programmes, intensive publicity campaigns and participation in international trade fairs, seminars, buyer-seller meets for a few selected focus products in focus countries. e) Assisting the exporters and EPCs in promotion of India, Indian products and Indian brands in the international market. f)Assisting projects for research and product development. g)Assisting any other activity, appropriate for promoting chosen product(s) on Country-Product focus approach basis. h) Supplementing State Government efforts in carrying out export potential survey of the State for identified product groups. Export Promotion Councils and Trade Promotion Organizations would be required to project their requirements for undertaking marketing promotion efforts abroad on
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country-product focus approach basis in a single project covering the objectives of the expanded scheme, which they propose to undertake. Such a project should be for identified product(s) whose export has potential for promotion to a chosen country. For each product, exporters participating in the project should be identified by the EPC. Selected exporters shall identify the need for intervention, its components and cost sharing by them within the parameters of the Scheme.

The scope of the scheme would cover the following activities:


(a) Marketing Studies Marketing studies on country product focus approach basis could be undertaken under this scheme to have an in-depth analysis of the existing and potential markets for evolving market related strategy, meeting the requirements of each market with regard to the local taste, requirements and quality. (b) Showrooms Showrooms could be set up for selected consumer items at identified centers on the basis of marketing studies in leased or rental accommodation. The participants will bear the rental/leased charges and full maintenance. The 75%, 50%, 25% of the leased/rental charges will be borne by the scheme in the 1st, 2nd and 3rd year respectively. (c) Warehousing facility Warehousing facilities could also be established on the same pattern as of showrooms to ensure quicker deliveries. (d) Participation in International Departmental Stores Tie up with local distributors and major stores could be used under this scheme as a tool for promoting particular product(s). A list of International Departmental Stores/Chains will be prepared and standardized. Supplies to these stores under brand names and Made in India labels would be rewarded with 2% of the fob value at the time of initial entry and one year thereafter. (e) Publicity Campaign Under this scheme, intensive campaigns for launching identified product/products in chosen markets through advertisement, pamphlets, banners, hoarding, radio, television would be encouraged. (f) Participation in International Trade Fairs, Seminars, Buyer-Seller Meets India, like any other country, has been participating in various International Trade fairs. However, such participation is generally not part of a comprehensive strategy. Thus, it is required to link participation in Trade Fairs at identified potential destinations with effective publicity campaigns, seminars, buyer-seller meets, etc. (g) Brand Promotion Brand promotion along with Marketing would be focused as a component of the approved project under the scheme to replace the poor perception of India as a supplier of low quality items, to a supplier of high-tech value addition world-class quality products. In addition to the incentives for supplying branded products with Made In India labels in the selected international departmental stores, the scheme would undertake marketing of India and its focus products in the identified countries. (h) Research & Product Development Selected exporters/Export Promotion Councils (EPCs)/Trade promotion Organization (TPO) would be assisted in modernizing and upgrading the identified products as per needs of the targeted markets on country-product focus basis as component of the approved project under the scheme. (i) Export Potential Surveys of the States to identify product groups
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The scheme would supplement the State Governments in carrying out export potential survey of the State for identified product groups to evolve market related strategy for promoting exports of the identified product groups from the State. An Empowered Committee headed by Secretary, Department of Commerce would approve the projects under this Scheme and also monitor the progress made in the projects, evaluate the impact of the support given from time to time, etc. The Committee would meet as and when required, but at least once in every quarter.

Focus Africa

Considering the potential that the Sub-Saharan African region offers and the insignificant presence of India in that market, an integrated programme Focus : Africa was launched in the year 2002-2003 with a view to significantly enhance Indias trade with the Sub-Saharan African region. The main objective of this initiative is to increase interactions between the two regions by identifying the areas of bilateral trade and investment. The potential for expansion in trade & investment is significant since Africa is the second largest continent in area and the third largest in population. The continent is very rich in natural resources. There is huge shortage of skilled manpower leading to poor manufacturing activity. The Focus: Africa programme aims to focus at Sub-Saharan African region with added emphasis on seven major trading partners of the region viz. Nigeria, South Africa, Mauritius, Kenya, Ethiopia, Tanzania and Ghana.

Market Development Assistance

a) MDA would be used for promotion of marketing activities. Opening of foreign offices, inviting prominent foreign delegates and buyers to India etc. would be supported from MDA to the extent of 60% of the total approved cost except in the case of warehousing, foreign offices, market survey and reverse trade delegations from Sub-Saharan African region. Market survey in the Sub-Saharan African region would be financed on 80% basis from MDA. A provision of Rs. 2 crores per year would be made starting from year 2002-03 for supporting market promotion activities in this region. b) One additional sale tour or fair participation in Sub-Saharan African countries would be permissible just like the Focus LAC countries. c) Approved export/trading houses, approved organizations and recognized consortium of SSI units shall be given assistance for opening and maintaining the warehouses on a declining scale of 75%, 50%, and 25% in three successive years to meet the rental expenses subject to the condition that the quality of warehouse and the fairness of the rent is certified by the concerned Indian Mission. d) Under reverse trade visits, visit of prominent delegates and buyers (one person from each organization) from Sub-Saharan African region under Focus Africa programme, for participation in Buyer-cum-Seller meets, exhibitions, etc. would be assisted in meeting their return air travel expenses in economy excursion class upto the entry point in India. The other expenses relating to their stay per diem allowance, local travel, etc. would be met either by the concerned EPC or by sharing between the organizers and the foreign delegates/buyers. e) Market Development Assistance to recognized Export/Trading Houses and recognized consortium of SSI units for opening new office would be permitted under Focus: Africa Programme on the lines as applicable under Focus: LAC programme i.e. 50% of the rental value of the office space certified by our Missions subject to a maximum of Rs. 5 Lakh per annum and 50% of the staff cost subject to a maximum of Rs.4 lakh for the first year.

ECGC Cover
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Most of the Sub-Saharan African countries are placed in lower category for grant of ECGC cover. Because of lower grading, the exporters have to pay higher premium for getting commercial cover. The gradings shall be reviewed periodically so that the economic situation of the countries reflects upon the grading of ECGC.

Lines of Credit

Lines of Credit enable the Indian exporters, including small and medium enterprises (SMEs), to export a variety of products (industrial manufactures, consumer durables and capital and engineering goods) to importers in these countries without any repayment risk. While 15% to 20% of the contract value is paid as advance by the importers, the balance 80% to 85% of the contract value is disbursed by the EXIM Bank to the Indian exporters on shipment of goods. The recovery of credit extended to the overseas buyer is taken care of by the Exim Bank without recourse to Indian exporter. The Exim Bank shall explore the possibilities of extending lines of credit to selected commercial banks in Sub-Saharan African countries. The success of Focus: Africa required proactive role and involvement of Export Promotion Councils, Apex Chambers and Indian Mission located in Sub Saharan African Region. Their role was to the following: establish and strengthen ties with their counterparts in the region and ensure that there are more frequent exchange of delegations. widely disseminate information amongst Indian businessmen through their publications, bulletins and other periodicals regarding potential Indian exports to Sub Saharan Africa. organize seminars and workshops at regular intervals to create awareness regarding the untapped potential that exist in the region for exporting goods. These seminars/workshops were held in industrial centres for wider coverage. organize catalogue/brochure exhibitions. provide regular feedback on implementation of the programme. play a pro-active role in coordinating promotional measures like organization of Buyer-Seller-Meets, visit of delegations and participation in trade fairs. carry out market surveys for the specified products in colloboration with the ITPO and concerned EPCs. Send processed/usable information in bulletins to the EPCs of focus products.

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Focus LAC
An integrated programme Focus: LAC was launched in November 1997 in order to significantly enhance Indias trade with the Latin American region with added emphasis on 8 major trading partners viz., Argentina, Brazil, Chile, Colombia, Mexico, Peru, Trinidad & Tobago and Venezuela. The programme has been extended upto March 2003. The main objective is to increase interaction between the two regions by identifying areas of bilateral trade and investments. India has set up Missions in 13 major countries in the LAC region. Recently post of Marketing Assistants, one each in nine focus countries has been provided. Recent initiatives in the LAC region as announced in the Exim Policy include the following: Textile quota policy Textile exports to the identified Latin American countries have been accorded double weightage for the purpose of determining entitlements under the non-quota exports entitlement system in the Textiles Quota Policy. Double weightage For the purpose of recognition to the Export House, Trading Houses, Star Trading Houses and Super Star Trading Houses, double weightage is given on FOB or NFE basis on exports to Latin American countries provided such exports are made in freely convertible currency. Trade Facilitation Trade facilitation is critical to export promotion. Efforts are constantly being made to provide transport/logistic support to the exporters and resolving, in coordination with the concerned Ministries and Departments, the problems experienced by the trading community in the carriage of goods by courier, sea, air, rail and road. Initiatives include intensification of containerisation, extension of Air Cargo Complexes (ACCs), computerisation of cargo clearance, introduction of Electronic Data Interchange (EDI), improved communication, warehousing, etc. As a result of continuing interdepartmental coordination, the following trade facilitation measures have been taken to promote trade: 1. A new 8-digit commodity classification for imports has been adopted. Customs and DGCI&S shall also adopt this classification shortly. The common classification to be used by DGFT and Customs will eliminate the classification disputes and hence reduce transaction costs and time. 2. The maximum fee limit for electronic application under various schemes has been reduced from Rs. 1.5 lakh to Rs. 1.00 lakh. 3. Same day licensing has been introduced in all regional offices. 4. Digital signature is being introduced for electronic transaction. 5. Main functions of DGS&D like Purchase, Registration and Inspection have also been taken up for Computerisation. 6. The percentage of physical examination of export cargo has been reduced to less than 10 percent except for a few sensitive destinations. 7. The application for fixation of brand rate of drawback is to be finalised within 15 days. 8. Direct negotiation of export documents is to be permitted. This will help the exporters to save bank charges. 9. 100% retention in EEFC accounts is permitted. 10. The repatriation period for realisation of export proceeds has been extended from 180 days to 360 days. The facility is already available to units in SEZ and exporters exporting to Latin American countries. These facilities are being made available to status holders only for the present. 11. DGFT has computerized all its 33 offices and all its license schemes are computerized.
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12. A facility has been created wherein any exporter/ importer can file application online on web or prepare application offline and submit it on the web. 13. 24 Hours working at the gates of the docks by Customs for the movement of export and import consignments. 14. Private pilots have been empanelled by Port Trusts and they are available for pilotage. 15. Notification of the procedure for examination of containers at LCSs when the container moves through land route from hinterland locations while going to neighbouring countries. 16. Priority for speedy disposal of uncleared/unclaimed cargo lying at Ports/Airports/ICDs/CFSs/ACCs. 17. Implementation of the Electronic Data Interchange (EDI) in phased manner at Ports/Customs Houses/Airports. 18. Single window clearance to proposals for setting up of Inland Container Depots/Container Freight Stations (ICDs/CFSs). The number of facilities in operation has gone up from 29 in 1992 to 114 ICDs/CFSs. 19. An Air Cargo Complex for precious and semi-precious cargo has also been sanctioned, in the private sector, in South Mumbai. 20. Two high level committees viz. Standing Committee on Promotion of Exports by Sea (SCOPE-SHIPPING) and Standing Committee on Promotion of Exports by Air (SCOPE-AIR) have been constituted under the chairmanship of Additional Secretary-Infrastructure, Department of Commerce. The objective of these is to resolve constraints in the smooth movement of international cargo.

10.Trade Finance
1. Export Credit - Interest Rate Structure According to the announcement of mid-term Review of Monetary and Credit Policy for the year 2002-2003, the interest rates on 181 to 270 days for pre-shipment credit and 91 to 180 days for post-shipment will be made free effective from May 1, 2003 and are to be decided by the banks subject to the approval of their Boards. Under the earlier guidelines, rupee packing credit and pre-shipment credit in foreign currency granted by a bank to an exporter were to be liquidated out of proceeds of bills drawn for the exported commodities. As announced in the Mid-Term Review of the Monetary and Credit policy for the year 2002-03, the exporters will now be allowed to repay/pre-pay packing credit availed both in rupees and in foreign currency out of balances held in Exchange Earners Foreign Currency A/c (EEFC A/c) as also from rupee resources of the exporter to the extent exports have actually taken place. 2. Export Credit in Foreign Currency (PCFC) In order to make the interest rates on export credit more competitive, the ceiling rate on export credit in foreign currency by banks was revised w.e.f. 29.4.02 to LIBOR plus 0.75 percentage point from LIBOR plus 1 percentage point. Banks were advised to give wide publicity to this important facility and make it easily accessible to all exporters including small exporters. 3. Conversion of Rupee packing Credit into PCFC In order to provide more flexibility to the exporters, banks were advised that they may at their discretion, allow exporters to convert their drawals under rupee preshipment credit into PCFC. 4. Survey on simplification of procedures for export credit delivery and level of exporters satisfaction with banks services The Reserve Bank has been making concerted efforts to encourage banks to improve the export credit delivery system. With the help of the National Council of Applied Economic Research (NCAER). A survey has been conducted on exporters satisfaction.
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While the survey results indicated a high level of satisfaction by exporters, certain suggestions were made for further improving credit delivery to exporters. 5. Special package for large value exports The RBI in consultation with Government of India had earlier announced a special financial package for large value export of certain select products, which are internationally competitive and have high value addition. The scheme has now been extended upto September 2003 and covers the following twelve products: i) Pharmaceuticals (including drugs, fine chemicals). ii) Agro-chemicals (including inorganic and organic chemicals). iii) Transport equipment (including commercial vehicles, two and three wheelers, tractors, railway wagons, and locomotives). iv) Cement (including glass, glassware, ceramics and refractories). v) Iron and steel (including iron and steel bars/rods and primary and semi-finished iron and steel). vi) Leather and leather goods. vii) Textiles. viii) Products of aluminium. ix) Petroleum products. x) Sugar. xi) Foodgrains. 6. Export Credit to Processors/exporters-Agri Export Zones Banks have been advised to treat the inputs supplied to farmers by exporters as raw material for export and sanction export credit to processors/exporters to cover the cost of such inputs required by farmers to cultivate the crops, to promote export of agri products. It has now been clarified to the banks that the facilities available to Agri Export Oriented Units situated in Agri Export Zones are also available to exporters of agricultural products/Agri Export Oriented Units, located outside the Agri Export Zones.

11. SPECIAL ECONOMIC ZONES (SEZs)


The Facts A new policy has been introduced in the Exim Policy effective from 1.4.2000 for setting up of Special Economic Zones in the country with a view to provide an internationally competitive and hassle free environment for exports. Units may be set up in SEZ for manufacture, trading, re-conditioning, and repair or for service activity. The units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units shall be subject to positive foreign exchange earning and on payment of applicable Customs duty and import policy in force. There is no proposal for the Central Government to set up any new SEZ in the country. The policy, however, provides for setting up of SEZs in the public, private, joint sector or by State Governments. It was also envisaged that some of the existing Export Processing Zones would be converted into Special Economic Zones. Government has issued notifications on 1.11.2000 for conversion of the existing Export Processing Zones at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra) and Cochin (Kerala) into Special Economic Zones. Approvals have also been given for setting up of 17 Special Economic Zones at Positra (Gujarat), Navi Mumbai, and Khopta (Maha Mumbai) (Maharashtra), Nanguneri (Tamil Nadu), Kulpi and Salt Lake (West Bengal), Paradeep and Gopalpur (Orissa), Bhadohi, Kanpur, Greater Noida and Moradabad (U.P.), Vishakhapatnam and Kakinada (Andhra Pradesh), Indore (Madhya Pradesh),
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Hassan ( Karnataka) and Vallarpadam/Puthuvypeen (Kerala) on the basis of proposals received from the Private Sector/State Governments. a) SEZ Scheme A designated duty free enclave and to be treated as foreign territory for trade operations and duties and tariffs. The activities permitted to be carried out in the SEZs are manufacture of goods, services, production, processing, assembling, re-conditioning, re-engineering, packaging, trading etc. SEZ units to be positive net foreign exchange earner within three years. Duty free goods to be utilised over the approval period of 5 years. Monitoring of performance of SEZ units by a committee headed by Development Commissioner and consisting of Customs. Facilities for SEZ Units 1. No licence required for import. 2. Duty free import of capital goods, raw materials, consumables, spares etc. 3. Duty free procurement of capital goods, raw materials, consumable spares etc. from the domestic market. 4. 100% income-tax exemption for 5 years and 50% exemption for 2 years thereafter. 5. Manufacturing, trading or service activity allowed. 6. Domestic Sales on full Custom duty subject to import policy in force. 7. No fixed wastage norms. 8. Full freedom for subcontracting. 9. Subcontracting of part of production permitted abroad. 10. No routine examination by Customs of exports and import cargo. 11. Facility to realize and repatriate exports proceeds within 12 months. 12. Re-export imported goods found defective, goods imported from foreign suppliers on loan basis etc. without G.R. waiver under intimation to the Development Commissioner. 13. Facility to retain 100% of foreign exchange receipts in Export Earners Foreign Currency (EEFC) Account. 14. 100% Foreign Direct Investment in manufacturing sector allowed through automatic route barring few sectors. 15. Duty free import/procurement from Domestic Tariff Area (DTA) of goods for setting up of units in the Zone permitted. 16. Exemption from service tax. 17. Exemption from Central Sales Tax to sales made from domestic tariff area to SEZ units. 18. Facility to set up offshore banking units in SEZs. 19. 100% FDI to SEZ Franchisee for providing basic telephone service in SEZs. 20. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restrictions through recognised banking channels. Facilities for developer of SEZ Procure goods from the DTA without payment of duty or import goods duty free for the development, operation and maintenance of SEZ. Income-tax exemption for 10 years in first 15 years. Full freedom in allocation of developed plots to approved SEZ units on purely commercial basis. Full authority to provide services like water, electricity, security, restaurants, recreation centres etc. on commercial lines.
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Facility to develop township within the SEZ with residential areas, markets, play grounds, clubs, recreation centres etc. with 100% FDI. Exemption from Service Tax.

b) EXPORT PROCESSING ZONES The Export Processing Zones (EPZs) set up as enclaves, separated from the Domestic Tariff Area by fiscal barriers, are intended to provide a competitive duty free environment for export production. There are four EPZs set up by the Government at Noida (Uttar Pradesh), Chennai (Tamil Nadu), Falta (West Bengal) and Visakhapatnam (Andhra Pradesh). Each of the Zones provides basic infrastructure such as developed land for construction of factory sheds, standard design factory buildings providing ready-built sheds, roads, power, water supply and drainage. In addition, Customs clearance is arranged within the Zones at no extra charge. Provision is made for locating banking/post office facilities and officers of clearing agents in the Service Centre located in each of the Zones. EOUs have on the other hand, to put up their own infrastructure. 296 units are in operation in EPZs as on September, 2002. c) EXPORT ORIENTED UNITS The Export Oriented Units (EOUs) scheme introduced in early 1981, is complementary to the EPZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. 1,621 units are in operation under the EOU scheme as on March, 2002. FACILITIES UNDER EOU/EPZ SCHEME Exemption from Central Excise Duty in procurement of capital goods, raw materials, consumables spares etc. from the domestic market. Exemption from customs duty on import of capital goods, raw materials, consumables spares etc. Reimbursement of Central Sales Tax (CST) paid on domestic purchases. Access to Domestic Market upto 50% of FOB value of exports. Job work on behalf of domestic exporters for direct export allowed. EXPORT PERFORMANCE Exports from EOU/EPZ units which stood at Rs.18,376.09 Crores in 2000-2001 rose to Rs.21,652.61 Crores in 2001-2002 representing a growth of 17.83%. Details of exports from EPZs/EOUs during the last three years are indicated below: (Rs. in crores) (April-Sept,2002)

Year 1999-2000 2000-2001 2001-2002 2002-2003 5696.90

EPZs 1776.69 2464.09 2917.61 1299.98

EOUs 13701.29 15912.00 18735.00 4396.92

Total 15477.98 18376.09 21652.61

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12) EXPORT PROMOTION INDUSTRIAL PARK (EPIP) SCHEME


The Central Government have so far approved 25 proposals for establishment of EPIPs in the States of Punjab, Haryana, Himachal Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra, Tamil Nadu, Andhra Pradesh, Uttar Pradesh, Gujarat, Bihar, Jammu & Kashmir, Assam, Madhya Pradesh, West Bengal, Orissa, Meghalaya, Manipur, Nagaland, Mizoram and Tripura. The EPIPs at Sitapura, Distt. Jaipur (Rajasthan), Bangalore (Karnataka), Ambarnath, Distt. Thane (Maharashtra), Surajpur, Distt. Gautambudh Nagar (U.P.), Gummidipoondi, Chengalpattu, Distt. MGR(Tamil Nadu), Amingaon near Guwahati (Assam), Kakkanad, Distt. Ernakulam (Kerala), Pashamylaram, Distt. Medak (Andhra Pradesh), Kundli, Distt. Sonipat (Haryana), Byrnihat, Distt. Ribhoi (Meghalaya) and Bhubaneswar, Distt. Khurda (Orissa) have been completed and allotment of space to large number of units have also been made in these EPIPs. Exports have already commenced from Karnataka, Rajasthan, Punjab, Haryana and Orissa EPIPs. The Parks in other States are at various stages of implementation. EPIP Scheme has been merged with Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) Scheme from 1.4.2002. Recognised Export Houses, Trading Houses, etc. With the objective to recognise established exporters with a view to building, marketing, infrastructure and expertise required for export promotion, the Government is granting the status to such exporters as Export Houses, Trading House, Star Trading House and Super Star Trading House. This status is granted on achieving the prescribed average export performance level subject to the conditions as laid down under Export and Import Policy.

Export Import (EXIM) Policy 2002-07


The annual amendment to the Export & Import (EXIM) Policy 2002-07 was carried out on March 31, 2003. The thrust of the amendment was to carry out procedural simplification of the various export promotion schemes, focus on critical sectors of export growth potential for India such as the services, agriculture, information technology etc. Further trade facilitation measures and incentives were granted for units in the Special Economic Zones (SEZ)/ Export Oriented Units (EOU)/ Electronic Hardware Technology Parks (EHTP)/Software Technology Parks of India (STPI) scheme in a bid to boost exports from these zones.The gist of the salient changes in the Exim Policy 2002-07 carried out w.e.f. 01.04.2003 and some subsequent changes introduced in January 2004 are given below: HIGHLIGHTS OF EXIM POLICY 2002-07 (as amended upto 31.3.2003) Service Exports
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Duty free import facility for service sector having a minimum foreign exchange earning of Rs.10 lakhs. The duty free entitlement shall be 10% of the average foreign exchange earned in the preceding three licensing years. However, for hotels, the same shall be 5% of the average foreign exchange earned in the preceding three licensing years. This entitlement can be used for import of office equipments, professional equipments, spares and consumables. However, imports of agriculture and dairy products shall not be allowed for imports against the entitlement. The entitlement and the goods imported against such entitlement shall be non-transferable. Agro Exports Corporate sector with proven credential will be encouraged to sponsor Agri Export Zone for boosting agro exports. The corporates to provide services such as provision of pre/post harvest treatment and operations, plant protection, processing, packaging, storage and related R&D. DEPB rate for selected agro products to factor in the cost of pre-production inputs such as fertiliser, pesticides and seeds. Status Holders Duty-free import entitlement for status holders having incremental growth of more than 25% in FOB value of exports (in free foreign exchange). This facility shall however be available to status holders having a minimum export turnover of Rs.25 crore (in free foreign exchange). The duty free entitlement shall be 10% of the incremental growth in exports and can be used for import of capital goods, office equipment and inputs for their own factory or the factory of the associate/supporting manufacturer/job worker. The entitlement/ goods shall not be transferable. This facility shall be available on the exports made from 1.4.2003. Annual Advance Licence facility for status holders to be introduced to enable them to plan for their imports of raw material and components on an annual basis and take advantage of bulk purchases. The Input-Output norms for status holders to be fixed on priority basis within a period of 60 days. Status holders in STPI shall be permitted free movement of professional equipments like laptop/computer. Hardware/Software To give a boost to electronic hardware industry, supplies of all 217 ITA-1 items from EHTP units to DTA shall qualify for fulfillment of export obligation. To promote growth of exports in embedded software, hardware shall be admissible for duty free import for testing and development purposes. Hardware upto a value of US$ 10,000 shall be allowed to be disposed off subject to STPI certification. 100% depreciation to be available over a period of 3 years to computer and computer peripherals for units in EOU/EHTP/STP/SEZ . Gem & Jewellery Sector Diamond & Jewellery Dollar Account for exporters dealing in purchase/sale of diamonds and diamond studded jewellery. Nominated agencies to accept payment in dollars for cost of import of precious metals from EEFC account of exporter. Gem & Jewellery units in SEZ and EOUs can receive precious metal i.e. Gold/Silver/Platinum prior to exports or post exports equivalent to value of jewellery exported. This means that they can bring export proceeds in kind against the present provision of bringing in cash only. Export Clusters Upgradation of infrastructure in existing clusters/industrial locations under the Department of Industrial Policy & Promotion (DIPP) scheme to increase overall competitiveness of the export clusters. Supplemental efforts to be made under the ASIDE scheme and similar schemes of other Ministries to bridge technology and productivity gaps in identified clusters.

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10 such clusters with high growth potential to be reinvigorated based on a participatory approach. Rehabilitation of Sick Units. For revival of sick units, extension of export obligation period to be allowed to such units based on BIFR rehabilitation schemes. This facility shall also be available to units outside the purview of BIFR but operating under the State rehabilitation programme. Removal of Quantitative Restrictions Import of 69 items covering animal products, vegetables and spices, antibiotics and films removed from restricted list. Export of 5 items namely paddy except basmati, cotton linters, rare earth, silk cocoons, family planning devices except condoms removed from restricted list. Special Economic Zones Scheme Sales from Domestic Tariff Area (DTA) to SEZs to be treated as export. This would now entitle domestic suppliers to Drawback/DEPB benefits, CST exemption and Service Tax exemption. Agriculture/Horticulture processing SEZ units will now be allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods as per the requirement of importing countries. This is expected to integrate the production and processing and help in promoting SEZs specialising in agro exports. Foreign bound passengers will now be allowed to take goods from SEZs to promote trade, tourism and exports. Domestic sales by SEZ units will now be exempt from SAD. Restriction of one year period for remittance of export proceeds removed for SEZ units. Netting of export permitted for SEZ unit provided it is between same exporter and importer over a period of 12 months. SEZ units permitted to take job work abroad and exports goods from there only. SEZ units can capitalise import payables. Wastage for subcontracting/exchange by gem and jewellery units in transactions between SEZ and DTA will now be allowed. Export/import of all products through post parcel/courier by SEZ units will now be allowed. The value of capital goods imported by SEZ units will now be amortised uniformly over 10 years. SEZ units will now be allowed to sell all products including gems and jewellery through exhibitions and duty free shops or shops set up abroad. Goods required for operation and maintenance of SEZ units will now be allowed duty free. 10. EOU Scheme. Agriculture/Horticulture processing EOUs will now be allowed to provide inputs and equipments to contract farmers in DTA to promote production of goods as per the requirement of importing countries. This is expected to integrate the production and processing and help in promoting agro exports. EOUs are now required to be only net positive foreign exchange earner and there will now be no export performance requirement. Foreign bound passengers will now be allowed to take goods from EOUs to promote trade, tourism and exports. The value of capital goods imported by EOUs will now be amortized uniformly over 10 years. Period of utilisation of raw materials prescribed for EOUs increased from 1 year to 3 years. Gems and jewellery EOUs are now being permitted sub-contracting in DTA. Wastage for subcontracting/exchange by gem and jewellery units in transactions between EOUs and DTA will now be allowed as per norms. Export/import of all products through post parcel/courier by EOUs will now be allowed. EOUs will now be allowed to sell all products including gems and jewellery through exhibitions and duty free

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shops or shops set up abroad. Gems and jewellery EOUs will now be entitled to advance domestic sales. EPCG scheme The scheme shall now allow import of capital goods for pre-production and postproduction facilities also. The Export Obligation under the scheme shall now be linked to the duty saved and shall be 8 times the duty saved. To facilitate upgradation of existing plant and machinery, import of spares shall also be allowed under the scheme. To promote higher value addition in exports, the existing condition of imposing an additional Export Obligation of 50% for products in the higher product chain to be done away with. Greater flexibility for fulfillment of export obligation under the scheme by allowing export of any other product manufactured by the exporter. This shall take care of the dynamics of international market. Capital goods upto 10 years old shall also be allowed under the scheme. To facilitate diversification into the software sector, existing manufacturer exporters will be allowed to fulfill export obligation arising out of import of capital goods under the scheme for setting up of software units through export of manufactured goods of the same company. Royalty payments received from abroad and testing charges received in free foreign exchange to be counted for discharge of export obligation under EPCG scheme. DEPB Scheme Facility for provisional DEPB rate introduced to encourage diversification and promote export of new products. DEPB rates rationalised in line with general reduction in Customs duty. Advance Licence Standard Input Output Norms for 403 new products notified. Anti-dumping and safeguard duty exemption to advance licence for deemed exports for supplies to EOU/SEZ/EHTP/STP. DFRC Scheme Duty Free Replenishment Certificate scheme extended to deemed exports to provide a boost to domestic manufacturer. Value addition under DFRC scheme reduced from 33% to 25%. Reduction of Transaction Cost High priority being accorded to the EDI implementation programme covering all major community partners in order to minimise transaction cost, time and discretion. We are now gearing ourselves to provide on line approvals to exporters where exports have been effected from 23 EDI ports. Online issuance of Importer-Exporter Code(IEC) number by linking the DGFT EDI network with the Income Tax PAN database is under progress. Applications filed electronically (through our website www.nic.in/ eximpol) shall have a 50% lower processing fee as compared to manual applications. Miscellaneous Actual user condition for import of second hand capital goods upto 10 years old dispensed with. Reduction in penal interest rate from 24 percent to 15 percent for all old cases of default under Exim Policy. Restriction on export of warranty spares removed. IEC holder to furnish online return of imports/exports made on yearly basis. Export of free of cost goods for export promotion @ 2 percent of average annual exports in preceding three years subject to ceiling of Rs.5 lakh permitted. HIGHLIGHTS OF THE FOREIGN TRADE POLICY 2004-09 1. Strategy:
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(a) It is for the first time that a comprehensive Foreign Trade Policy is being notified. The Foreign Trade Policy takes an integrated view of the overall development of Indias foreign trade. (b) The objective of the Foreign Trade Policy is two-fold: to double Indias percentage share of global merchandise trade by 2009;and to act as an effective instrument of economic growth by giving a thrust toemployment generation, especially in semi-urban and rural areas. (c) The key strategies are: Unshackling of controls; Creating an atmosphere of trust and transparency; Simplifying procedures and bringing down transaction costs; Adopting the fundamental principle that duties and levies should not beexported; Identifying and nurturing different special focus areas to facilitate development of India as a global hub for manufacturing, trading and services. Special Focus Initiatives: (a) Sectors with significant export prospects coupled with potential for employmentgeneration in semi-urban and rural areas have been identified as thrust sectors,and specific sectoral strategies have been prepared. (b) Further sectoral initiatives in other sectors will be announced from time to time.For the present, Special Focus Initiatives have been prepared for Agriculture,Handicrafts, Handlooms, Gems & Jewellery and Leather & Footwear sectors. (c) The threshold limit of designated Towns of Export Excellence is reduced fromRs.1000 crores to Rs.250 crores in these thrust sectors. Package for Agriculture: The Special Focus Initiative for Agriculture includes: (a) A new scheme called Vishesh Krishi Upaj Yojana has been introduced to boost exports of fruits, vegetables, flowers, minor forest produce and their value added products. (b) Duty free import of capital goods under EPCG scheme. (c) Capital goods imported under EPCG for agriculture permitted to be installed anywhere in the Agri Export Zone. (d) ASIDE funds to be utilized for development for Agri Export Zones also. (e) Import of seeds, bulbs, tubers and planting material has been liberalized. (f) Export of plant portions, derivatives and extracts has been liberalized with a view to promote export of medicinal plants and herbal products. Gems & Jewellery: (a) Duty free import of consumables for metals other than gold and platinum allowed up to 2% of FOB value of exports. (b) Duty free re-import entitlement for rejected jewellery allowed up to 2% of FOB value of exports. (c) Duty free import of commercial samples of jewellery increased to Rs.1 lakh. (d) Import of gold of 18 carat and above shall be allowed under the replenishment scheme. Handlooms & Handicrafts: (a) Duty free import of trimmings and embellishments for Handlooms & Handicraftssectors increased to 5% of FOB value of exports. (b) Import of trimmings and embellishments and samples shall be exempt from CVD. (c) Handicraft Export Promotion Council authorised to import trimmings,embellishments and samples for small manufacturers. (d) A new Handicraft Special Economic Zone shall be established. Leather & Footwear:
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(a) Duty free entitlements of import trimmings, embellishments and footwear components for leather industry increased to 3% of FOB value of exports. (b) Duty free import of specified items for leather sector increased to 5% of FOB value of exports. (c) Machinery and equipment for Effluent Treatment Plants for leather industry shall be exempt from Customs Duty. Export Promotion Schemes: (a) Target Plus: A new scheme to accelerate growth of exports called Target Plus has been introduced. Exporters who have achieved a quantum growth in exports would be entitled to duty free credit based on incremental exports substantially higher than the general actual export target fixed. (Since the target fixed for 2004-05 is 16%, the lower limit of performance for qualifying for rewards is pegged at 20% for the current year). Rewards will be granted based on a tiered approach. For incremental growth of over 20%, 25% and 100%, the duty free credits would be 5%, 10% and 15% of FOB value of incremental exports. (b) Vishesh Krishi Upaj Yojana: Another new scheme called Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme) has been introduced to boost exports of fruits, vegetables, flowers, minor forest produce and their value added products. Export of these products shall qualify for duty free credit entitlement equivalent to 5% of FOB value of exports. The entitlement is freely transferable and can be used for import of a variety of inputs and goods. (c) Served from India Scheme: To accelerate growth in export of services so as to create a powerful and unique Served from India brand instantly recognized and respected the world over, the earlier DFEC scheme for services has been revamped and re-cast into the Served from India scheme. Individual service providers who earn foreign exchange of at least Rs.5 lakhs, and other service providers who earn foreign exchange of at least Rs.10 lakhs will be eligible for a duty credit entitlement of 10% of total foreign exchange earned by them. In the case of stand-alone restaurants, the entitlement shall be 20%, whereas in the case of hotels, it shall be 5%. Hotels and Restaurants can use their duty credit entitlement for import of food items and alcoholic beverages. (d) EPCG: Additional flexibility for fulfillment of export obligation under EPCG schemein order to reduce difficulties of exporters of goods and services. Technological upgradation under EPCG scheme has been facilitated and incentivised. Transfer of capital goods to group companies and managed hotels now permitted under EPCG. In case of movable capital goods in the service sector, the requirement of installation certificate from Central Excise has been done away with. Export obligation for specified projects shall be calculated based on concessional duty permitted to them. This would improve the viability of such projects. (e) DFRC: Import of fuel under DFRC entitlement shall be allowed to be transferred to marketing agencies authorized by the Ministry of Petroleum and Natural Gas. (f) DEPB:
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The DEPB scheme would be continued until replaced by a new scheme to be drawn up in consultation with exporters. (g)New Status Holder Categorization: (a) A new rationalized scheme of categorization of status holders as Star Export Houses has been introduced as under: Category Total performance over three years One Star Export House 15 crores Two Star Export House 100 crores Three Star Export House 500 crores Four Star Export House 1500 crores Five Star Export House 5000 crores (b) Star Export Houses shall be eligible for a number of privileges including fasttrackclearance procedures, exemption from furnishing of Bank Guarantee, eligibility for consideration under Target Plus Scheme etc. (h)EOUs: (a) EOUs shall be exempted from Service Tax in proportion to their exported goods and services. (b) EOUs shall be permitted to retain 100% of export earnings in EEFC accounts. (c) Income Tax benefits on plant and machinery shall be extended to DTA units which convert to EOUs. (d) Import of capital goods shall be on self-certification basis for EOUs. (e) For EOUs engaged in Textile & Garments manufacture leftover materials and fabrics upto 2% of CIF value or quantity of import shall be allowed to be disposed of on payment of duty on transaction value only. (f) Minimum investment criteria shall not apply to Brass Hardware and Hand-made Jewellery EOUs (this facility already exists for Handicrafts, Agriculture, Floriculture, Aquaculture, Animal Husbandry, IT and Services). (i)Free Trade and Warehousing Zone: A new scheme to establish Free Trade and Warehousing Zone has been introduced 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. This is aimed at making India into a global trading-hub. FDI would be permitted up to 100% in the development and establishment of the zones and their infrastructural facilities. Each zone would have minimum outlay of Rs.100 crores and five lakh sq. mts. built up area. Units in the FTWZs would qualify for all other benefits as applicable for SEZ units. Import of Second hand Capital Goods Import of second-hand capital goods shall be permitted without any age restrictions. Minimum depreciated value for plant and machinery to be re-located into India has been reduced from Rs.50 crores to Rs.25 crores. (j) Services Export Promotion Council: An exclusive Services Export Promotion Council shall be set up in order to map opportunities for key services in key markets, and develop strategic market access programmes, including brand building, in co-ordination with sectoral players and recognized nodal bodies of the services industry. (k) Common Facilities Centre: Government shall promote the establishment of Common Facility Centres for use by home-based service providers, particularly in areas like Engineering & Architectural design, Multi-media operations, software developers etc., in State and District-level towns, to draw in a vast multitude of home-based professionals into the services export arena.
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(l) Procedural Simplification & Rationalisation Measures: All exporters with minimum turnover of Rs.5 crores and good track record shallbe exempt from furnishing Bank Guarantee in any of the schemes, so as to reduce their transactional costs. All goods and services exported, including those from DTA units, shall be exemptfrom Service Tax. Validity of all licences/entitlements issued under various schemes has beenincreased to a uniform 24 months. Number of returns and forms to be filed have been reduced. This process shall beontinued in consultation with Customs & Excise. Enhanced delegation of powers to Zonal and Regional offices of DGFT for speedy and less cumbersome disposal of matters. Time bound introduction of Electronic Data Interface (EDI) for export transactions. 75% of all export transactions to be on EDI within six months. (m) Pragati Maidan: In order to showcase our industrial and trade prowess to its best advantage and leverage existing facilities, Pragati Maidan will be transformed into a world-class complex. There shall be state-of-the-art, environmentally-controlled, visitor friendly exhibition areas and marts. A huge Convention Centre to accommodate 10,000 delegates with flexible hall spaces, auditoria and meeting rooms with high-tech equipment, as well as multi-level car parking for 9,000 vehicles will be developed within the envelope of Pragati Maidan.

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(n) Legal Aid: Financial assistance would be provided to deserving exporters, on the recommendation of Export Promotion Councils, for meeting the costs of legal expenses connected with trade-related matters. (o) Grievance Redressal: A new mechanism for grievance redressal has been formulated and put into place by a Government Resolution to facilitate speedy redressal of grievances of trade and industry. (p) Quality Policy: DGFT shall be a business-driven, transparent, corporate oriented organization. Exporters can file digitally signed applications and use Electronic Fund TransferMechanism for paying application fees. All DGFT offices shall be connected via a central server making application processing faster. DGFT HQ has obtained ISO 9000 certification by standardizing and automating procedures. (q) Bio Technology Parks Biotechnology Parks to be set up which would be granted all facilities of 100% EOUs. Co-acceptance/ Avalisation introduced as equivalent to irrevocable letter of credit to provide wider flexibility in financial instrument for export transaction. (r) Board of Trade: The Board of Trade shall be revamped and given a clear and dynamic role. An eminent person or expert on trade policy shall be nominated as President of the Board of Trade, which shall have a Secretariat and a separate Budget Head, and will be serviced by the Department of Commerce.

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Chapter-3
Indian software industry - the History

Service Export Including Software Exports


It was in the 70s that the computer as a productivity tool started proliferating in the Indian industrial scene. But it was only by mid 80s that the forecasters, analysts and Indian government policy planners began to understand the potential of Indian talent in computer software. This realisation led to the formulation of the computer software policy in 1986. The economists began to analyse the potential of the Indian software industry. It would the said, be one of the fastest growing sectors of the economy and provides high quality employment of young people. It would earn significant revenue from exports and would be a highly desirable industry, as it required skilled manpower, few raw materials and was not in any way damaging to the environment. Many scoffed at the idea of India making any significant contributions to the high technology world of software. But for once, the forecasters and analysts were right. They may even have under estimated the potential of the industry. Currently, the software industry in India is worth Rs. 63.1 billion (US $ 1.75 billion) and if we add in the kind of in-house development that takes place at many large commercial/corporate end-users, they the total software industry is close to Rs. 80 billion or US $ 2.2 billion, whereas ten years back the software industry in India was not more than Rs. 300 million or US $ 10 million. Nevertheless this phenomenal growth of the industry has not been achieved overnight. The C.A.G.R. for the Indian software industry in the last five years has been 52.6%. Here the C.A.G.R. for the software export industry has been a high 55.04% while that for the domestic industry has been 48.9%. Despite these high growth rates, Indias share in the world software market is very low, but India still enjoys an advantage over some of the other nations which are trying to promote software exports. This is due to the fact that India possesses the worlds second largest pool of scientific manpower which is also English speaking. Coupled with the fact that the quality of Indian software is good and manpower cost is relatively low, it provides India a very good opportunity in the world market. Currently, the software industry in India employs more than 1, 60,000 people and continue to be amongst the fastest growing sectors in the Indian economy. No wonder, software has been identified as a thrust area by government of India both for exports as well as in the domestic sector. After showing impressive growth in the export market, the recent trend in the industry is to give increased focus to domestic market so that all possible resources may be enhanced for an ultimate quantum jump in the international market.

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INDIAN SOFTWARE

AND

SERVICES INDUSTRY: NASSCOM ANALYSIS


Composition of IT Market in India (USD Billion) 2003-04

Indian IT Industry The IT industrys contribution to the Indian GDP has increased from approximately 1.4 percent in 1998-99 to more than 3 percent in 2003-04 The Indian IT industry includes hardware, peripherals, networking, training, domestic and export market for software and services and BPO

3.4

3.75 12.5 0.26

Indian Software and Services Industry

In d ia n

Domestic Software and Services Hardware, Peripherals and Networking Training Software and Service Exports S o ftw a r e & S e r vic e In d u s tr y

In 2003-04, total revenues of the Indian software 25 and services 2 0 .5 industry were 20 US$ 15.9 bn, including 16 .3 15.9 domestic 15 revenues of US$ 12 .4 12 .5 3.4 bn 9 .6 The Indian 10 software and service industry 4 .2 is likely to grow 5 3 .4 2 .8 to US$ 20.5 bn, with domestic market revenues 0 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 of US$ 4.2 bn Indian software 12 .5 16 .3 S o f tw are & S ervices E xp o rts 9 .6 and services 2 .8 3 .4 4 .2 D o mes tic market exports 12 .4 15.9 2 0 .5 T o tal S o f tw are & S ervice registered a Ind us try growth of 30.5 % in FY 2003-04 clocking S o f tw are & S ervices E xpD o mes tic marketo tal S o f tw are & S ervice Ind us try o rts T revenues of US$ 12.5 billion. The Indian software and services exports are likely to witness 30-32 % growth to reach revenues of US$ 16.3 bn Software and services exports contribution to Indias total invisible receipts is also continuously increasing, indicating the strength of the software sector as the driver of the overall foreign exchange reserves.

Geographical Breakdown

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USD

North America, which accounts for over 55 per cent of the global IT spend, represented approx. 70 per cent of Indian software exports in 2003-04, with Europe ranking second at 22.25 per cent of total exports. North America remains the dominant market for ITES-BPO services, accounting for over 80 per cent of the ITES-BPO business in India. Indian companies have been gradually able to increase the European share in total software and services exports. Indian companies are aggressively exploring new markets in geographies like Japan, Germany and France. Over the next few years, the Asia-Pacific region will emerge as a key target region for the Indian software and services industry as it will be important for Indian players to expand to new regions

Exports by Verticals The financial services sector (IT spending by banks, insurance companies, and securities firms) accounted for the largest share of Indian software and services exports at around 40 per cent followed by manufacturing with around 12 percent Emerging verticals: Healthcare, Telecom Service providers, Retail Government

Indian IT software services and BPO (ITES) revenues: Vertical


($ billion)
Banking, Financial Services & Insurance (BFSI) Manufacturing Telecom equipment Government Retail Utilities Transportation Telecom service providers Healthcare

2002-03
39% 12% 9% 1% 5% 3% 1% 4% 5%

2003-04
40% 12% 9% 1% 5% 3% 1% 4% 5%

and

Exports by Service Lines Others 21% 21% Custom application development Total 100% 100% maintenance, and application The above classification of software exports by vertical is tentative. outsourcing, accounting for 88 The above classification and revenues are likely to change in percent of total software exports coming years as more granular data is obtained from software companies. Source: NASSCOM Emerging service lines: IT consulting, System Integration, Network Consulting and Integration, Hardware Support Installation, Processing Services and IS outsourcing

and

and

Global Delivery Model: Offshoring is Mainstream Offshore revenues as a proportion of total revenues have increased to 59 per cent in 200304, whereas the onsite proportion has reduced from 43 per cent to nearly 41 per cent. The growing share of offshore development, compared with on-site services, is one of the reasons for the declining growth rate of Indian software exports Knowledge Professionals Indias key advantage in the global IT and ITES-BPO industry is the availability of an abundant, high quality and cost-effective pool of skilled knowledge workers The overall median age of the software professionals is about 27.5 years The skills in demand include software analysts, domain specialists, information security, integration specialists, database administrators, network specialist and communication engineers, data warehousing and semiconductor design 81 percent of all software professionals have a graduate degree or above 13 percent are M.Tech, MBA, CA, ICWA, 67 percent are B.Tech, BE or MCA. 20 percent are diploma-holders or graduates 2001-02 2002-03 2003-04 Software Exports sector 170,000 205,000 260,000 Software-domestic sector 22,000 25,000 28,000 Software-captive in user organizations 224,250 260,000 280,000 ITES-BPO 106,000 171,000 245,000 Study Material on International Business by - Nagpur
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Total

522,250

661,000 813,000 Source: NASSCOM

Quality As of December 2003, India has 65 companies at SEI CMM Level 5 assessment. The quality maturity of Indian software and BPO industry can be measured from the fact that already 275 Indian software and ITES-BPO companies have acquired quality certifications and about 80 more companies are in the pipeline. Many leading Indian BPO companies have received recognized quality certifications such as COPC. One of the most recognized and widely used standards is ISO 9000, the international quality management standard. Although it is relatively early days for the Indian BPO sector, the sector is maturing rapidly and this is increasingly apparent in the volume and complexity of work that is being outsourced to India. The Indian BPO companies are world class in their offerings as compared to those in other countries. Indian providers have a client satisfaction level of over 80 percent, while quality fatal defects are less than 2 percent. Indias Environment Security Laws India China Philippines

Indian companies as well as IPR the Government have been proactive in taking Copyright appropriate steps to tackle Patent Product patentsx x security concerns. Many 2005 Indian companies are aware of and are opting for international security standards such as ISO DATA 17799, BS7799, COBIT and PROTECTION ITSM. NASSCOM, with the Comprehensive x x Indian government, has laid Data Protection framework-2004 the foundation for the required legal framework. Laws x x x The IT Act, 2000 includes Vertical laws and policies Specific concerning data security Laws and cyber crimes. Other than IT Act, the Indian Copyright Act of 1972 deals CYBER with copyright issues in computer programs. Digital As a part of the recently signatures launched Trusted Sourcing Hacking initiative, NASSCOM has Privacy * researched comprehensively on the security framework (regulatory environment and security practices) in India. The report benchmarks Indian ITS and BPO companies with their counterparts in US and UK with regards to practices followed on data security, confidentiality and privacy laws.

Structure of Indian Software and Services Industry The Indian IT services industry comprises a diverse group of companies-large, near-billion dollar global companies and small start-ups, Indian companies and multinationals. Growth rates across companies is quite varied. Study Material on International Business by - Nagpur
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Tier 1 companies (i.e. the top 5 firms) account for about 32 percent of total software exports; and have benefited from customers recent scaling of operations Tier 2 companies (with revenues of between Rs. 1 billion and Rs. 10 billion) account for about 24 percent of the industry, and face the challenge of differentiation from Tier 1 players. The revenues of these companies are under pressure because of fierce bidding by those in Tier 1 MNC back-ends account for about 26 percent of the industry Focused companies (about 3-4 percent of the industry) include those with a focus on a particular domain/service line/products, who are facing the challenge of cutbacks in key markets such as telecom, and managing to diversify their offerings Small companies, with revenues of less than Rs. 1 billion, account for 12-14 percent of the market, and many have witnessed a slow growth due to excessive dependence on staff augmentation

Country Competitiveness India has become one of the most favoured destinations for sourcing software and IT enabled services, achieving an export value of US$ 12.5 billion in 2003-04. India in comparison to other locations ranks high in several critical parameters including, level of government support, quality of the labor pool, English language skills, cost advantages, project management skills and over-all quality control. Additionally, a favorable time zone difference with North America and Europe helps organizations achieve 24x7 internal operations and customer service. Indias strengths include Highly skilled, abundant labor pool and market-driven education system Labor cost advantages Process and quality focus - large number of companies have received SEI-CMM Level 5 certifications Project management and complex project execution skills and experience Entrepreneurial culture Indian diasporas and strong customer relationships Friendly government policies for IT exports Indias opportunities include Creation of global household brands Service lines such as systems integration and IT consulting Deeper penetration in existing service lines, verticals and geographies (Europe, China, Japan) Main Destinations for Offshoring IT Services (until March 2003)
Parameter IT export Industry size (US $, million) Active export focused IT professionals IT employee cost (US$, per year) Number of CMM level 5 certified companies IT Labor Force India 8,955 Canada 3780 Ireland 1920 Israel 900 South Africa 96

195,000

45000

21000

15000

2000

5,000-12,000

36000

25,000-35,000

25000

18000

60

NA

NA

Low cost, High quality

High cost, High quality

High cost, High quality

High cost, High quality

Infrastructure Main positives

Average English language workforce, robust project management experience

Good Near-shore, cultures - 71 with UK and US

Good Large development Microsoft, Dell, Significant offshoring precedent High cost

Good More shrinkwrapped software production

moderate cost, moderate quality Good Language skills

qualified highly centers Study skills, highlyon International Business byof tech Material abundant - like and compatible companies Nagpur

Main negatives

Ordinary infrastructure, some geo political risk

High cost of employees

Regional unrest

Nascent BPO industry, lack of precedent

Source: Evalueserve, NASSCOM

Facts and Figures

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Government recognition of the software Industry


Government of India has recognised software industry as a thrust area and high priority industry. The Government has established a Software Development Promotion Agency to give impetus to software exports as well as for domestic market. It has given due cognizance to high value addition content and foreign exchange earning potential of the industry. Of course, it is enabled by India having
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the largest English speaking pool of highly skilled manpower and our focus on providing cutting edge quality solutions to our partners. In the previous decade, Government of India has unfolded several promotional schemes to catalyze growth of software industry. Along the way, they have also announced and implemented many initiatives, policies meant to foster growth of software exports and expand domestic software base. With the liberalization of the Indian economy, Government of India has proactively kept a few points in consideration to facilitate rapid globalization. They includes: Foreign enterprises are to be treated on par with their Indian counterparts. All undertakings (Indian or foreign) have to confirm to the general requirements of the Governments New Industrial Policy (NIP), 1991. Foreign enterprises would have the freedom to remit profits and repatriate capital, subject to foreign exchange considerations. A strict schedule to bring tariff structure on par with international norms to provide a level playing field. India has signed the ITA Agreement at WTO. Automatic approval for foreign investment up to 100% Tax holiday for a block of five years in the first eight years of operation Allows Duty free import of capital goods subject to export obligation Up to 25% production can be sold in DTA (Domestic Tariff Area) No excise duty payable on local purchase Dedicated high speed datacom links Easy availability of infrastructure STP units can import telecommunications infrastructure with zero custom duty and without any export obligation Domestic purchases eligible for benefit of deemed exports The STP scheme was among the first successes of governments commitment to promote software industry in India and making it the most attractive software outsourcing base. Among the other winning policies to the credit of Government of India and its shared vision, notable ones are: (1) Software can be imported duty free. Software industry was the first to be brought on par with non-tariff trade regime in keeping with the WTO spirit. (2) Government of India has allowed 100% tax exemption on profits derived from software exports. (3) Automatic clearance to FDI proposals upto 51%. (4) EPCG (Export Promotion of Capital Goods) : This scheme allows import of capital goods at reduced import duty subject to export obligation. This is allowed to DTA units. (5) India has one of the toughest copyright act in the world. NASSCOM / BSA alliance has already facilitated police raids in New Delhi, Mumbai, Madras, Calcutta and Bangalore resulting in arrest of 41 copyright infringers.

IT software and services market


IT software and services market in India continued to be driven by exports, which exhibited robust growth during the 2003-04 period. The export segment, which had logged in revenues of Rs.461 billion (US$9.55 billion) in 2002-03, accounted for around 60 percent of the total revenues of the IT industry that year. Software and services exports meanwhile are expected to cross the Rs. 555.1 billion mark (US$12.2 billion) in 2003-04, a jump of 20.4 percent in rupee terms and 28 percent in dollar terms. The high growth of the export sector, however, will not be matched by the domestic market, which is expected to log in momentum of around 15 percent, down from 23
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percent in 2002-03. In terms of revenues, the domestic market will cross the Rs. 154 billion (US$ 3.4 billion) mark, with the packaged software segment logging in Rs. 21 billion (US$ 462 million) worth of revenues and the software services touching Rs. 100 billion (US$2.2 billion) levels. The Indian software and services market continued to build momentum, as an economic upturn began sweeping the global geographies. The sector, which had managed to sustain growth during the challenging 2000-02 period, built up steam once again, reverting gradually to its performance levels prior to the global economic recession. Close to 60 percent of the revenues of the overall IT software and services market were accounted for by exports, which jumped from Rs. 461 billion (US$ 9.55 billion) in 2002-03 to an estimated Rs. 555.1 billion (US$ 12.2 billion) in 2003-04. The growth of the domestic software and services market lagged behind at around 15 percent in 2003-04, down from 23 percent in the previous year. The ITES/BPO industry grew at a rapid fire 52.3 percent during 2003-04, accounting for around 29.3 percent of the overall IT export revenues in this period. During 2002-03, the financial services sector accounted for the largest share of Indian software and services exports. IDC studies indicate that IT spending by US banks will touch US$ 60 billion by 2007. The telecom vertical accounted for around 13 percent of Indian software and services exports during 2002-03. The manufacturing segment contributed 12 percent of revenues to overall IT export earnings during 2002-03, while healthcare accounted for an estimated five percent of Indian software exports in 2002-03. India continued to expand its presence in two of the 10 major IT services lines. Custom application development and maintenance and applications outsourcing accounted for nearly 88 percent of total software exports in 2003-04. More recently, Indian companies have begun moving up the value chain and are offering services in IT consulting, systems integration, network consulting and integration processing services and IS outsourcing. The Indian software and services industrys global delivery model veered towards offshore outsourcing, which is expected to account for around Rs. 33,010 crore in 2003-04. On-site services will touch Rs. 22,500 crore in the same period. The Indian software and services export sector has a pyramid structure, with a handful of companies with revenues exceeding Rs. 10 billion (US$ 210 million). The number of companies with revenues above Rs. 1 billion (US$ 21 million) has grown from 52 in 2001-02 to 70 in 2002-03. Tier 1 companies within the industry (top five firms) account for about 32 percent of total software exports.

The global scenario


Business intelligence majors such as IDC state that the IT services market will grow at a CAGR of 5.4 percent over the next five years. Some of the other developments defining this segment include the following: a high growth IT outsourcing industry which will maintain a momentum of five percent in 2003-04. Application outsourcing will remain the focus within this segment a high growth Application Service Providers segment which is forecast to grow at a healthy five year CAGR of 25.3 percent a return to moderate growth of the custom applications development segment, which was the worst hit by the offshoring phenomenon a mild recovery by the US IT services market which is expected to achieve growth of around two percent during 2003-04 and around six percent by 2005.
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a healthy growth of around 8.6 percent in the IT services market within the Asia Pac region, and a five year CAGR of 12.6 percent high growth rates of IT services in the rest of the world (including central and Eastern Europe, Middle East and Africa). The rise of offshoring as a mainstream strategy based on overall savings of 30-60 percent for outsourcing companies. According to Morgan Stanley, the percentage of CIOs outsourcing software applications offshore is likely to triple to 28 percent from 8 percent in 2003. IDC expects offshore volumes to double to US$16 billion in 2004and jump to US$ 40 billion by 2007.

Trends in Indian software and services exports


The Indian software and services market continued to remain export oriented, with sales to overseas customers accounting for the bulk of the sectors turnover for 200304. While software and services exports grew at a healthy 26 percent, logging in a revenue of Rs. 461 billion (US$ 9.55 billion) during 2002-03, the numbers were estimated to touch Rs. 55.51 billion (US$ 12.2 billion) in the 2003-04 period. This represented a jump of around 20.4 percent in Rupee terms and 28 percent in US dollar terms. It was seen that: the contribution of the software and services export segment to Indias overall invisible receipts rose from 59 percent in 2002-03 to around 73 percent in 200304. the Indian software and services industry continued to focus on North America, which remained the largest market for the sector. The other key export destinations for Indian software and services companies were the European and Asia Pac regions. The industry, in fact increased the export contribution from the European geo during 2003-04. The UK, Germany and France together accounted for over 75 percent of Indian exports to Europe Within the Asia Pacific region, Japan, continued to be the largest market for Indian software and services players, followed by China, Hong Kong, Taiwan and South Korea. On the verticals front, the Indian software exporting companies focused primarily on the financial services segment, which lead the tally with an overall revenue contribution of around 39 percent during 2002-03. Companies developed banking solutions centered around enterprise integration, security and enterprise portals, knowledge management and CRM (Customer Relationship Management). The telecom sector, meanwhile accounted for 13 percent of software and services exports in 2002-03, followed by manufacturing, at 12 percent, healthcare (5 percent) and utilities and retail. In the area of global service lines, India continued to play in two out of the ten major IT services segments. As in the past, custom application development and maintenance and application outsourcing services accounted for nearly 88 percent of the total software exports from India. However, there were some signs of movement in the higher end of the software services spectrum, with Indian software majors scaling to offer solutions in the areas of IT consulting and systems integration. Trends also indicated that the offshore delivery model became the preferred business model for the Indian software and services industry during 2003-04, with offshore revenues, as a proportion of the total revenues jumping by approximately 24.4 percent, as compared with 14.20 percent for onsite revenues over 2002-03.

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Future trends and opportunities for the Indian software and services industry According to leading global business intelligence analysts, the offshore outsourcing market, still in a nascent stage, is expected to witness substantial growth over the next few years. Forrester Research estimates that only 3-4 percent of the Fortune 500 companies offshore more than 10 percent of their IT services spending. Considering the mammoth IT budgets of these companies, there is a vast untapped potential that the segment offers Indian software and services vendors. Industry watchers are hopeful that industry pricing will remain relatively stable over the near-to-intermediate term and that Indian services firms may even be able to raise prices. Supply side factors indicate that India will continue to have a significant pool of tech-ready and tech-trainable students over the next few years. It was estimated that during 2003 around 375,000 students joined up engineering or other technical programs. This was in addition to the 500,000 non-engineering graduates that passed out of Indias higher education institutions. It is expected that over the next few years, Indian software and services companies will adopt a global delivery model based on four components: onshore (same country as client); on-site (at the client site), nearshore (country near to client country) and offshore (based in India)

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Chapter-4
Institutions in Export Promotion
1. Ministry of Commerce
The Department of Commerce, in the Ministry of Commerce and Industry is headed by a Secretary. Four Additional Secretaries, ten Joint Secretary level officers and a number of other senior officers assist the Secretary. The Department formulates policies in the sphere of foreign trade, especially the import and export policy of the country. Its responsibilities also extend to such matters as multilateral, bilateral commercial relations, state trading, export promotion measures, and development and regulation of certain export oriented industries and commodities. Functional Divisions The Department of Commerce consists of the following nine principal functional Divisions: i. Administrative and General Division; ii. Finance Division; iii. Economic Division; iv. Trade Policy Division; v. Foreign Trade Territorial Division; vi. Export Products Division; vii. Export Industries Division; viii. Export Services Division; ix. Supply Division. Attached and subordinate offices The Department has following attached and subordinate offices:- ATTACHED OFFICES 1. Directorate General of Foreign Trade (DGFT), New Delhi This Directorate is headed by the Director General of Foreign Trade (DGFT) and is responsible for execution of the Exim Policy announced by the Government from time to time for promotion of exports. In addition, it also looks after the work relating to issue of licences and monitoring of export obligations etc. The Directorate has its Headquarters at New Delhi and has 32 regional offices. These offices are at the following locations: -

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2. Directorate General of Supplies and Disposal (DGS&D) It is the executive arm of the Supply Division of the Department of Commerce for conclusion of Rate Contracts for common user items, procurement of stores, inspection of stores, shipment and clearance. The Director General of Supplies & Disposal heads the Directorate.

Subordinate offices
1. Directorate General of Commercial Intelligence and Statistics (DGCI&S), Kolkata This Directorate is the primary Government agency for collection, compilation and publication of the foreign, inland and ancillary trade statistics and for the dissemination of commercial information. The Directorate brings out a number of publications, particularly on trade statistics, which have a wide variety of applications. These publications are also used by trading public and research scholars. The DGCI&S maintains a commercial library for the use of the traders, exporters, importers, research scholars and Govt. and semi Govt. agencies, etc. 2. Export Processing Zones (EPZs) / Special Economic Zones (SEZs) EPZs, set up as enclaves separated from domestic tariff areas by physical barriers, are intended to provide a duty free environment for export promotion. Each Zone is headed by a Development Commissioner. A scheme for setting up SEZs to promote export was announced on 31st March, 2000. Units may be set up in SEZ for manufacture, trading, re-conditioning, repair or for service activity. The units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any predetermined value addition or minimum export performance requirements as in the case of EPZs. Sales in the Domestic Tariff Area in the SEZ units shall be subject to positive foreign exchange earning and on payment of full Custom Duty and import policy in force. The Government has since converted all the existing Export Processing Zones located at Kandla (Gujarat), Santa Cruz (Maharashtra), Cochin (Kerala), Madras (Tamil Nadu), Noida (Uttar Pradesh), Falta (West Bengal) and Visakhapatnam (Andhra Pradesh) into Special Economic Zones. The Export Processing Zones/Special Economic Zones are responsible for administration of the Export-Oriented units located within the zones. 3. Office of the Custodian of Enemy Property (CEP), Mumbai Enemy properties in India are administered by the Office of the CEP for India, who is entrusted with the custody, management and administration of enemy properties arising out of Indo-Pak conflicts of 1965 and 1971 in accordance with the provisions of the Enemy Property Act, 1968, as amended in 1977. The Office is headed by the Custodian of Enemy Property of India. The Office of the Custodian of Enemy Property has a branch office at Kolkata. 4. Pay and Accounts Office (Supply side) The payment and accounting functions of the Supply Division, including those of DGS&D are performed by the CCA under the Departmentalized Accounting System.
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When it comes to the payment of suppliers bills, the Organisation is one of the largest in the country. 5. Pay and Accounts Office (Commerce and Textiles) The Pay and Accounts Office common to both the Department of Commerce and the Ministry of Textiles, is responsible for the payment of claims, accounting of transactions and other related matters through the four Departmental Pay and Accounts Offices in Delhi, two in Mumbai, two in Kolkata and one in Chennai. These departmental Pay and Accounts offices are controlled by the Principal Accounts Office at Delhi with the Chief Controller of Accounts (CCA) as the head of the department of the Accounts wing.

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Autonomous bodies
1. Commodity Boards (i) Coffee Board The Coffee Board was set up under Section (4) of the Coffee Act, 1942. A statutory body, it is the oldest Board under the Department of Commerce. The Coffee Board has its headquarters at Bangalore, and is headed by a Chairman. The Board has four Regional Coffee Research Stations, a Coffee Research Institute, a number of Regional Field Stations and Coffee Demonstration Farms. The primary functions of the Board relate to undertaking programmes and projects for the growth and development of the coffee industry; promotion of coffee exports in the international market; promotion of coffee consumption in the domestic market; research, extension and developmental activities to increase productivity; evolve pest and disease resistant varieties with suitable package of practices; take measures for improvement in quality of coffee by prescribing and enforcing quality standards and parameters at all stages and human resource development programmes for employees and representatives of the industry etc. (ii) Rubber Board The Rubber Board was set up under Section (4) of Rubber Act, 1947, as a statutory body under the Department of Commerce. The Board is responsible for development of the rubber industry. Headed by a Chairman, The Rubber Board has its Head Office at Kottayam. It has five Zonal Offices, 39 Regional Offices and a number of Field Stations, Rubber Development Centres and Regional nurseries etc. The primary functions of the Rubber Board relate to promoting the development of the rubber industry; assisting and encouraging scientific, technical and economic research; supply technical advice to rubber growers; train growers in improved methods of planting, cultivation and manuring and collection of statistics from the owners of estates, dealers and manufacturers etc. (iii) Tea Board The present Tea Board was set up under Section(4) of the Tea Act 1953 and was constituted on 1st April, 1954. It is a statutory body functioning under the Department of Commerce. The Tea Board is the apex body for the tea industry in India and is headed by a Chairman. The Head Office of Tea Board is at Kolkata. It has fifteen Regional and Sub-Regional Offices in different cities. Besides, the Board has foreign offices at Dubai, Moscow, New York and London. The primary functions of the Tea Board relate to rendering financial and technical assistance for cultivation, manufacture, marketing of tea; export promotion; aiding research and developmental activities for augmentation of tea production and improvement of tea quality; encourage and assist the unorganized small growers sector financially and technically and the collection and maintenance of statistical data and its publication for the benefit of growers, processors and exporters. (iv) Tobacco Board The Tobacco Board was set up on 1st January. 1976 under the Tobacco Act, 1975. A statutory body under the Department Commerce, the Tobacco Board is responsible for the development of the Tobacco industry. The Board is headed by a Chairman. It is headquartered at Guntur in Andhra Pradesh. The Board also has a Directorate of Auctions at Bangalore. The primary functions of the Board include regulating the production and curing of Virginia Tobacco; keeping a constant watch on the Virginia Tobacco market in India and abroad and ensuring fair and remunerative prices to growers; maintenance and improvement of existing markets and development of new markets outside India for tobacco and tobacco products by devising appropriate marketing strategies; recommending to the Central Government the minimum prices that may be fixed and regulating tobacco marketing in India and abroad with due
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regard to interest of growers, manufacturers and dealers; propagating information useful to growers, traders and manufacturers and purchasing Virginia tobacco from growers when the same is considered necessary for protecting the interests of growers, etc. (v) Spices Board The Spices Board was set up under Section (1) of the Spices Board Act, 1986 and came in force on 26th February, 1987. It is a statutory Body functioning under the Department of Commerce. The Spices Board has its head office at Cochin and is headed by a Chairman. It has 12 Regional Offices, 13 Zonal Offices and 30 Field Units. The Board is responsible for the export development of 52 spices mentioned in the schedule to Spices Board Act and the overall development, which includes production improvement, of small and large cardamom. The primary functions of the Board relate to increasing the production and productivity of small and large cardamom; Crop improvement through selection/hybridization for evolving new varieties; assisting exporters in setting up in-house laboratories; assisting the Govt. in the development of national quality standards on spices and implementation of various export development programmes like promotion of Indian brands abroad, etc.

2. Export Inspection Council (EIC), New Delhi


The EIC, an autonomous body, is responsible for the enforcement of quality control and compulsory pre-shipment inspection of the various commodities meant for export and notified under the Export (Quality Control & Inspection) Act, 1963. It was set up under Section (3) of the Export (Inspection and Quality Control) Act, 1963. It is headed by a Director. EIC is assisted in its functions by the Export Inspection Agencies (EIAs) located at Chennai, Delhi, Kochi, Kolkata and Mumbai alongwith a network of 42 sub-offices and laboratories to back up the pre-shipment inspection and certification activities.

3. Indian Institute of Foreign Trade (IIFT), New Delhi


The IIFT, registered under the Societies Registration Act 1860 as Society, is headed by the Director General. The Institute became functional on 1st April, 1964. It is engaged in the following activities:i) Training of personnel in modern techniques of international trade; ii) Organisation of research in problems of foreign trade; iii) Organisation of marketing research, area surveys, commodity surveys, market surveys; and iv) Dissemination of information arising from its activities relating to research and market studies. The IIFT has been accorded the Deemed To Be University status by the Ministry of Human Resource Development and the University Grants Commission(UGC) with effect from 20th May, 2002.

4. Indian Institute of Packaging (IIP), Mumbai


The IIP is registered under the Societies Registration Act 1860. It was established in the year 1966 jointly by the Ministry of Commerce (now Department of Commerce) and the Packing and Allied Industries of the country. The Institute is headed by a Director. It is located at Mumbai. The main aim of the Institute is to undertake research in raw materials for the packaging industry, to organise training programmes on packaging technology and to stimulate consciousness of the need for good packaging etc.

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5. Marine Products (MPEDA), Cochin

Export

Development

Authority

The MPEDA was set up under Section (4) of MPEDAAct, 1972 and actually became functional from 20th April, 1972. It is a statutory body functioning under the Department of Commerce. The MPEDA, a statutory body, is responsible for development of the marine products industry with special reference to exports. It is headed by a Chairman. It has its headquarters at Cochin and has a number of Regional and Sub- Regional Offices. Besides, it has Trade Promotion Offices at Tokyo and New York.

6. Agricultural and Processed Food Products Development Authority (APEDA), New Delhi

Export

The APEDA was set up by an Act of Parliament of 1986 and came into being on 13th February 1986. The APEDA is also a statutory body which is entrusted with the tasks of agricultural exports, including the export of processed foods in value added form. It is headed by a Chairman. Headquartered at New Delhi, it has a number of Regional Offices.

Export Promotion Councils (EPCs)


There are at present ten Export Promotion Councils under the administrative control of the Department of Commerce and eight export promotion councils related to textile sector under the administrative control of Ministry of Textiles. These Councils are registered as non -profit organisations under the Companies Act/Societies Registration Act. The Export Promotion Councils perform both advisory and executive functions. These Councils are also the registering authorities under the Export Import Policy, 1997-2002. These Councils have been assigned the role and functions under the said Policy. The Committee constituted to look into the aspects of rationalization of election procedure of the Export Promotion Councils (EPCs) and the criteria to be adopted for their restructuring so that they retain their relevance to the national export effort in the context of globlisation and economic liberalization, has made recommendations to streamline and strengthening the functioning of the EPCs. The Government has since accepted the recommendations of the Committee and issued Model Bye-Laws and guidelines to all EPCs for adoption.

Export Promotion Councils under Department of Commerce:


1. 2. 3. Engineering export promotion council Overseas construction council of india Basic chemicals, pharmaceuticals and cosmetics export promotion council 4. Chemicals and allied products export promotion council 5. Council for leather exports promotion council 6. Sports goods export promotion council 7. Gem and jewellery export promotion council 8. Shellac export promotion council 9. Cashew export promotion council 10. Plastics export promotion council

Textiles Sector:
1. Apparel export promotion council
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2. 3. 4. 5. 6. 7. 8.

Carpet export promotion council Cotton textile export promotion council Export promotion council for handicrafts Handloom export promotion council The indian silk export promotion council Synthetic & rayon textile export promotion council Wool & woolens export promotion council

Other organisations
1. Federation of Indian Export Organisations (FIEO), New Delhi The FIEO, New Delhi is an apex body of various export promotion organisations and institutions. It was set up in 1965 and it registered under the Societies Registration Act, 1860. It also functions as a primary servicing agency to provide integrated assistance to Government recognised Export Houses / Trading Houses and acts as a Central Co-ordinating Agency in respect of export promotional efforts in the field of consultancy services in the country. FIEO organises seminars and sends Trade Delegations to overseas markets for export promotion. The Federation brings out FIEO News, a yearly publication for the use of its member exporters and importers. 2. Indian Council of Arbitration (ICA), New Delhi The ICA set up under the Societies Registration Act, promotes arbitration as a means of settling commercial disputes and popularises the concept of arbitration among the traders, particularly those engaged in international trade. The Council, a non-profit service organisation, is a grantee institution of the Department of Commerce and is eligible for assistance under the Market Development Assistance (MDA) Scheme of the Department. The main objectives of the Council are to promote the knowledge and use of arbitration and provide arbitration facilities for amicable and quick settlement of commercial disputes with a view to maintaining the smooth flow of trade, particularly, export trade on a sustained and enduring basis. 3. Indian Diamond Institute (IDI), Surat The IDI is registered under the Societies Registration Act. It was established in 1978 with the objective of strengthening and improving the availability of trained manpower for the gems & jewellery industry by conducting various Diploma/Post Graduate Diploma level courses in this field.

Public Sector Undertakings (PSUs)


The following trading/service corporations are functioning under the administrative control of the Department of Commerce:

(i) State Trading Corporation (STC) of India Ltd (ii) MMTC Ltd (iii) PEC Limited (iv) Export Credit Guarantee Corporation (ECGC) of India Limited (v) India Trade Promotion Organisation (ITPO)

Export Credit Guarantee Corporation (ECGC) of India Limited


What is ECGC?
Export Credit Guarantee Corporation of India Limited was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.
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Being essentially an export promotion organisation, it functions under the administrative control of the Ministry of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community. ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.500 crores and authorised capital Rs. 1000 crores. The paid-up capital is expected to be enhanced to Rs.800 crores.

What does ECGC do?


provides a range of credit risk insurance covers to exporters against loss in export of goods and services offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them

provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

How does ECGC help exporters?

offers insurance protection to exporters against payment risks provides guidance in export-related activities makes available information on different countries with its own credit ratings makes it easy to obtain export finance from banks/financial institutions assists exporters in recovering bad debts

information on credit-worthiness of overseas buyers


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Need for export credit insurance


Payments for exports are open to risks 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 payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainities. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

The products and services offered by ECGC are broadly classified as under:

1. Credit Insurance Policies


a.SCR or Standard Policy To cover risks in respect of all shipments on short term credit by exporters with anticipated annual turnover of more than Rs.50 lacs. b. urnover Policy A variation of SCR policy with additional discounts and incentives available to exporters who pay a premium of not less than Rs. 10 lacs per year. c.Small Exporters Policy Similar to SCR Policy, but for exporters with anticipated annual turnover of Rs.50 lacs or less. Specific Shipment Policy (Short term) To cover risks in respect of a specific shipment or shipments against a specific contract. d.Buyerwise Policy To cover risks in respect of all shipment to one or a few buyers. f.Specific Policy for Supply Contract To cover risks in respect of export of capital goods or turnkey projects involving medium/long term credit. g. Insurance cover for Buyer's Credit and Line of Credit To cover risks in respect of credit extended by a bank in India to an overseas buyer for paying for machinery and equipments to be imported from India or credit extended by a bank in India to an overseas institution for facilitating imports from India. h. Services Policy To cover risk of non-payment to Indian companies entering into contract with foreign principals for providing them with technical or professional services. j.Construction Works Policy To provide cover to an Indian Contractor who executes a civil construction job abroad.

2. Maturity Factoring
Maturity Factoring undertaking to pay the amount due for a shipment on the maturity of the credit period.

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3. Guarantees to Banks
a.Packing Credit Guarantee To enable banks to provide preshipment advances to exporters for the manufacture, processing, purchasing or packing of goods meant for export against a firm order. b.Export Production Finance Guarantee To enable banks to sanction advances at the pre-shipment stage to the full extent of cost of production when it exceeds the f.o.b. value of the contract/ order, the difference representing incentives receivable. c.Post-Shipment Credit Guarantee To enable banks to extend post-shipment finance to exporters through purchase, negotiation or discount of export bills or advances against such bills. d.Export Finance Guarantee Covers post-shipment advances granted by banks to exporters against export incentive receivable in the form of cash assistance, duty drawback, etc. e.Export Performance Guarantee A counter-guarantee to protect a bank against losses that it may suffer on account of guarantees given by it on behalf of exporters. f.Export Finance (Overseas Lending) Guarantee To protect a bank financing an overseas project by providing a foreign currency loan to the contractor from the risk of non-payment by the contractor.

4. Special Schemes
Transfer Guarantee To safeguard banks in India against losses on account failure of a foreign bank to reimburse it with the amount paid to an exporter, when the Indian bank has added confirmation to a letter of credit opened by the foreign bank. Overseas Investment Insurance To cover the risks on account of war, expropriation or restriction on remittances to Indian investments made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects. Exchange Fluctuations Risk Cover To provide protection from exchange rate fluctuation to exporters of capital goods, civil engineering contractors and consultants who have to receive payments over a period of years for their exports, construction works or services.

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India Trade Promotion Organisation (ITPO)


The India Trade Promotion Organisation (ITPO) has come into effect from 1-1-92 with the main objective of promoting exports and imports and upgradation of technology, through the medium of fairs to be held in India and abroad, to undertake publicity through the print and electronic media, to assist Indian companies in product development, to organise export development programmes and integrated marketing programmes for specific products in specific markets. The India Trade Promotion Organisation provides information and market intelligence to the business community in India. It also organises visits of buyers and trade delegations to industry and trade establishments in India with a view to promoting contacts. The India Trade Promotion Organisation is a service organisation and has close and periodical interaction with the trade, industry and Government. It serves the industry by entering into comparatively less explored markets, provides information and support for participation in fairs, for developing exports of new items, and provides updated trade related information. Address : Pragati Bhawan, Pragati Maidan, NEW DELHI-110022. Telephone : (91)11- 332819 Fax : (91)11-3318142 Web site : http://www.indiatradepromotion.org/ ITPO provides a wide spectrum of services to trade and industry and acts as a catalyst for growth of India's trade. As the nodal agency of the Government, ITPO approves holding of international trade fairs in India and regulates holding of various expositions in India primarily to avoid any duplication of efforts while ensuring proper timing. It manages India's world class exhibition complex which is constantly upgraded to keep it in a high standard of readiness. Spread over 149 acres of prime land in the heart of India's capital, New Delhi, Pragati Maidan offers 62,000 sq.mtrs. of covered exhibition space in 16 halls, besides 10,000 sq.mtrs. of open display area. The state-of-the-art exhibition halls have enhanced the appeal of Pragati Maidan as the ideal business center for an increasing number of fair organisers and business visitors from different parts of the world. ITPO has an extensive infastructure as well as marketing and information facilities that are availed both by exporters and importers. ITPO's overseas offices assist buyers seeking information relating to sourcing products from India. ITPO's overseas offices at New York, Frankfurt, Tokyo, Moscow and Sao Paulo are pursuing opportunities for enhancement of India's trade and investment. Similarly, India Trade Promotion Organisation's Regional Offices at Bangalore, Chennai, Kolkata, and Mumbai, through their respective profile of activities , ensure a well-attenuated trade promotion drive through out the country. Siginficantly, ITPO has successfully completed the first phase of setting up of a modern exhibition facility outside Delhi following the commissioning of the state-ofthe-art Chennai Trade Centre. Managed by Tamil Nadu Trade Promotion Organisation (TNTPO), a subsidiary of ITPO jointly set up with the Tamil Nadu Industrial development Corporation (TIDCO), the CTC addresses a long-felt need for a permanent and modern exhibition venue in the state which has emerged as a hub of trade-related activities. Fittingly, the Centre opened its innings with the India International Leather Fair, one of the most Prestigious events in ITPO's annual calender and probably the biggest show of its kind in the continent. A similar joint initiative of ITPO and the Karnataka State Industrial Development Board is expected to fructify shortly as a regional exhibition complex at Whitefield, Bangalore.
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The main activities and services of ITPO are:

1. Managing the extensive trade fair complex, Pragati Maidan in the heart of Delhi 2. Organising various trade fairs and exhibitions at its exhibition complex in Pragati Maidan and other centers in India. 3. Facilitating the use of Pragati Maidan for holding of trade fairs and exhibitions by other fair organisers both from India and abroad. 4. Timely and efficient services to overseas buyers. 5. Establishing durable contacts between Indian suppliers and overseas buyers. 6. Assisting Indian companies in product development and adaptation to meet buyers' requirements. 7. Organising Buyer-Seller Meets and other exclusive India shows with a view to bringing buyers and sellers together. 8. Organising India Promotions with Department Stores and Mail Order Houses abroad. 9. Participating in overseas trade fairs and exhibitions. 10. Arranging product displays for visiting overseas buyers. 11. Organising seminars/conferences/workshops on trade-related subjects. 12. Encouraging small and medium scale units in export promotion efforts. 13. Conducting in-house and need-based research on trade and export promotion. 14. Enlisting the involvement and support of the State Governments in India for promotion of India's foreign trade. 15. Trade information services through electronic accessibility at Business Information Centre.

Advisory Bodies
1. Board of Trade (BOT)
The BOT was set up on May 5, 1989 with a view to providing an effective mechanism to maintain continuous dialogue with trade and industry in respect of major developments in the field of International Trade. It meets atleast once in a year. The Commerce and Industry Minister is Chairman of the Board of Trade. Its official membership includes Secretaries of the Ministries of Commerce and Industry, Finance (Revenue), External Affairs, Textile; Chairman of Indian Trade Promotion Organization (ITPO), Chairman/MD of Export Credit & Guarantee Corporation of India Limited (ECGC), MD/Exim Bank and Deputy Governor of Reserve Bank of India. The non official members are Federation of Indian Chamber of Commerce and Industry (FICCI); Associated Chamber of Commerce & Industry (ASSOCHAM), Confederation of Indian Industry (CII), Federation of Indian Export Organisations (FIEO), All India Handloom Farmers Marketing Co-operative Society, representatives of various Trade and Industry sectors, media and other eminent personalities in the field of Export and Import Trade. The broad terms of reference of the Board of Trade are as follows: i) To advise the Government on policy measures for preparation and implementation of both short and long term plans for increasing exports in the light of emerging national and international economic scenario. ii) To review export performance of various sectors, identify constraints and suggest measures to be taken both by Government and industry/trade consistent with the need to maximise export earnings and restrict imports. iii) To examine the existing institutional framework for exports and suggest practical measures for reorganisation/streamlining it with a view to ensuring co-ordinated and timely decision making.
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iv) To review the policy instrument, package of incentives and procedures for exports and suggest steps to rationalise and channelise incentives to areas where they are most needed. 2. Export Promotion Board (EPB) The EPB functions under the Chairmanship of the Cabinet Secretary to provide policy and infrastructural support through greater coordination amongst concerned Ministries for boosting the growth of exports. All Ministries directly connected with facilitating foreign trade are represented on the Board by their Secretaries. This interalia includes Secretaries of Department of Commerce; Ministry of Finance; Department of Revenue; Department of Industrial Policy & Promotion; Ministry of Textile; Department of Agriculture & Cooperation; Ministry of Civil Aviation; Ministry of Surface Transport. 3. Directorate General of Anti-Dumping & Allied Duties (DGAD) The formal set up of DGAD came into existence in April 1998 in the Department of Commerce. It is responsible for carrying out investigations and to recommend the amount of anti-dumping duty on the identified articles which would be adequate to remove injury to the domestic industry. The Directorate General of Anti-Dumping & Allied Duties is headed by a Designated Authority of the level of Additional Secretary to the Government of India.

ICC (International Chamber of Commerce)


What is ICC? ICC (International Chamber of Commerce) is the voice of world business championing the global economy as a force for economic growth, job creation and prosperity. Because national economies are now so closely interwoven, government decisions have far stronger international repercussions than in the past. ICC the world's only truly global business organization responds by being more assertive in expressing business views. ICC activities cover a broad spectrum, from arbitration and dispute resolution to making the case for open trade and the market economy system, business self-regulation, fighting corruption or combating commercial crime. ICC has direct access to national governments all over the world through its national committees. The organization's Paris-based international secretariat feeds business views into intergovernmental organizations on issues that directly affect business operations. 1. Setting rules and standards Arbitration under the rules of the ICC International Court of Arbitration is on the increase. Since 1999, the Court has received new cases at a rate of more than 500 a year. ICC's Uniform Customs and Practice for Documentary Credits (UCP 500) are the rules that banks apply to finance billions of dollars worth of world trade every year. ICC Incoterms are standard international trade definitions used every day in countless thousands of contracts. ICC model contracts make life easier for small companies that cannot afford big legal departments. ICC is a pioneer in business self-regulation of e-commerce. ICC codes on advertising and marketing are frequently reflected in national legislation and the codes of professional associations. 2. Promoting growth and prosperity ICC supports government efforts to make a success of the Doha trade round. ICC provides world business recommendations to the World Trade Organization.
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ICC speaks for world business when governments take up such issues as intellectual property rights, transport policy, trade law or the environment. Signed articles by ICC leaders in major newspapers and radio and TV interviews reinforce the ICC stance on trade, investment and other business topics. Every year, the ICC Presidency meets with the leader of the G8 host country to provide business input to the summit. ICC is the main business partner of the United Nations and its agencies. 3. Spreading business expertise At UN summits on sustainable development, financing for development and the information society, ICC spearheads the business contribution. Together with the United Nations Conference on Trade and Development (UNCTAD), ICC helps some of the world's poorest countries to attract foreign direct investment. In partnership with UNCTAD, ICC has set up an Investment Advisory Council for the least-developed countries. ICC mobilizes business support for the New Partnership for Africa's Development. At ICC World Congresses every two years, business executives tackle the most urgent international economic issues. The World Chambers Con-gress, also biennial, provides a global forum for chambers of commerce. Regular ICC regional con-ferences focus on the concerns of business in Africa, Asia, the Arab World and Latin America. 4. Advocate for international business ICC speaks for world business whenever governments make decisions that crucially affect corporate strategies and the bottom line. ICC's advocacy has never been more relevant to the interests of thousands of member companies and business associations in every part of the world. Equally vital is ICC's role in forging internationally agreed rules and standards that companies adopt voluntarily and can be incorporated in binding contracts. ICC provides business input to the United Nations, the World Trade Organization, and many other intergovernmental bodies, both international and regional. History of the International Chamber of Commerce The ICC's origins The International Chamber of Commerce was founded in 1919 with an overriding aim that remains unchanged: to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital. Much of ICC's initial impetus came from its first president, Etienne Clmentel, a former French minister of commerce. Under his influence, the organization's international secretariat was established in Paris and he was instrumental in creating the ICC International Court of Arbitration in 1923. ICC has evolved beyond recognition since those early post-war days when business leaders from the allied nations met for the first time in Atlantic City. The original nucleus, representing the private sectors of Belgium, Britain, France, Italy and the United States, has expanded to become a world business organization with thousands of member companies and associations in around 130 countries. Members include many of the world's most influential companies and represent every major industrial and service sector. The voice of international business Traditionally, ICC has acted on behalf of business in making representations to governments and intergovernmental organizations. Three prominent ICC members served on the Dawes Commission which forged the international treaty on war reparations in 1924, seen as a breakthrough in international relations at the time. A year after the creation of the United Nations in San Francisco in 1945, ICC was granted the highest level consultative status with the UN and its specialized agencies.
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Ever since, it has ensured that the international business view receives due weight within the UN system and before intergovernmental bodies and meetings such as the G8 where decisions affecting the conduct of business are made. Defender of the multilateral trading system ICC's reach - and the complexity of its work - have kept pace with the globalization of business and technology. In the 1920s ICC focused on reparations and war debts. A decade later, it struggled vainly through the years of depression to hold back the tide of protectionism and economic nationalism. After war came in 1939, ICC assured continuity by transferring its operations to neutral Sweden. In the post-war years, ICC remained a diligent defender of the open multilateral trading system. As membership grew to include more and more countries of the developing world, the organization stepped up demands for the opening of world markets to the products of developing countries. ICC continues to argue that trade is better than aid. In the 1980s and the early 1990s, ICC resisted the resurgence of protectionism in new guises such as reciprocal trading arrangements, voluntary export restraints and curbs introduced under the euphemism of "managed trade". Challenges of the 21st Century After the disintegration of communism in eastern Europe and the former Soviet Union, ICC faced fresh challenges as the free market system won wider acceptance than ever before, and countries that had hitherto relied on state intervention switched to privatization and economic liberalization. As the world enters the 21st century, ICC is building a stronger presence in Asia, Africa, Latin America, the Middle East, and the emerging economies of eastern and central Europe. Today, 16 ICC commissions of experts from the private sector cover every specialized field of concern to international business. Subjects range from banking techniques to financial services and taxation, from competition law to intellectual property rights, telecommunications and information technology, from air and maritime transport to international investment regimes and trade policy. Self-regulation is a common thread running through the work of the commissions. The conviction that business operates most effectively with a minimum of government intervention inspired ICC's voluntary codes. Marketing codes cover sponsoring, advertising practice, sales promotion, marketing and social research, direct sales practice, and marketing on the Internet. Launched in 1991, ICC's Business Charter for Sustainable Development provides 16 principles for good environmental conduct that have been endorsed by more than 2300 companies and business associations. Practical services to business ICC keeps in touch with members all over the world through its conferences and biennial congresses - in 2004 the world congress will be in Marrakesh. As a memberdriven organization, with national committees in 84 countries, it has adapted its structures to meet the changing needs of business. Many of them are practical services, like the ICC International Court of Arbitration, which is the longest established ICC institution. The Court is the world's leading body for resolving international commercial disputes by arbitration. A record number of more than 590 cases came before the Court in 2002. In December alone, the Court registered more than 80 new cases, an all-time record for a single month. The first Uniform Customs and Practice for Documentary Credits came out in 1933 and the latest version, UCP 500, came into effect in January 1994. These rules are used by banks throughout the world. A supplement to UCP 500, called the eUCP, was added in 2002 to deal with the presentation of all electronic or part electronic documents. In 1936, the first nine Incoterms were published, providing standard definitions of universally employed terms like Ex quay, CIF and FOB, and whenever necessary they are revised. Incoterms 2000 came into force on 1 January 2000.
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In 1951 the International Bureau of Chambers of Commerce (IBCC) was created. It quickly became a focal point for cooperation between chambers of commerce in developing and industrial countries, and took on added importance as chambers of commerce of transition economies responded to the stimulus of the market economy. In 2001, on the occasion of the 2nd World Chambers Congress in Korea, IBCC was renamed the World Chambers Federation (WCF), clarifying WCF as the world business organization's department for chamber of commerce affairs. WCF also administers the ATA Carnet system for temporary duty-free imports, a service delivered by chambers of commerce, which started in 1958 and is now operating in over 57 countries. Another ICC service, the Institute for World Business Law was created in 1979 to study legal issues relating to international business. At the Cannes film festival every year, the Institute holds a conference on audiovisual law. The fight against commercial crime In the early 1980s, ICC set up three London-based services to combat commercial crime: the International Maritime Bureau, dealing with all types of maritime crime; the Counterfeiting Intelligence Bureau; and the Financial Investigation Bureau. A cybercrime unit was added in 1998. An umbrella organization, ICC Commercial Crime Services, coordinates the activities of the specialized anti-crime services. All these activities fulfil the pledge made in a key article of the ICC's constitution: "to assure effective and consistent action in the economic and legal fields in order to contribute to the harmonious growth and the freedom of international commerce."

How ICC works


1.Council The ICC World Council is the equivalent of the general assembly of a major intergovernmental organization. The big difference is that the delegates are business executives and not government officials. There is a federal structure, based on the Council as ICC's supreme governing body. National committees name delegates to the Council, which normally meets twice a year. Ten direct members - from countries where there is no national committee - may also be invited to participate in the Council's work. 2.National committees and groups They represent the ICC in their respective countries. The national committees and groups make sure that ICC takes account of their national business concerns in its policy recommendations to governments and international organizations. 3.The Chairmanship and Executive Board The Council elects the Chairman and Vice-Chairman for two-year terms. The Chairman, his immediate predecessor and the Vice-Chairman form the Chairmanship. The Council also elects the Executive Board, responsible for implementing ICC policy, on the Chairman's recommendation. The Executive Board has between 15 and 30 members, who serve for three years, with one third retiring at the end of each year. 4.Special Presidency Group The SPG advises the ICC Chairmanship and Executive Board. Its role is to step back from the ICC's immediate tasks and take a strategic long-term view of the world business' organization's priorities. The group identifies underlying trends in international affairs and gives advice on the appropriate business response. 5.Secretary General The Secretary General heads the International Secretariat and works closely with the national committees to carry out ICC's work programme. The Secretary General is appointed by the Council at the initiative of the Presidency and on the recommendation of the Executive Board.
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6. Commissions Member companies and business associations can shape the ICC stance on any given business issue by participating in the work of ICC commissions. Commissions are the bedrock of ICC, composed of a total of more than 500 business experts who give freely of their time to formulate ICC policy and elaborate its rules. Commissions scrutinize proposed international and national government initiatives affecting their subject areas and prepare business positions for submission to international organizations and governments.

FAQ- Write short notes on:


Que: - Export promotion and export promotion council. Ans: -Almost all nations of the world endeavor to develop exports because of the importance of exports to the economy. When the domestic market is small, foreign market provides opportunities to achieve economies of scale and growth. Secondly, the supply of many commodities, as in the case of a number of agricultural products in India, is more than the domestic demand. Thirdly, exports enable certain countries to achieve export led growth. Fourthly, export markets may help mitigate the effects of domestic recession. Fifthly, a country; may need to boost its exports to earn enough foreign exchange to finance its imports and service its foreign debt. It may be noted that many countries are suffering from trade deficit and foreign debt. Lastly, even in the case of countries with trade surplus, export promotion may be required to maintain its position against the national competition and the level of domestic economics Activity. Objectives: - The principal objectives of the export promotion measures are to: (1) compensate the exporters for the high domestic cost of production. (2) Provide necessary assistance to the new and infant exporters to develop the export business and (3) Increase the relative profitability of the export business vis--vis the domestic business. Export promotion council: - Export promotional councils are non-profit limited companies registered under the companies act. They have been formed with a view to assist export promotional activities of specified commodities. The government of India has so far set up the following 20-export promotion council for different commodities. (1) Apparel exports promotion council. New Delhi. (2) Basic chemical pharmaceutical and cosmetics export promotion council, Bombay. (3) Cashew export promotion council, Cochin. (4) Chemicals and allied products export promotion council. (5) Cotton textile, export promotion council Bombay. (6) Engineering exports promotion council Calcutta. (7) Export promotion council for finished leather and leather manufacturers Kanpur. (8) Gem, and jewellary export promotion council, Bombay. Etc. some of these councils have opened their branches or have registered themselves in selected foreign countries. All the exporters of products coming under a council are entitled to become members of the said council. These councils guide their members in planning the export strategies. Role or function of export promotion councils: (1) Assist the exporters: - One of the main functions of export promotion councils is to help the exporters who are registered under it to expand their overseas markets. An exporters who intends to export can obtain valuable guidelines from EPCs in respect of market potential abroad for certain products.
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(2) Claiming of incentives: - EPCs assist 6t exporters in claiming incentives from government authorities for instance engineering EPC assist its registered exporters to claim IPRS. EEPC obtains payment order from the licensing authority in respect or IPRS and then makes payment to the exporters. (3) Issue of certificate of origin: - Certain countries demand certificate of origin from the exporters certifying the origin of goods. (4) Collection of information: - It collects valuable information on overseas imports, import regulations. About competition market potential and other developments in foreign trade. (5) Supplying information: - It provides information on latest developments in the field of export trade. It may relate to various aspects or foreign trade. Such information is vital to the exporters to promote their sales abroad. (6) Organizing seminars: - It organizes seminars workshops discussions, meeting conferences on various aspects of foreign trade. Exporters are invited to take part in such seminars and workshops. The exporters can make use of such participation to act better understanding of foreign trade. (7) Trade fair and exhibitions: - It may also assist the concerned authorities in organizing trade fairs and exhibitions in India and abroad. It may also assist the exporters to take part in such trade fairs and exhibitions. It may also arrange buyer seller meets, so as to promote Indian exports. (8) Invite trade delegations: - It may invite trade delegations from abroad, both at private level and at governmental level. Such trade delegations are very important to promote export trade of India. Foreign delegations visit India and sign contracts with Indian exporters. (9) Developing export consciousness: - This organization makes all the possible efforts to develop export consciousness in our country. This is because there is a grate need for export for a country like ours so as to earn foreign exchange. (10) Other functions: - It may allocate or distribute quota in respect of certain items. It may fix minimum floor price or may advice the government in such flaxation of floor prices. EPC may undertake publicity through schemes like joint foreign publicity in export markets. Que: - Export credit guarantee corporation of India limited (ECGC). Ans: - In order to provide export credit and insurance support to Indian exporters, the GOI set up the export risks insurance corporation in July, 1957. it was transformed into export credit guarantee corporation limited in 1964. Since 1983, it is now known, as ECGC is a company wholly owned by the GOI. It functions under the administrative control of directors representing government, banking, insurance, trade and industry. Functions of ECGC: - The various functions, which ECGC performs are: (1) Helps exporters in obtaining financial assistance from commercial banks and other financial institutions on the strength of its policies and guarantees. (2) Helps exporters in collecting and disseminating information regarding credit worthiness of overseas buyers. (3) Helps in developing and diversifying exports. (4) It insures the exporters credit risks and guarantees payment to the exporter who can afford credit with confidence and enlarge his overseas business with a sense of security. (5) Charges a low rate of premium to enable the exporters to compete effectively in the overseas of market. (6) Provides risk coverage against political and commercial risks. (7) It provides a service, which is not available from commercial insurance companies.

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Risks covered by ECGC: - ECGC provides risk coverage against political and commercial risks, which are detailed below: (1) Commercial risks: - These risk are of a trade nature which arise out of a) buyers failure to accept goods. b) Buyers protected default to pay for goods accepted by him. c) Insolvency of the buyer. (2) Political risks: - These risks arises out do disturbance in political situations of a country such as a) War, revolution or civil disturbances in the country of the producer of goods. b) Imposing new license restriction or cancellation of valid import license in the buyers country. c) Restrictions on remittance of money in buyers country. d) Cancellation of export license or imposing of additional licensing restrictions preventing the exporter from exporting goods. e) Additional handling, transport or insurance charges due to interruption or diversion of voyage, which cannot be covered from purchaser. f) Imposition of restriction on remittances by the government in the buyers country or any government action, which may block to delay payment to the exporter. g) Any other case of loss occurring outside India which is not normally covered by commercial insurers and which is beyond the control either of exporter or importer. Various policies issued by ECGC: - The covered issued by ECGC can be divided broadly into four groups: (a) Standard policies: - Issued to exporters to protect them against payment risks involved in exports on short-term credit. (b) Specific policies: - Designed to protect Indian firms against payment risk involved in (i) export on deferred terms of payment (ii) services rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. (c) Financial guarantees: - Issued to banks in India to protect them from risks of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages and (d) Special schemes: - Such as transfer guarantee meant to protect banks which add confirmation to letters of credit opened by foreign banks, insurance cover for buyers credit etc. Que: - Role of RBI in export finance. Ans: - RBI the central bank of our country does not directly provide export finance to the exporters, but it adopts policies and initiate measures to encourage commercial banks and other financial institutions provide liberal export finance, RBI has developed various schemes to encourage commercial banks to provide export credit to the export sector. The schemes of RBI are: Export bills credit scheme: - Under this scheme, RBI used to grant advances to schedule banks against export bills, maturing within 180days. Now this scheme is not in operation. Pre-shipment credit scheme: - Under this scheme, RBI provides refinance facilities to scheduled banks that provide pre-shipment loans to banafide exporters. Export credit interest subsidy scheme: - Under this scheme RBI provides interest subsidy of minimum 1.5% p.a. to banks that provide export finance to exporters, provided the banks charge interest to exporters within the ceiling prescribed by RBI. The subsidy is given both against packing and post shipment. Duty drawback credit scheme: - Under this scheme, the exporters ca avail of interest free advances from the bank upto 90days against shipping bills provisionally certified by the customs authorities towards a refund of customs duty. The advances made by commercial banks under the scheme are eligible for refinance, free of interest from RBI for a maximum period of 90days from the date of advance. Apart from the above-mentioned schemes, RBI also approve or sanctions applications made by the exporters for: a) allotment of exporter code number, which is a must for every exporter. b) Extension of time limit for realization of exports goods. c) Reduction in invoice price of exports goods. d) Fixation of commission to overseas consignee or agents. e) Provision of blanket permit where a lump sum exchange is released for a number of purposes. f)
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Remittances abroad in respect of advertising, legal expenses etc. g) appointment of foreign nationals as technical and non-technical personnel in Indian firms. h) Appointment of non-resident as directors of Indian companies. i) Any other matters relating to foreign trade, that requires clearance from exchange control department of RBI. j) Clearance in respect joint ventures abroad. Que: - EXIM bank and function objectives of exim bank. Ans: - The export import bank of India set up in 1982 for the purpose of financing, facilitating and promoting foreign trade of India, is the principal financial institution in the country for coordination working of institutions engaged in financing exports and imports the exim bank is fully owned by the government of India and is managed by a board of directors with representation from government, financial institution, banks and business community. The operations are grouped into project finance trade finance and overseas investment finance, supported by planning and coordination groups. Objectives and functions: - The objectives and functions of the exim bank include the following: (1) Grant of loans and advances in India solely or jointly with commercial banks to persons exporting or intending to export from India goods which may include the export of turnkey projects and civil consultancy services. (2) Grant of lines of credit to governments, financial instituting and other suitable organizations in foreign countries to enables person outside India to import from India goods including turnkey projects, civil construction contracts and other services including, consultancy services. (3) Handling transactions where a mix of government credit and commercial credit for exports is involved. (4) Purchasing, discounting and negotiating export bills. (5) Selling or discounting export bills in international markets. (6) Discounting of export bills negotiated or purchased by a scheduled bank or financial institution notified by government or granting loans and advances against such bill. (7) Providing refinance facilities to specified financial institutions against credits extended by them for specified export or imports. (8) Granting loans and advances or issuing guarantees solely or jointly with a commercial bank for the import of goods and services from abroad. Functions of EXIM bank: - The assistance provided by bank to the exporters can be grouped under two heads: (1) Fund bases assistance: -Fund bases assistance is divided into three broad groups: (a) Assistance to Indian exporters: - (i) It provides direct financial assistance to exporters on differed payment terms. (ii) It finances export and import of machinery and equipment on lease basis. (iii) It finances Indian joint ventures in foreign countries. (iv) The exim bank offers financial assistance to 100% EOUs and units set up in FTZs. (v) It provides a pre-shipment finance to eligible exporters for procuring raw materials and other inputs required to produce machinery and equipment to be exported. (vi) It also offers credit facilities to deemed exports. (b) Assistance to overseas buyers and agencies: - (i) It offers overseas buyers credit facility to foreign importers for import of Indian capital goods and related services with repayment spread over a period of years. (ii) Long term finance is also provided under lines of credit to finance government and financial institutions abroad, which in turn extend finance to importers of their country to buy Indian capital goods. (iii) It provides relending facility to overseas banks to make available tem finance to their clients for import of Indian goods.

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(c) Assistance to Indian commercial banks: - (i) It provides refinance facilities so as to enable commercial banks to offer credit to Indian exporters who extend term credit to importers. (ii) It offers exports bills rediscounting facility to commercial banks in India so that it helps commercial banks to fund post shipment credit extended to Indian exporters. (2) Non-fund bases assistance: - Non fund bases assistance is divided into two groups: (a) Financial guarantees and bonds: - EXIM banks provides non fund bases assistance in the form of guarantees in the nature of bid bonds, performance guarantee etc. these guarantees are provided together with commercial banks. (b) Advisory and other services: - (i) It advises Indian companies in executing contracts abroad, and on sources of overseas financing. (ii) It advises Indian exporters on global exchange control practices. (iii) The EXIM banks offer financial and advisory services to Indian construction projects abroad. (iv) It advises small scale manufactures on export markets and products.

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Chapter-5
World Trade Organization (WTO)
Fact file
The WTO Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (198694) Membership: 146 countries (on 4 April 2003) Budget: 154 million Swiss francs for 2003 Secretariat staff: 550 Head: Supachai Panitchpakdi (directorgeneral) Functions: Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for developing countries Cooperation with other international organizations Function, Structure and status of world trade organization
Funcation of WTO The following are the functions of the WTO: (1) Facilitate the management of the multilateral trade agreements and the plurilateral trade agreements for the fulfillment of their obligations. (2) All multilateral trade relations concerning the above agreements are negotiated by the members in this forum. (3) The WTO also facilitates implementation of the results of the negotiations as decides by the ministerial conference. (4) It administers the understanding on rules and procedures governing the settlement of dispute, forming part of the agreement. (5) The WTO is responsible foe administration of the trade policy review mechanism forming part of the agreement. (6) It also the organ for establishing co-ordination with other wings of the UNO such as the international monetary fond and the international bank for reconstruction and development and its affiliated agencies.

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Structure of World Trade Organization: -

The ministerial conference The ministerial conference is the highest body; it is composed of the representatives of the members. The ministerial conference is the executive of the WTO and responsible for carrying out the functions of the WTO the ministerial conference has authority to take decisions in any matters under the relevant MTA. The ministerial conference shall meet at least once every two years. The ministerial conference and committees The ministerial conference establishes three functional, committees for discharge of functions assigned to them under the multilateral trade agreement. These committees are: (a) Committee on trade and development. (b) Committee on balance of payment restrictions and (c) Committee on budget, finance and administration These committees also discharge functions specially assigned to them by the general council. These committees are open to representatives of all members. Specifically committees and development period carry reviews the special provisions in the multilateral trade agreement in favor of the least-development country members and report to the general council for appropriate action. The bodies under the plurilateral trade agreements discharge the functions within the institutional framework of the WTO. These bodies shall keep the general council informed of their activities in regular basis. The general council: - The general council is an executive forum composed of representatives of all the members its discharge the functions of the ministerial council during intervals between meetings of the ministerial council. The general council shall meet as and when appropriate and necessary. The general council established its own rules of procedures and also approves the rules of procedures for the functional councils, namely council for trade in goods, council for trade in services and council for trade related aspects for intellectual property rights established by it. The general council is also be responsible for (1) The discharged of the responsibilities of dispute settlement body as outlined in the understanding on rules and procedures governing the settlement of disputes, which forms part of the MTA. (2) The discharge of the responsibilities of the trade policy review body as outlined in the trade policy review mechanism, which forms part of the agreement The disputes settlement body and the trade policy review body may have their own respective chairman and establish their won respective rules of procedures for fulfillments of their responsibilities The functional councils under the general council. The general council shall have three functional councils working under its guidance and supervision. These are: (a) Council for trade in goods. (b) Council for trade in services. (c) Council for trade-related aspects of intellectual property rights.

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Functions of the three councils: - (a) The council for trade in goods oversees the functioning of the multilateral trade agreement relating to trade in goods. (b) The council for trade in services oversees the functioning on the multilateral trade agreement relating to trade in services. (c) The council for trade-related aspects of intellectual property rights oversees the functioning of the multilateral trade agreement connected with intellectual property rights and obligations, forming part of the agreement. These councils establish their respective rule of procedures subject to the approval of the general council membership of these councils is open representative of all members. The councils will meet as necessary. Status of world trade organization: - The WTO has legal personally members shall endow it with such legal capacity privileges and immunities as are necessary for the exercise of its functions. The representative of the members and all official of the WTO enjoy international privilege and immunities similar to those stipulated in the specialized agencies as approved by the general assembly of the United Nations on November 21, 1947. Withdrawal: - Any member may withdrawal from the agreement such withdrawal shall supply both to the agreement and the multinational trade agreement and shall take effect upon the expiration of six month from date on which written notice of withdrawal is received by the director general of the WTO. Withdrawal from plurilateral trade agreement shall govern by provision of that agreement. Dispute settlement: - Since 1 January 1995, new disputes follow the procedures of the dispute settlement understanding annexed to the WTO agreement these procedures mark a subtending change from the past. They are ended set of rules, which apply generally to all WTO disputes the adoption of panel reports cannot be blocked by parties to the dispute, and they provide for the appeal of a panel decision to a new seven person appellate body. The new procedures are overseen by the general council sitting as the dispute settlement body. The general council meetings for the first time as the DSB on 10 February 1995 established an appellate body and heard the first disputes raised under the WTOs dispute settlement mechanism. Since then the WTO received 100 trade disputes for resolution as on 19 August 1997, a record in just a little more than two and a half years of its existence. This pace of some 40 disputes a year represents vote of confidence by members in the improved dispute settlement mechanism of the new organization. WTOs predecessor, GATT dealt in at with some 300 disputes or about six disputes a year. Among the leading complainants, the U.SA tops the list having logged as many as 34 complaints followed by European communities which logged 21 complaints Canada has the third position among the leading complainants which brought disputes to the WTO Japan, Mexico and India each brought 5 dispute to the WTO during this period whereas Thailand brought only 4 disputes. So are as the subject of complaints is concerned, we find that European communities and member states figured in 21cases, followed by the U.S.A. which figured in 20cases Japan, Korea and India each and cases Brazil 7cases and others 25cases. With regard to the status of disputes we find that as many as 56disputes are under consultation, 15 disputes were withdrawn and another 10cases seemed to have been settled bilaterally in 19cases request has been made for established of panel, 1dispute under appeal 2 dispute were closed the ruling or recommendation in one dispute have been ruling or recommendation in one dispute have been implemented whereas those in 6cases are under implementation stage. Dispute settlement under the GATT 1947 and the Tokyo agreements. During the review period, dispute actions have been initiated of pursued under certain WTO predecessor agreements still in force. Under the GATT 1947 four panel reports were submitted to the council for adaptation, and there was one new request for consultations.
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Objectives of world trade organization: - The objectives of WTO are in fact, the same as those of the GATT i.e. to secure the conduct of international trade on the basis of non-discrimination. This is based on the most favored nation principle, which stated that discrimination among the WTO members is not allowed. Thus, every member state of WTO will be given the treatment granted to the country, which is most favored. The Marakesh agreement establishing WTO states that it shall also pursue the following objectives, in addition to its primary task for the implementation of the GATT, 1994. These objectives are (1) raising the standards of living and income. (2) Ensuring full employment. (3) Expanding production, trade and optimal use of world resources. (4) Securing sustained development in relation to the optimal use of the world resources protecting and preserving the environment in a manner consistent with various levels of national economic development. (5) Ensuring that developing countries and especially the least developed among them secure better share of the growth in international trade. The policies of WTO are geared towards the implementation of various agreement negotiated as a part of GATT94. The WTO has established the dispute settlement board to resolve the disputes among the member countries arising due to their failure to fulfill their commitments under the GATT94. Besides WTO ensures the enforcement of appropriate trade policies by its member countries in conformity with their commitments made under the GATT94 by conducting the periodic review of their commitments made under the GATT94 by conducting the periodic review of their policies through its trade policy review division. These measures enable WTO to enforce the multilateral trading system, which provides the strong foundations for the liberalization and globalization, Based on the principle of transparency, national treatment and the most favored nation treatment to all other member nations of WTO.

The agreements
The WTO is rules-based; its rules are negotiated agreements 1. Overview: a navigational guide The WTO Agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. They prescribe special treatment for developing countries. They require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted, and through regular reports by the secretariat on countries trade policies. These agreements are often called the WTOs trade rules, and the WTO is often described as rules-based, a system based on rules. However, it is important to remember that the rules are actually agreements that governments negotiated. This chapter focuses on the Uruguay Round agreements, which are the basis of the present WTO system. Additional work is also now underway in the WTO. This is the result of decisions taken at Ministerial Conferences, in particular the meeting in Doha, November 2001, when new negotiations and other work were launched. (More on the Doha Agenda, later.)

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Six-part broad outline


The table of contents of The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts is a daunting list of about 60 agreements, annexes, decisions and understandings. In fact, the agreements fall into a simple structure with six main parts: an umbrella agreement (the Agreement Establishing the WTO); agreements for each of the three broad areas of trade that the WTO covers (goods, services and intellectual property); dispute settlement; and reviews of governments trade policies. The agreements for the two largest areas goods and services share a common three-part outline, even though the detail is sometimes quite different. They start with broad principles: the General Agreement on Tariffs and Trade (GATT) (for goods), and the General Agreement on Trade in Services (GATS). (The third area, Trade-Related Aspects of Intellectual Property Rights (TRIPS), also falls into this category although at present it has no additional parts.) Then come extra agreements and annexes dealing with the special requirements of specific sectors or issues. Finally, there are the detailed and lengthy schedules (or lists) of commitments made by individual countries allowing specific foreign products or service-providers access to their markets. For GATT, these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs and quotas for some agricultural goods. For GATS, the commitments state how much access foreign service providers are allowed for specific sectors, and they include lists of types of services where individual countries say they are not applying the mostfavoured-nation principle of non-discrimination. Underpinning these are dispute settlement, which is based on the agreements and commitments, and trade policy reviews, an exercise in transparency. Much of the Uruguay Round dealt with the first two parts: general principles and principles for specific sectors. At the same time, market access negotiations were possible for industrial goods. Once the principles had been worked out, negotiations could proceed on the commitments for sectors such as agriculture and services.

In a nutshell
The basic structure of the WTO agreements: how the six main areas fit together the umbrella WTO Agreement, goods, services, intellectual property, disputes and trade policy reviews. Umbrella Goods Basic principles GATT Additional Other goods details agreements and annexes Market access Countries commitments schedules of commitments Dispute settlement Transparency AGREEMENT ESTABLISHING WTO Services Intellectual property GATS TRIPS Services annexes Countries schedules of commitments (and MFN exemptions) DISPUTE SETTLEMENT TRADE POLICY REVIEWS

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Additional agreements

Another group of agreements not included in the diagram is also important: the two plurilateral agreements not signed by all members: civil aircraft and government procurement.

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Intellectual Property: Protection and Enforcement


The WTOs Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated in the 198694 Uruguay Round, introduced intellectual property rules into the multilateral trading system for the first time. Origins: into the rule-based trade system Ideas and knowledge are an increasingly important part of trade. Most of the value of new medicines and other high technology products lies in the amount of invention, innovation, research, design and testing involved. Films, music recordings, books, computer software and on-line services are bought and sold because of the information and creativity they contain, not usually because of the plastic, metal or paper used to make them. Many products that used to be traded as low-technology goods or commodities now contain a higher proportion of invention and design in their value for example brandnamed clothing or new varieties of plants. Creators can be given the right to prevent others from using their inventions, designs or other creations and to use that right to negotiate payment in return for others using them. These are intellectual property rights. They take a number of forms. For example books, paintings and films come under copyright; inventions can be patented; brandnames and product logos can be registered as trademarks; and so on. Governments and parliaments have given creators these rights as an incentive to produce ideas that will benefit society as a whole. The extent of protection and enforcement of these rights varied widely around the world; and as intellectual property became more important in trade, these differences became a source of tension in international economic relations. New internationallyagreed trade rules for intellectual property rights were seen as a way to introduce more order and predictability, and for disputes to be settled more systematically. The Uruguay Round achieved that. The WTOs TRIPS Agreement is an attempt to narrow the gaps in the way these rights are protected around the world, and to bring them under common international rules. It establishes minimum levels of protection that each government has to give to the intellectual property of fellow WTO members. In doing so, it strikes a balance between the long term benefits and possible short term costs to society. Society benefits in the long term when intellectual property protection encourages creation and invention, especially when the period of protection expires and the creations and inventions enter the public domain. Governments are allowed to reduce any short term costs through various exceptions, for example to tackle public health problems. And, when there are trade disputes over intellectual property rights, the WTOs dispute settlement system is now available. The agreement covers five broad issues: how basic principles of the trading system and other international intellectual property agreements should be applied how to give adequate protection to intellectual property rights how countries should enforce those rights adequately in their own territories how to settle disputes on intellectual property between members of the WTO special transitional arrangements during the period when the new system is being introduced.

Basic principles: national treatment, MFN, and balanced protection


As in GATT and GATS, the starting point of the intellectual property agreement is basic principles. And as in the two other agreements, non-discrimination features
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prominently: national treatment (treating ones own nationals and foreigners equally), and most-favoured-nation treatment (equal treatment for nationals of all trading partners in the WTO). National treatment is also a key principle in other intellectual property agreements outside the WTO. The TRIPS Agreement has an additional important principle: intellectual property protection should contribute to technical innovation and the transfer of technology. Both producers and users should benefit, and economic and social welfare should be enhanced, the agreement says.

Intellectual rights
Intellectual rights (from the French "droits intellectuels") is a term sometimes used to refer to the legal protection afforded to owners of intellectual capital. This notion is more commonly referred to as "intellectual property", though "intellectual rights" more aptly describes the nature of the protections afforded by most nations. Both terms were used in Europe during the 19th century as a means of distinguishing between two different views of intellectual protection. "Intellectual property" was generally used to advocate a belief that copyrights and patents should provide rights akin to physical property rights. The term "intellectual rights" was used by those who felt that such protection should take the form of temporary, limited grants. Although most modern copyright systems do not treat copyrighted or patented materials in the same way as real property, the term "intellectual property" has gained prominence. Also, at least three different kinds of capital and rights are involved: creativity (individual capital) which implies rights to benefit from one's free expression invention (instructional capital) which implies rights to benefit from having created some more efficient device or process reputation (social capital) which implies rights not to have one's name or specific distinguishing tagline or ethic sullied by imitators or rivals All three capital terms predate the term intellectual capital, which appears to be a 19th century artifact of early, now-discredited, economic theory. Intellectual property or IP refers to certain kinds of exclusive rights to intellectual capital, some forms of which can expire after a set period of time, and other forms of which can last indefinitely. Common types of intellectual property rights include conflicting areas of law: Copyrights, which give the holder some exclusive rights to control some reproduction of works of authorship, such as books and music, for a certain period of time. Patents give the holder an exclusive right to use and license use of an invention for a certain period, typically 20 years from the filing date of a patent application. Trademarks are distinctive names, phrases or marks used to identify products to consumers. Trade secrets, where a company keeps information secret, perhaps by enforcing a contract under which those given access to information are not permitted to disclose it to others. These rights, conferred by law, can be given, sold, rented (called "licensing") and, in some countries, even mortgaged, in much the same way as physical property. However, the rights typically have limitations, sometimes including term limits and other exceptions (such as fair use for copyrighted works.) It is important to understand that it is the rights that are the property, and not the intellectual work they apply to. A patent can be bought and sold, but the invention that it covers is not owned at all. For this and other reasons, some people think that
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the term intellectual property is misleading. Some use the term "intellectual monopoly" instead, because such so-called "intellectual property" is actually a government-granted monopoly on certain types of action. Others object to this usage, because of potential confusion with the economic sense of the term "monopoly." Others still prefer not to use a generic term because of differences in the nature of copyright, patent and copyright law, and try to be specific about which they are talking about.

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History
It is not exactly clear where the concept of intellectual property originated. The first patent in England was granted by Henry VI in 1449 to a Flemish man a 20 year monopoly (co-incidentally, the current length of UK/EU patents is still 20 years) on the manufacture of stained glass (destined for Eton College). This was the start of a long tradition by the English Crown of the granting of "letters patent" (meaning 'open letter', as opposed to a letter under seal) which granted "monopolies" to favoured persons (or people who were prepared to pay for them). This became increasingly open to abuse as the Crown granted patents in respect of all sorts of known goods (salt, for example). After public outcry, James I was forced to revoke all existing monopolies and declare that they were only to be used for 'projects of new invention'. This was incorporated into the Statute of Monopolies 1623. In the reign of Queen Anne the rules were changed again so that a written description of the article was given. Outside of England, patent law was the subject of legislative protection in the Venetian Statute of 1474. Copyright was not invented until after the advent of the printing press and wider public literacy. In England the King was concerned by the unfair copying of books and used the royal prerogative to pass the Licencing Act 1662 which established a register of licensed books and required a copy to be deposited with the Stationers Company. The Statute of Anne was the first real act of copyright, and gave the author rights for a fixed period. Internationally, the Berne Convention in the late 1800's set out the scope of copyright protection and is still in force to this day. Design rights started in England in 1787 with the Designing & Printing of Linen Act and have expanded from there. The term intellectual property appears to have originated in Europe during the 19th century. French author A. Nion mentions "proprit intellectuelle" in his Droits civils des auteurs, artistes et inventeurs, published in 1846, and there may well have been earlier uses of the term. During the period in question, there was some controversy over the nature of copyright and patent protections in Europe; those who supported unlimited copyrights frequently used the term property to advance that agenda, while others who supported a more limited system sometimes used the term intellectual rights (droits intellectuels). The system currently used by much of the Western world is more in line with the second view, with limited copyrights that eventually expire. Regardless, the term intellectual property has gained prominence throughout the world, as evidenced by the United Nations World Intellectual Property Organization (WIPO), formed in 1967.

Trends
Recently the general trend in intellectual property law has been expansion: to cover new types of subject matter such as databases, to regulate new categories of activity in respect of the subject matter already protected, to increase the duration of individual rights, and to remove restrictions and limitations on these rights. Another effect of this trend is an increase in the term of the government-granted rights, and an expansion of the definition of "author" to include corporations as the legitimate creators and owners of works. The concept of work for hire has had the effect of treating a corporation or business owner as the legal author of works created by people while employed. Another trend is to increase the number and type of what is claimed as intellectual property. This has resulted in increasingly broad patents and trademarks: for instance, Microsoft attempting to trademark the phrase, "Where do you want to go
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today?". Trade marks in EU law can now encompass smells (e.g. of cut grass for tennis balls), shapes (e.g. of a soft drinks bottle), colors (e.g. red for fizzy drinks), words (e.g. COCA-COLA) and sounds (Intel, has registered four notes). The granting of patents for life forms, software algorithms and business models stretches the initial concept of giving the inventor limited rights to exclude the use if his invention. Some argue that these expansions harm an essential "bargain" driven between public and copyright holders: as most "new" ideas borrow from other ideas, it is thought that too many intellectual property laws will lead to a reduction the overall creative output of a society. The expansion of exclusive rights is also alleged to have led to the emergence of organizations whose business model is to frivolously sue other companies. The electronic age has seen an increase in the attempt to use software based digital rights management tools to restrict the copying and use of digitally based works. This can have the effect of limiting fair use provisions of copyright law and even make the first sale doctrine (known in EU law as 'exhaustion of rights') moot. This would allow, in essence the creation of a book which would disintegrate after one reading. As individuals have proven adept at circumventing such measures in the past, many copyright holders have also successfully lobbied for laws such as the Digital Millennium Copyright Act, which uses criminal law to prevent any circumvention of software used to enforce digital rights management systems. Equivalent provisions, to prevent circumvention of copyright protection have existed in EU for some time, and are being expanded in, for example, Article 6 and 7 the Copyright Directive. Other examples are Article 7 of the Software Directive of 1991 (91/250/EEC), and the Conditional Access Directive of 1998 (98/84/EEC). At the same time, the growth of the Internet, and particularly peer-to-peer filesharing networks like Kazaa and Gnutella represents a challenge to intellectual property laws. The Recording Industry Association of America, in particular, has been on the front lines of the fight against what it terms "piracy". Though the industry has had some victories against services, including a highly publicized case against the file-sharing company Napster, the increasingly decentralized nature of these networks is making legal action more difficult.

How to protect ground-rules

intellectual

property:

common

The second part of the TRIPS agreement looks at different kinds of intellectual property rights and how to protect them. The purpose is to ensure that adequate standards of protection exist in all member countries. Here the starting point is the obligations of the main international agreements of the World Intellectual Property Organization (WIPO) that already existed before the WTO was created: the Paris Convention for the Protection of Industrial Property (patents, industrial designs, etc) the Berne Convention for the Protection of Literary and Artistic Works (copyright). Some areas are not covered by these conventions. In some cases, the standards of protection prescribed were thought inadequate. So the TRIPS agreement adds a significant number of new or higher standards. a. Copyright The TRIPS agreement ensures that computer programs will be protected as literary works under the Berne Convention and outlines how databases should be protected. It also expands international copyright rules to cover rental rights. Authors of computer programs and producers of sound recordings must have the right to
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prohibit the commercial rental of their works to the public. A similar exclusive right applies to films where commercial rental has led to widespread copying, affecting copyright-owners potential earnings from their films. The agreement says performers must also have the right to prevent unauthorized recording, reproduction and broadcast of live performances (bootlegging) for no less than 50 years. Producers of sound recordings must have the right to prevent the unauthorized reproduction of recordings for a period of 50 years. b.Trademarks The agreement defines what types of signs must be eligible for protection as trademarks, and what the minimum rights conferred on their owners must be. It says that service marks must be protected in the same way as trademarks used for goods. Marks that have become well-known in a particular country enjoy additional protection. c.Geographical indications A place name is sometimes used to identify a product. This geographical indication does not only say where the product was made. More importantly, it identifies the products special characteristics, which are the result of the products origins. Well-known examples include Champagne, Scotch, Tequila, and Roquefort cheese. Wine and spirits makers are particularly concerned about the use of placenames to identify products, and the TRIPS Agreement contains special provisions for these products. But the issue is also important for other types of goods. Using the place name when the product was made elsewhere or when it does not have the usual characteristics can mislead consumers, and it can lead to unfair competition. The TRIPS Agreement says countries have to prevent this misuse of place names. For wines and spirits, the agreement provides higher levels of protection, i.e. even where there is no danger of the public being misled. Some exceptions are allowed, for example if the name is already protected as a trademark or if it has become a generic term. For example, cheddar now refers to a particular type of cheese not necessarily made in Cheddar, in the UK. But any country wanting to make an exception for these reasons must be willing to negotiate with the country which wants to protect the geographical indication in question. The agreement provides for further negotiations in the WTO to establish a multilateral system of notification and registration of geographical indications for wines. These are now part of the Doha Development Agenda and they include spirits. Also debated in the WTO is whether to negotiate extending this higher level of protection beyond wines and spirits. d. Industrial designs Under the TRIPS Agreement, industrial designs must be protected for at least 10 years. Owners of protected designs must be able to prevent the manufacture, sale or importation of articles bearing or embodying a design, which is a copy of the protected design. e. Patents The agreement says patent protection must be available for inventions for at least 20 years. Patent protection must be available for both products and processes, in almost all fields of technology. Governments can refuse to issue a patent for an invention if its commercial exploitation is prohibited for reasons of public order or morality. They can also exclude diagnostic, therapeutic and surgical methods, plants and animals (other than microorganisms), and biological processes for the production of plants or animals (other than microbiological processes). Plant varieties, however, must be protectable by patents or by a special system (such as the breeders rights provided in the conventions of UPOV the International Union for the Protection of New Varieties of Plants).
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The agreement describes the minimum rights that a patent owner must enjoy. But it also allows certain exceptions. A patent owner could abuse his rights, for example by failing to supply the product on the market. To deal with that possibility, the agreement says governments can issue compulsory licences, allowing a competitor to produce the product or use the process under licence. But this can only be done under certain conditions aimed at safeguarding the legitimate interests of the patentholder. If a patent is issued for a production process, then the rights must extend to the product directly obtained from the process. Under certain conditions, alleged infringers may be ordered by a court to prove that they have not used the patented process. An issue that has arisen recently is how to ensure patent protection for pharmaceutical products does not prevent people in poor countries from having access to medicines while at the same time maintaining the patent systems role in providing incentives for research and development into new medicines. Flexibilities such as compulsory licensing are written into the TRIPS Agreement, but some governments were unsure of how these would be interpreted, and how far their right to use them would be respected. A large part of this was settled when WTO ministers issued a special declaration at the Doha Ministerial Conference in November 2001. They agreed that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. They underscored countries ability to use the flexibilities that are built into the TRIPS Agreement. And they agreed to extend exemptions on pharmaceutical patent protection for least-developed countries until 2016. On one remaining question, they assigned further work to the TRIPS Council to sort out how to provide extra flexibility, so that countries unable to produce pharmaceuticals domestically can import patented drugs made under compulsory licensing. A waiver providing this flexibility was agreed on 30 August 2003. f. Integrated circuits layout designs The basis for protecting integrated circuit designs (topographies) in the TRIPS agreement is the Washington Treaty on Intellectual Property in Respect of Integrated Circuits, which comes under the World Intellectual Property Organization. This was adopted in 1989 but has not yet entered into force. The TRIPS agreement adds a number of provisions: for example, protection must be available for at least 10 years. g. Undisclosed information and trade secrets Trade secrets and other types of undisclosed information which have commercial value must be protected against breach of confidence and other acts contrary to honest commercial practices. But reasonable steps must have been taken to keep the information secret. Test data submitted to governments in order to obtain marketing approval for new pharmaceutical or agricultural chemicals must also be protected against unfair commercial use.

Curbing anti-competitive licensing contracts

The owner of a copyright, patent or other form of intellectual property right can issue a licence for someone else to produce or copy the protected trademark, work, invention, design, etc. The agreement recognizes that the terms of a licensing contract could restrict competition or impede technology transfer. It says that under certain conditions, governments have the right to take action to prevent anticompetitive licensing that abuses intellectual property rights. It also says governments must be prepared to consult each other on controlling anti-competitive licensing.

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Enforcement: tough but fair

Having intellectual property laws is not enough. They have to be enforced. This is covered in Part 3 of TRIPS. The agreement says governments have to ensure that intellectual property rights can be enforced under their laws, and that the penalties for infringement are tough enough to deter further violations. The procedures must be fair and equitable, and not unnecessarily complicated or costly. They should not entail unreasonable time-limits or unwarranted delays. People involved should be able to ask a court to review an administrative decision or to appeal a lower courts ruling. The agreement describes in some detail how enforcement should be handled, including rules for obtaining evidence, provisional measures, injunctions, damages and other penalties. It says courts should have the right, under certain conditions, to order the disposal or destruction of pirated or counterfeit goods. Wilful trademark counterfeiting or copyright piracy on a commercial scale should be criminal offences. Governments should make sure that intellectual property rights owners can receive the assistance of customs authorities to prevent imports of counterfeit and pirated goods. Technology transfer Developing countries in particular, see technology transfer as part of the bargain in which they have agreed to protect intellectual property rights. The TRIPS Agreement includes a number of provisions on this. For example, it requires developed-country governments to provide incentives for their companies to transfer technology to least-developed countries.

Transition arrangements: 1, 5 or 11 years or more

When the WTO agreements took effect on 1 January 1995, developed countries were given one year to ensure that their laws and practices conform with the TRIPS agreement. Developing countries and (under certain conditions) transition economies were given five years, until 2000. Least-developed countries have 11 years, until 2006 now extended to 2016 for pharmaceutical patents. If a developing country did not provide product patent protection in a particular area of technology when the TRIPS Agreement came into force (1 January 1995), it has up to 10 years to introduce the protection. But for pharmaceutical and agricultural chemical products, the country must accept the filing of patent applications from the beginning of the transitional period, though the patent need not be granted until the end of this period. If the government allows the relevant pharmaceutical or agricultural chemical to be marketed during the transition period, it must subject to certain conditions provide an exclusive marketing right for the product for five years, or until a product patent is granted, whichever is shorter. Subject to certain exceptions, the general rule is that obligations in the agreement apply to intellectual property rights that existed at the end of a countrys transition period as well as to new ones.

Anti-dumping, Subsidies, Safeguards: Contingencies, etc


Binding tariffs and applying them equally to all trading partners (most-favourednation treatment, or MFN) are key to the smooth flow of trade in goods. The WTO agreements uphold the principles, but they also allow exceptions in some circumstances.

Three of these issues are: actions taken against dumping (selling at an unfairly low price) subsidies and special countervailing duties to offset the subsidies
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emergency measures to limit imports temporarily, designed to safeguard domestic industries.

Anti-dumping actions
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be dumping the product. Is this unfair competition? Opinions differ, but many governments take action against dumping in order to defend their domestic industries. The WTO agreement does not pass judgement. Its focus is on how governments can or cannot react to dumping it disciplines anti-dumping actions, and it is often called the Anti-Dumping Agreement. (This focus only on the reaction to dumping contrasts with the approach of the Subsidies and Countervailing Measures Agreement.) The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where there is genuine (material) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporters home market price), and show that the dumping is causing injury or threatening to do so. GATT (Article 6) allows countries to take action against dumping. The Anti-Dumping Agreement clarifies and expands Article 6, and the two operate together. They allow countries to act in a way that would normally break the GATT principles of binding a tariff and not discriminating between trading partners typically anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the normal value or to remove the injury to domestic industry in the importing country. There are many different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It provides three methods to calculate a products normal value. The main one is based on the price in the exporters domestic market. When this cannot be used, two alternatives are available the price charged by the exporter in another country, or a calculation based on the combination of the exporters production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price. Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation has to be conducted according to specified rules first. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question. If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty. Detailed procedures are set out on how anti-dumping cases are to be initiated, how the investigations are to be conducted, and the conditions for ensuring that all interested parties are given an opportunity to present evidence. Anti-dumping measures must expire five years after the date of imposition, unless an investigation shows that ending the measure would lead to injury. Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product). Other conditions are also set. For example, the investigations also have to end if the volume of dumped imports is negligible (i.e. if the volume from one country is less than 3% of total imports of that product although investigations can proceed if several countries, each supplying less than 3%
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of the imports, together account for 7% or more of total imports). The agreement says member countries must inform the Committee on Anti-Dumping Practices about all preliminary and final anti-dumping actions, promptly and in detail. They must also report on all investigations twice a year. When differences arise, members are encouraged to consult each other. They can also use the WTOs dispute settlement procedure.

Anti-Dumping
The Customs Tariff Act, 1975 contains various provisions for giving relief to the domestic producers against injury caused to them by imports. These include Section 8B, Section 9, Section 9A, Section 9B and Section 9C of the Customs Tariff Act, 1975 and the rules made there under. These provisions are aimed at offsetting the adverse effects of increased imports, subsidized imports or dumped imports.

Dumping
Dumping occurs when the export price of goods imported into India is less than the Normal Value of like articles sold in the domestic market of the exporter. Imports at cheap or low prices do not per se indicate dumping. The price at which like articles are sold in the domestic market of the exporter is referred to as the Normal Value of those articles. Normal Value The normal value is the comparable price at which the goods under complaint are sold, in the ordinary course of trade, in the domestic market of the exporting country or territory. If the normal value cannot be determined by means of domestic sales, the Act provides for the following two alternative methods : Comparable representative export price to an appropriate third country. Cost of production in the country of origin with reasonable addition for administrative, selling and general costs and for profits. Export Price The export price of goods imported into India is the price paid or payable for the goods by the first independent buyer. Constructed Export Price If there is no export price or the export price is not reliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be constructed on the basis of the price at which the imported articles are first resold to an independent buyer. If the articles are not resold as above or not resold in the same condition as imported, their export price may be determined on a reasonable basis.

Margin of Dumping
Margin of dumping refers to the difference between the Normal Value of the like article and the Export Price of the product under consideration. Margin of dumping is normally established on the basis of : a comparison of weighted average Normal Value with a weighted average of prices of comparable export transactions; or

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comparison of normal values and export prices on a transaction to transaction basis. A Normal Value established on a weighted average basis may be compared to prices of individual export transactions if the Designated Authority finds a pattern of export prices that differ significantly among different purchasers, regions, time period, etc. It is significant to note that the alternative method of comparing the normal values and export prices is a major change introduced after the Uruguay Round. The margin of dumping is generally expressed as a percentage of the export price. Factors Affecting Comparison of Normal Value and Export Price The export price and the normal value of the goods must be compared at the same level of trade, normally at the ex-factory level, for sales made as near as possible in time. Due allowance is made for differences that affect price comparability of a domestic sale and an export sale. These factors, inter alia, include : * Physical characteristics * Levels of trade * Quantities * Taxation * Conditions and terms of sale It must be noted that the above factors are only indicative and any factor which can be demonstrated to affect the price comparability, is considered by the Authority. Like Articles Anti-dumping action can be taken only when there is an Indian industry which produces like articles when compared to the allegedly dumped imported goods. The article produced in India must either be identical to the dumped goods in all respects or in the absence of such an article, another article that has characteristics closely resembling those goods.

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Injury to the domestic industry

The Indian industry must be able to show that dumped imports are causing or are threatening to cause material injury to the Indian domestic industry. Material retardation to the establishment of an industry is also regarded as injury. The material injury or threat thereof cannot be based on mere allegation, statement or conjecture. Sufficient evidence must be provided to support the contention of material injury. Injury analysis can broadly be divided in two major areas: 1. The Volume Effect The Authority examines the volume of the dumped imports, including the extent to which there has been or is likely to be a significant increase in the volume of dumped imports, either in absolute terms or in relation to production or consumption in India, and its affect on the domestic industry. 2. The Price Effect The effect of the dumped imports on prices in the Indian market for like articles, including the existence of price undercutting, or the extent to which the dumped imports are causing price depression or preventing price increases for the goods which otherwise would have occurred. The consequent economic and financial impact of the dumped imports on the concerned Indian industry can be demonstrated, inter alia, by : Decline in output Loss of sales Loss of market share Reduced profits Decline in productivity Decline in capacity utilization Reduced return on investments Price effects Adverse effects on cash flow, inventories, employment, wages, growth, investments, ability to raise capital, etc. Injury analysis is a detailed and intricate examination of all the relevant factors. It is not necessary that all the factors considered relevant should individually show injury to the domestic industry. Casual link A causal link must exist between the material injury being suffered by the Indian industry and the dumped imports. In addition, other injury causes have to be investigated so that they are not attributed to dumping. Some of these are volume and prices of imports not sold at dumped prices, contraction in demand or changes in the pattern of consumption, export performance, productivity of the domestic industry etc.

Relief to the Domestic Industry


Relief can be provided to the domestic industry in the form of antidumping duties or price undertakings. 1. Anti-dumping duties
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Duties are imposed on a source specific basis and can be expressed either on ad valoren or specific basis. Non-cooperative exporters are required to pay the residuary duty, which is generally the highest of the co-operative exporters.

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Lesser Duty Rule Under the GATT provisions, the national authorities cannot impose duties higher than the margin of dumping. It is, however, suggested that it would be desirable if the appropriate Government authorities impose a lesser duty which is adequate to remove the injury to the domestic industry. Under the Indian laws, the Government is obliged to restrict the anti-dumping duty to the lower of the two i.e. dumping margin and the injury margin. Injury Margin Besides the calculation of the margin of dumping, the Designated Authority also calculates the injury margin which is the difference between the fair selling price due to the domestic industry and the landed cost of the product under consideration. Landed cost for this purpose is taken as the assessable value under the Customs Act and the basic customs duties. De Minimis Margins Any exporter whose margin of dumping is less than 2% of the export price shall be excluded from the purview of anti-dumping duties even if the existence of dumping, injury as well as the causal link are established. Further, investigations against any country are required to be terminated if the volume of the dumped imports from that particular source are found to be below 3% of the total imports, provided the cumulative imports from all those countries who individually account for less than 3%, are not more than 7%. 2. Price undertakings The Designated Authority may suspend or terminate investigation if the exporter concerned furnished an undertaking to revise his price to remove the dumping or the injurious effect of dumping as the case may be. No undertaking can however be accepted before preliminary determination is made. No anti-dumping duties are recommended on such exporters from whom price undertaking has been accepted. No price undertaking may, however, be accepted in case it is found that acceptance of such undertaking is impracticable or is unacceptable for any reason.

INVESTIGATION PROCESS
An application received by the Designated Authority is dealt with as follows: 1. Preliminary Screening: The application is scrutinized to ensure that it is adequately documented and provides sufficient evidence for initiation. If the evidence is not adequate, then a deficiency letter is issued normally within 20 days of the receipt of the application. 2. Initiation: When the Designated Authority is satisfied that there is sufficient evidence in the application with regard to dumping, material injury and causal link, a Public Notice is issued initiating an investigation to determine the existence and effect of the alleged dumping. The Designated Authority notifies the diplomatic representative of the Government of the exporting country before proceeding to initiate the investigation. The initiation notice will be issued normally within 45 days of the date of receipt of a properly documented application. 3. Access to Information : The Authority provides access to the non-confidential evidence presented to it by various interested parties in the form of a public file, which is available for inspection after receipt of the responses.
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4. Preliminary Findings: The Designated Authority will proceed expeditiously with the conduct of the investigation and shall, in appropriate cases, make a preliminary finding containing the detailed information on the main reasons behind 14 the determination. The preliminary finding will normally be made within 150 days of the date of initiation. 5. Provisional Duty: A provisional duty not exceeding the margin of dumping may be imposed by the Central Government on the basis of the preliminary finding recorded by the Designated Authority. The provisional duty can be imposed only after the expiry of 60 days from the date of initiation of investigation. The provisional duty will remain in force only for a period not exceeding 6 months, extendable to 9 months under certain circumstances. 6. Oral Evidence : Interested parties who participate in the investigations can request the Designated Authority for an opportunity to present the relevant information orally. However, such oral information shall be taken into consideration only when it is subsequently reproduced in writing. The Authority may grant oral hearing anytime during the course of the investigations. 7. Final Determination: The final determination is normally made within 150 days of the date of preliminary determination. 8. Disclosure of Information: The Designated Authority will inform all interested parties of the essential facts which form the basis for its decision before the final finding is made. 9. Time-limit for Investigation Process The normal time allowed by the statute for conclusion of investigation and submission of final findings is one year from the date of initiation of the investigation. The above period may be extended by the Central Government by 6 months. 10. Termination: The Designated Authority may suspend or terminate the investigation in the following cases : i) if there is a request in writing from the domestic industry at whose instance the investigation was initiated. ii) when there is no sufficient evidence of dumping or injury. iii) if the margin of dumping is less than 2% of the export price. iv) the volume of dumped imports from a country is less than 3% of the total imports of the like article into India or the volume of dumped imports collectively from all such countries is less than 7% of the total imports. v) injury is negligible.

FAQ - Anti-dumping
Q.1. Who can file an application? Ans.1. A dumping investigation is normally initiated only upon receipt of a written application by or on behalf of the "Domestic Industry" In order to constitute a valid application, the following two conditions have to be satisfied. (i) The domestic producers expressly supporting the application must account for not less than 25% of the total production of the like article by the domestic industry in India; and (ii) The domestic producers expressly supporting the application must account for more than 50% of the total production of the like article by those expressly supporting or opposing the application. Applications can be made by or on behalf of
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the concerned domestic industry to the Designated Authority in the Ministry of commerce for an investigation of any alleged dumping. The Designated Authority may initiate an investigation when there is sufficient evidence that dumped imports are causing or are threatening to cause material injury to he Indian industry producing like articles or are materially retarding the establishment of an industry. Q.2. What information is required to be included in the application. Ans.2. Applications should be submitted to the Designated Authority in the Ministry of Commerce in the prescribed form. Guidelines on how to complete a questionnaire are a part of the prescribed application proforma. The proforma also advises the applicant of the type of evidence required in appropriate areas. Part-I (i) Complete description of alleged dumped goods, including information on its size, quality, category and uses of such goods along with any applicable technical specifications or standards (national or international ) and the tariff classification numbers, customs classification, customs duty, import policy (including Advance Licensing provisions). (ii) Country(ies) of origin of the alleged dumped goods. (iii) Since when such goods from the named country(ies) (are) being imported in the Indian market and when did dumping start. (iv) Whether such goods are shipped to India through third countries. (v) Volume and value of such dumped goods imported into India from each country alleged to be dumping the goods for the past two year and the current year to date. (vi) Volume and value of such goods from other countries, not alleged to be dumping the goods, for the past two year and the current year to date. (vii) Name(s) and address(es) of known exporters and manufacturers of the alleged dumped goods. (viii) Name(s and address(es) of known importers of the alleged dumped goods in India. (ix) Name(s) and address(es) of the users of the alleged dumped goods in India. (x) Name(s) and address(es) of associations of the users of the alleged dumped goods in India. Part II - Indian Industry Complete information needs to be provided about the Indian industry producing the subject goods. The following information is relevant for this section of the complaint: (i) Name(s) address(es), contact person, telephone numbers, and fax numbers of Indian producers of the subject goods who are lodging the plaint. (ii) Name(s), address(es), contact person, telephone numbers, fax numbers of Delhi Office, if any of the Indian producers of the subject goods who are lodging the complaint. (iii) Name(s) and address(es) of Indian producers other than complainant alongwith their production (volume and value) of subject goods during the last two years. (iv) Whether viable substitutes exist for the product. If so, complete information about the substitutes and their degree of substitutions. (v) Subject goods (including size, type, range, models) that petitioner(s) produces. Details of articles that petitioner(s) is/are capable of producing. Details of goods the petitioner(s) may purchase to complement the product line. (vi) Does any of the petitioner(s) import and/or export the subject goods. If yes, details of country wise volume and value of imports and exports during the last two years and in the current year to date.

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(vii) What are the differences in the petitioner(s) product and the alleged dumped product, if any. To the extent feasible, differences in the imported product and petitioner's product need be quantified. (viii) Difference in the production process employed by the petitioner(s) and the exporters. It would be appropriate to quantify the impact of such differences, if any, on prices. (ix) Volume and value of Indian production with a separate breakdown of petitioner(s) and of other Indian producers not party to this complaint for the last past two completed years and current year to date. Q.3. When one can file an application ? Ans.3. Applications can be made by or on behalf of the concerned domestic industry to the Designated Authority in the Ministry of Commerce for an investigation of any alleged dumping and when there is sufficient evidence that dumped imports are causing or are threatening to cause material injury to he Indian industry producing like articles or are materially retarding the establishment of an industry. Q.4. What is the meaning of like Article, domestic industry, normal value, export price, margin of dumping and material injury ? Ans.4. Like Article means an article which is identical or alike in all respects to the article under investigation for being dumped in India or in the absence of such article, another article which although not alike in all respects, has characteristics closely resembling those of the articles under investigations. Domestic industry means the domestic producers as a whole engaged in the manufacture of the like article and any activity connected therewith or those whose collective output of the said article constitutes a major proportion of the total domestic production of that article except when such producers are related to the exporters or importers of the alleged dumped article or are themselves importers thereof in which case such producers may be deemed not to form part of domestic industry. Normal value means the comparable price at which like products are sold, in the ordinary course of trade, in the domestic market of the exporting country or territory. Export Price means price of goods imported into India and is the price paid or payable for the goods by the first independent buyer. Margin of dumping refers to the difference between the Normal value of the like article and the Export Price of the product under consideration. The margin of dumping is generally expressed as a percentage of the export price. In regard to Injury to the Domestic Industry the Indian industry must be able to show that dumped imports are causing or are threatening to cause material injury to the Indian `domestic industry'. Material retardation to the establishment of an industry is also regarded as injury. The material injury or threat thereof cannot be based on mere allegation, statement or conjecture. `Sufficient evidence must be provided to support the contention of material injury. Q.5. How to collect information about normal value and export price ? Ans.5. Normal value: The normal value is the comparable price at which the goods under complaint are sold, in the ordinary course of trade, in the domestic market of the exporting country or territory. The information about normal value can, therefore, be collected from the sale invoices in the domestic market of the domestic country. If the normal value cannot be determined by means of domestic sales, the Act provides for the following two alternative methods:Study Material on International Business by - Nagpur
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Comparable representative export price to an appropriate third country. Cost of production in the country of origin with reasonable addition for administrative, selling and general costs and for profits. Export Price: The export price of goods imported into India is the price paid or payable for the goods by the first independent buyer. The information, therefore, can be collected from import documents. Constructed Export Price If there is no export price or the export price is not reliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be constructed on the basis of the price at which the imported articles are first resold to an independent buyer. Q.6. How to collect information about imports in the country ? Ans.6 Data on the volume and value of imported goods can be compiled from some published sources, such as the Directorate General of Commercial Intelligence & Statistics (DGCI&S) publications, Customs Daily Lists and/or information otherwise available. Source of information must be specified while furnishing information. Q.7. For how long anti-dumping duty can be imposed ? Ans.7. An anti-dumping duty imposed under the Act unless revoked earlier remains in force for 5 years from the date of imposition. Q.8. Is the duty once levied reviewed periodically ? Ans.8 The Designated Authority is empowered to review the need for the continued imposition of the anti-dumping duty, from time to time. Such a review can be done suo motu or on the basis of request received from an interested party in view of the changed circumstances. A review shall also follow the same procedures prescribed for an investigation to the extent they are applicable. Q.9. Who has to pay this duty ? Ans.9 Anti-dumping duty imposed needs to be paid by the importers. Q.10. What can be done if the dumping continues or increases? Ans.10 Request for review can be made to the Designated Authority. Q.11. How is the duty imposed ? Ans.11 The Central Government may, within three months of the date of publication of final findings by the designated authority impose anti-dumping duty by notification in the official Gazette, upon importation into India of the article covered by the final findings. Q.12. What happens if some information is not made available or if the concerned parties do not co-operate ? Ans.12 In case where an interested party refuses access to, or otherwise does not provide necessary information within a reasonable period, or significantly impedes the investigation, the designated authority may record its findings on the basis of the facts available to it and make such recommendations to the Central Government as it deems fit under such circumstances. Q.13. Does the Govt. provides any guidance to the domestic industry in filing a petition ?
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Ans.13 The Ministry of Commerce have brought out a brochure. `Anti-dumping-a guide' for the benefit of trade which provides information about the legal as well as procedural aspects of anti-dumping. Q.14. What can be done in cases of anti-dumping investigation against the exports ? Ans.14 The exporters should make all efforts to provide the information required by the Investigating Authority and to co-operate with them. They can also seek the help of Ministry of Commerce in this regard. Q.15. Can the domestic Industry apply for imposition of provisional Anti Dumping duty ? Ans.15 A provisional duty not exceeding the margin of dumping may be imposed by the Central Government on the basis of the preliminary finding recorded by the Designated Authority. The provisional duty can be imposed only after the expiry of 60 days from the date of initiation of investigation. The provisional duty will remain in force only for a period not exceeding 6 months, extendable to 9 months under certain circumstances. Q.16. Whether Anti Dumping duty is imposed on all the imports ? Ans.16 Anti-dumping duty is a source - specific duty i.e. imposed only against dumped imports Anti-dumping duty is imposed on a non-discriminatory basis, applicable to all imports of such articles from whatever sources found dumped and causing injury to domestic industry except in the cases from those sources from which price undertaking has been accepted. Q.17. Whether there is any provisions for Appeal against the imposition of Anti Dumping duty. Ans.17 An appeal against the order of the Designated Authority may be filed with the Customs, Excise and Gold (Control) Appellate Tribunal within 90 days of the date of the order. Q.18. Whether Anti-dumping duty is applicable to imports under Advance licence. Ans.18 Anti-dumping duty is not payable on imports on products imported by Advance License holders. Safeguard duty: The Agreement on Safeguards has come into existence on 1 January, 1995, which authorises importing countries to provide protection to their domestic producers against serious injury caused or threatened to be caused to them by increased imports. The safeguard measures are intended to be applied only for a short duration with a view to allow an opportunity to the domestic produces to adjust to the new situation of competition offered by the increased imports. In India, the Agreement on Safeguards has been implemented recently by introducing a new Section 8B in the Customs Tariff Act, 1975 on 1 March, 1997. The Safeguard Duty Rules have been notified on 29 July, 1997. In accordance with the provisions of the Safeguard Duty Rules, safeguard duty can be imposed on any product imported into the country, in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten serious injury to the domestic producers of like or directly competitive products, irrespective of the source of origin of the imported product.

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The safeguard duties can be imposed for a short duration with the immediate intention of preventing or remedying serious injury to the domestic industry. Such a measure would, however, also require the industry to adjust itself to the new situation of competition offered by the increased imports. A safeguard measure can be imposed only after the Director General arrives at a finding, after due investigation, that the increased imports of particular product(s) are causing or are threatening to cause serious injury to the domestic producers of like-or directly competitive articles. An application for initiation of a safeguard investigation can be made by any aggrieved producer/manufacturer, trade representative body, firm or institution, which is representative of the domestic industry. This application should be made in the format issued by the Director General (Safeguards) a copy of which can be obtained from his office or from Industry Chamber and Association and should include information as detailed in Annex to the Trade Notice (along with all supportive evidence/data/annexes) to: The Director General (Safeguards), 5th Floor, `D' Block, I.P.Bhawan, I.P.Estate, New Delhi-110 002.

Non-Tariff Barriers: Red Tape, etc


A number of agreements deal with various bureaucratic or legal issues that could involve hindrances to trade. Import licensing Rules for the valuation of goods at customs Preshipment inspection: further checks on imports Rules of origin: made in ... where? Investment measures a. Import licensing: keeping procedures clear Although less widely used now than in the past, import licensing systems are subject to disciplines in the WTO. The Agreement on Import Licensing Procedures says import licensing should be simple, transparent and predictable. For example, the agreement requires governments to publish sufficient information for traders to know how and why the licences are granted. It also describes how countries should notify the WTO when they introduce new import licensing procedures or change existing procedures. The agreement offers guidance on how governments should assess applications for licences. Some licences are issued automatically if certain conditions are met. The agreement sets criteria for automatic licensing so that the procedures used do not restrict trade. Other licences are not issued automatically. Here, the agreement tries to minimize the importers burden in applying for licences, so that the administrative work does not in itself restrict or distort imports. The agreement says the agencies handling licensing should not normally take more than 30 days to deal with an application 60 days when all applications are considered at the same time. b. Rules for the valuation of goods at customs For importers, the process of estimating the value of a product at customs presents problems that can be just as serious as the actual duty rate charged. The WTO agreement on customs valuation aims for a fair, uniform and neutral system for the valuation of goods for customs purposes a system that conforms to commercial realities, and which outlaws the use of arbitrary or fictitious customs values. The agreement provides a set of valuation rules, expanding and giving greater precision to the provisions on customs valuation in the original GATT.
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A related Uruguay Round ministerial decision gives customs administrations the right to request further information in cases where they have reason to doubt the accuracy of the declared value of imported goods. If the administration maintains a reasonable doubt, despite any additional information, it may be deemed that the customs value of the imported goods cannot be determined on the basis of the declared value. c. Preshipment inspection: a further check on imports Preshipment inspection is the practice of employing specialized private companies (or independent entities) to check shipment details essentially price, quantity and quality of goods ordered overseas. Used by governments of developing countries, the purpose is to safeguard national financial interests (preventing capital flight, commercial fraud, and customs duty evasion, for instance) and to compensate for inadequacies in administrative infrastructures. The Preshipment Inspection Agreement recognizes that GATT principles and obligations apply to the activities of preshipment inspection agencies mandated by governments. The obligations placed on governments which use preshipment inspections include non-discrimination, transparency, protection of confidential business information, avoiding unreasonable delay, the use of specific guidelines for conducting price verification and avoiding conflicts of interest by the inspection agencies. The obligations of exporting members towards countries using preshipment inspection include non-discrimination in the application of domestic laws and regulations, prompt publication of those laws and regulations and the provision of technical assistance where requested. The agreement establishes an independent review procedure. This is administered jointly by the International Federation of Inspection Agencies (IFIA), representing inspection agencies, and the International Chamber of Commerce (ICC), representing exporters. Its purpose is to resolve disputes between an exporter and an inspection agency.

d. Rules of origin: made in ... where?

Rules of origin are the criteria used to define where a product was made. They are an essential part of trade rules because a number of policies discriminate between exporting countries: quotas, preferential tariffs, anti-dumping actions, countervailing duty (charged to counter export subsidies), and more. Rules of origin are also used to compile trade statistics, and for made in ... labels that are attached to products. This is complicated by globalization and the way a product can be processed in several countries before it is ready for the market. The Rules of Origin Agreement requires WTO members to ensure that their rules of origin are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, impartial and reasonable manner; and that they are based on a positive standard (in other words, they should state what does confer origin rather than what does not). For the longer term, the agreement aims for common (harmonized) rules of origin among all WTO members, except in some kinds of preferential trade for example, countries setting up a free trade area are allowed to use different rules of origin for products traded under their free trade agreement. The agreement establishes a harmonization work programme, based upon a set of principles, including making rules of origin objective, understandable and predictable. The work was due to end in July 1998, but several deadlines have been missed. It is being conducted by a Committee on Rules of Origin in the WTO and a Technical Committee under the auspices of the World Customs Organization in Brussels. The outcome will be a single set of rules of origin to be applied under non-preferential trading conditions by all WTO members in all circumstances. An annex to the agreement sets out a common declaration dealing with the
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operation of rules of origin on goods, which qualify for preferential treatment.

Rules of origin
Rules of origin are used by governments to determine the country in which imported goods should be treated as having been produced. The revolutionary changes that are taking place in communications and transport now enable manufacturing companies to obtain inputs for the production of final products in far-off countries where trained personnel are available and costs are lower. This trend towards sourcing inputs from different countries is further facilitated by steps being taken to remove tariffs and other barriers to trade. Virtually all manufactured products available in markets today are produced in more than one country. This is so whether the products are consumer articles like textiles or cosmetics or the sophisticated machinery used in the manufacture of consumer goods. For instance, in the case of textile articles say shirts or blouses it is possible that the cotton or synthetic fibre used in their manufacture is produced in one country; the textile woven, dyed and printed in another country; and the cloth cut and stitched in yet another country.

Why it is necessary for governments to determine the origin of imported goods?

Such determination is necessary in three situations. First, for imports under preferential arrangements, importing countries have to ensure that the lower or preferential rates are made available to products originating from preference-receiving countries. They therefore need evidence to show that the imported product has been, if not wholly produced, at least substantially transformed in a preference-receiving country. Second, for imports under MFN (Most-favoured-nation (MFN) treatment Favour one, favour all. MFN means treating ones trading partners equally on the principle of non-discrimination.) tariff rates, the determination of origin is ordinarily not necessary as such duties are applied on a non-discriminatory basis to imports from all sources. However, where the measures applicable at the border take into account the country of origin, the determination of origin becomes necessary. These measures include the following: Collection of anti-dumping and countervailing duties; Administration of country-specific quota restrictions (e.g. those imposed under the provisions of the Agreement on Textiles and Clothing or under a countrys safeguard measures); Administration of tariff quotas; and Application of marks of origin or labels to indicate the country of origin. Third, the determination of origin is also necessary in the collection of trade statistics.

Main principles on which current national rules are based


The national systems currently in use to determine origin vary considerably. Moreover, within countries the rules may differ according to the purpose for which they are used (e.g. administering quantitative restrictions, collecting preferential duties, labelling to indicate origin). However, despite the wide variations in the systems adopted, broadly speaking they are based on two main principles. The first is the principle of value added in manufacturing or further processing. Under systems based on this principle, a product would be considered to have been
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manufactured in the country where a specified percentage (e.g. 40%, 50%, 60%) of the product value has been added. The second principle is the determination of origin on the basis of changes in tariff classification. WTO member countries are encouraged to use the Harmonized System Nomenclature (HS) developed by the World Customs Organization (WCO, the former Customs Co-operation Council) for both the collection of trade statistics and the imposition of customs duties. The System has 97 chapters, within each of which products are arranged according to the degree of processing, commencing with raw materials, through to semi-processed products and ending with finished products. By using this system of classification, a product is determined to have originated in the country where, as a result of processing, its tariff classification changes. Problems posed by differences in the rules for determining origin GATT does not contain specific rules for the determination of origin. This has given countries the flexibility to adopt their own rules and to apply them differently according to the purpose for which they are used . Moreover, this flexibility has enabled countries to adopt rules of origin for protective purposes, for instance to deny access to quotas on the grounds that the import product cannot be considered to have originated in the country to which a quota is allotted. To find solutions to these and the other problems that have arisen as a result of the absence of precise rules, the Agreement on Rules of Origin was negotiated in the Uruguay Round.

Agreement on Rules of Origin

Coverage and objectives Agreement on Rules of Origin, Article 1:1 The provisions of the Agreement apply to laws, regulations and administrative determinations of general application applied by any Member to determine the country of origin of goods imported on an MFN basis. It specifically states that its substantive provisions do not apply to imports made under preferential arrangements. The basic objective of the Agreement is to require countries to adopt a uniform set of harmonized rules for determining the origin of goods imported on an MFN basis. Since it was expected that technical work on developing such rules would take time, the Agreement provides two sets of provisions. The first set lays down the disciplines which countries are expected to follow during the transition period, i.e. until the entry into force of the new harmonized rules. The technical work on the harmonization of these rules is currently being done by the WCO Technical Committee under the guidance of the WTO Committee on Rules of Origin, which has been established under the Agreement. The second set of provisions is applicable after the transition period. It also lays down principles and guidelines for the technical work on the harmonization of rules of origin.

Rules applicable in the transition period

Agreement on Rules of Origin, Article 2 In the transition period, it is open to a country to apply different standards according to the purpose or the objective for which the rules are applied. After the transition period, however, the harmonized standards elaborated on a product-by-product basis are to be applied uniformly, irrespective of the purpose for which they are used. In other words, it will not be open to a country to apply one set of standards for determining origin for the purpose of administering quantitative restrictions and another set for indicating origin through labelling.
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The Agreement further lays down the principles (e.g. transparency, nondiscrimination and provisions for review of administrative decision) which countries are expected to follow during the transition period. These are set out in box 30.

Rules applicable after the transition period

Agreement on Rules of Origin, Article 3(b), Agreement on Rules of Origin, Article 9:2(c)(iii)After the transition period, the rules provide that the origin of goods shall always be the country where the last substantial transformation has been carried out. For this purpose, the WCO Technical Committee is required to elaborate for particular products or product sectors the change in tariff subheading or heading that must occur, through manufacturing or processing, for a country to claim origin. However, for products for which the exclusive use of a change in tariff subheading does not allow for the expression of substantial transformation, the Committee is advised to provide supplementary criteria. Such criteria could include additional requirements relating to ad valorem percentages and/or manufacturing or process operations.

Present state of play in the technical work on harmonization

The technical work on the harmonization of rules of origin was to have been completed by 1998. The highly complex nature of the work and the differences that have arisen among countries on specific criteria for determining origin in certain product groups have prevented the WCO Technical Committee from completing its work by the target date. The results of its work when completed will, after approval by the WTO Committee on Rules of Origin, be adopted by the WTO Ministerial Conference. They will then incorporated into the Agreement on Rules of Origin as an annex. All member countries will be required to apply the harmonized criteria specified in the annex on an MFN basis from the date agreed for its entry into force. It should be noted that in addition to the obligation to apply the harmonized criteria, member countries will have to abide by the principles relating to transparency, non-discrimination, administrative assessment and judicial review listed in box 30 [(d) to (k)].

Preferential rules of origin

Though the harmonized rules of origin being developed by WCO will not apply to imports obtained under regional preferential arrangements or under Generalized Systems of Preferences, the Agreement provides that countries should take into account the general principles listed in box 30 in applying and administering such rules of origin.

Box 30 Disciplines during the transition period


(Agreement on Rules of Origin, Article 2) During the transition period (i.e. until the entry into force of the new harmonized rules), Members are required to ensure that: (a) Rules of origin, including specifications for the substantial transformation test ,are clearly defined. (b) Rules of origin are not used as a trade policy instrument. (c) Rules of origin do not themselves create restrictive, distorting or disruptive effects on international trade and do not require the fulfilment of conditions not related to the manufacture or processing of the product in question.

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(d) Rules of origin applied to imports and exports are not more stringent than those applied to determine whether a good is domestic, and do not discriminate between Members (the GATT MFN principle). (e) Rules of origin are administered in a consistent, uniform, impartial and reasonable manner. (f) Rules of origin are based on a positive standard. Negative standards are permissible either as part of a clarification of a positive standard or in individual case where a positive determination or origin is not necessary. (g) Rules of origin are published promptly. (h) Upon request, assessments of origin are issued as soon as possible but no later than 150 days after such a request is submitted. Assessments are to be made publicly available; confidential information is not to be disclosed except if required in the context of judicial proceedings. Assessments of origin remain valid for three years provided the facts and conditions remain comparable, unless a decision contrary to an assessment is made in a review referred to in (j). (i) New rules of origin or modifications thereof do not apply retroactively. (j) Any administrative action in relation to the determination of origin is reviewable promptly by judicial, arbitral or administrative tribunals or procedures independent of the authority issuing the determination; such findings can modify or even reverse the determination. (k) Confidential information is not disclosed without the specific permission of the person providing such information, except to the extent that this may be required in the context of judicial proceedings.

Business implications
The adoption of harmonized criteria for determining origin is expected to resolve many of the problems faced by exporters today, particularly those related to textiles, in utilizing quotas allotted specifically to their countries. Harmonization will also eliminate current differences in national rules for determining origin. This will reduce the administrative burden on exporting enterprises which today have to ensure that they meet the varying requirements imposed by different countries on products subject to quantitative or other restrictive measures.

Settling Disputes
The priority is to settle disputes, not to pass judgement. 1. A unique contribution Dispute settlment is the central pillar of the multilateral trading system, and the WTOs unique contribution to the stability of the global economy. Without a means of settling disputes, the rules-based system would be less effective because the rules could not be enforced. The WTOs procedure underscores the rule of law, and it makes the trading system more secure and predictable. The system is based on clearly-defined rules, with timetables for completing a case. First rulings are made by a panel and endorsed (or rejected) by the WTOs full membership. Appeals based on points of law are possible. However, the point is not to pass judgement. The priority is to settle disputes, through consultations if possible. By May 2003, only about one third of the nearly 300 cases had reached the full panel process. Most of the rest have either been notified as settled out of court or remain in a prolonged consultation phase some since 1995. Principles: equitable, fast, effective, mutually acceptable Disputes in the WTO are essentially about broken promises. WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the
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multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgements. A dispute arises when one country adopts a trade policy measure or takes some action that one or more fellow-WTO members considers to be breaking the WTO agreements, or to be a failure to live up to obligations. A third group of countries can declare that they have an interest in the case and enjoy some rights. A procedure for settling disputes existed under the old GATT, but it had no fixed timetables, rulings were easier to block, and many cases dragged on for a long time inconclusively. The Uruguay Round agreement introduced a more structured process with more clearly defined stages in the procedure. It introduced greater discipline for the length of time a case should take to be settled, with flexible deadlines set in various stages of the procedure. The agreement emphasizes that prompt settlement is essential if the WTO is to function effectively. It sets out in considerable detail the procedures and the timetable to be followed in resolving disputes. If a case runs its full course to a first ruling, it should not normally take more than about one year 15 months if the case is appealed. The agreed time limits are flexible, and if the case is considered urgent (e.g. if perishable goods are involved), it is accelerated as much as possible. The Uruguay Round agreement also made it impossible for the country losing a case to block the adoption of the ruling. Under the previous GATT procedure, rulings could only be adopted by consensus, meaning that a single objection could block the ruling. Now, rulings are automatically adopted unless there is a consensus to reject a ruling any country wanting to block a ruling has to persuade all other WTO members (including its adversary in the case) to share its view. Although much of the procedure does resemble a court or tribunal, the preferred solution is for the countries concerned to discuss their problems and settle the dispute by themselves. The first stage is therefore consultations between the governments concerned, and even when the case has progressed to other stages, consultation and mediation are still always possible.

How are disputes settled?


Settling disputes is the responsibility of the Dispute Settlement Body (the General Council in another guise), which consists of all WTO members. The Dispute Settlement Body has the sole authority to establish panels of experts to consider the case, and to accept or reject the panels findings or the results of an appeal. It monitors the implementation of the rulings and recommendations, and has the power to authorize retaliation when a country does not comply with a ruling. First stage: consultation (up to 60 days). Before taking any other actions the countries in dispute have to talk to each other to see if they can settle their differences by themselves. If that fails, they can also ask the WTO director-general to mediate or try to help in any other way. Second stage: the panel (up to 45 days for a panel to be appointed, plus 6 months for the panel to conclude). If consultations fail, the complaining country can ask for a panel to be appointed. The country in the dock can block the creation of a panel once, but when the Dispute Settlement Body meets for a second time, the appointment can no longer be blocked (unless there is a consensus against appointing the panel). Officially, the panel is helping the Dispute Settlement Body make rulings or recommendations. But because the panels report can only be rejected by consensus in the Dispute Settlement Body, its conclusions are difficult to overturn. The panels findings have to be based on the agreements cited.
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The panels final report should normally be given to the parties to the dispute within six months. In cases of urgency, including those concerning perishable goods, the deadline is shortened to three months. The agreement describes in some detail how the panels are to work. The main stages are: Before the first hearing: each side in the dispute presents its case in writing to the panel. First hearing: the case for the complaining country and defence: the complaining country (or countries), the responding country, and those that have announced they have an interest in the dispute, make their case at the panels first hearing. Rebuttals: the countries involved submit written rebuttals and present oral arguments at the panels second meeting. Experts: if one side raises scientific or other technical matters, the panel may consult experts or appoint an expert review group to prepare an advisory report. First draft: the panel submits the descriptive (factual and argument) sections of its report to the two sides, giving them two weeks to comment. This report does not include findings and conclusions. Interim report: The panel then submits an interim report, including its findings and conclusions, to the two sides, giving them one week to ask for a review. Review: The period of review must not exceed two weeks. During that time, the panel may hold additional meetings with the two sides. Final report: A final report is submitted to the two sides and three weeks later, it is circulated to all WTO members. If the panel decides that the disputed trade measure does break a WTO agreement or an obligation, it recommends that the measure be made to conform with WTO rules. The panel may suggest how this could be done. The report becomes a ruling: The report becomes the Dispute Settlement Bodys ruling or recommendation within 60 days unless a consensus rejects it. Both sides can appeal the report (and in some cases both sides do). Appeals Either side can appeal a panels ruling. Sometimes both sides do so. Appeals have to be based on points of law such as legal interpretation they cannot reexamine existing evidence or examine new issues. Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the Dispute Settlement Body and broadly representing the range of WTO membership. Members of the Appellate Body have four-year terms. They have to be individuals with recognized standing in the field of law and international trade, not affiliated with any government. The appeal can uphold, modify or reverse the panels legal findings and conclusions. Normally appeals should not last more than 60 days, with an absolute maximum of 90 days. The Dispute Settlement Body has to accept or reject the appeals report within 30 days and rejection is only possible by consensus.

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The case has been decided: what next? Go directly to jail. Do not pass Go, do not collect . Well, not exactly. But the sentiments apply. If a country has done something wrong, it should swiftly correct its fault. And if it continues to break an agreement, it should offer compensation or suffer a suitable penalty that has some bite.
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Even once the case has been decided, there is more to do before trade sanctions (the conventional form of penalty) are imposed. The priority at this stage is for the losing defendant to bring its policy into line with the ruling or recommendations. The dispute settlement agreement stresses that prompt compliance with recommendations or rulings of the DSB [Dispute Settlement Body] is essential in order to ensure effective resolution of disputes to the benefit of all Members. If the country that is the target of the complaint loses, it must follow the recommendations of the panel report or the appeals report. It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of the reports adoption. If complying with the recommendation immediately proves impractical, the member will be given a reasonable period of time to do so. If it fails to act within this period, it has to enter into negotiations with the complaining country (or countries) in order to determine mutually-acceptable compensation for instance, tariff reductions in areas of particular interest to the complaining side. If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (suspend concessions or obligations) against the other side. The Dispute Settlement Body must grant this authorization within 30 days of the expiry of the reasonable period of time unless there is a consensus against the request. In principle, the sanctions should be imposed in the same sector as the dispute. If this is not practical or if it would not be effective, the sanctions can be imposed in a different sector of the same agreement. In turn, if this is not effective or practicable and if the circumstances are serious enough, the action can be taken under another agreement. The objective is to minimize the chances of actions spilling over into unrelated sectors while at the same time allowing the actions to be effective. In any case, the Dispute Settlement Body monitors how adopted rulings are implemented. Any outstanding case remains on its agenda until the issue is resolved. 2. The panel process The various stages a dispute can go through in the WTO. At all stages, countries in dispute are encouraged to consult each other in order to settle out of court. At all stages, the WTO director-general is available to offer his good offices, to mediate or to help achieve a conciliation. Note: some specified times are maximums, some are minimums, some binding, some not 3. Case study: the timetable in practice On 23 January 1995, Venezuela complained to the Dispute Settlement Body that the United States was applying rules that discriminated against gasoline imports, and formally requested consultations with the United States. Just over a year later (on 29 January 1996) the dispute panel completed its final report. (By then, Brazil had joined the case, lodging its own complaint in April 1996. The same panel considered both complaints.) The United States appealed. The Appellate Body completed its report, and the Dispute Settlement Body adopted the report on 20 May 1996, one year and four months after the complaint was first lodged. The United States and Venezuela then took six and a half months to agree on what the United States should do. The agreed period for implementing the solution was 15 months from the date the appeal was concluded (20 May 1996 to 20 August 1997). The case arose because the United States applied stricter rules on the chemical characteristics of imported gasoline than it did for domestically-refined gasoline. Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards it violated the national treatment principle and could not be justified under exceptions to normal WTO rules for health and environmental
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conservation measures. The dispute panel agreed with Venezuela and Brazil. The appeal report upheld the panels conclusions (making some changes to the panels legal interpretation. The United States agreed with Venezuela that it would amend its regulations within 15 months and on 26 August 1997 it reported to the Dispute Settlement Body that a new regulation had been signed on 19 August.
Time (0 = start of case) 5 years 4 months 0 60 days +1 month +2 months +2 months 30 days 24 February 1995 25 March 1995 10 April 1995 Target/ actual period Date 1990 September 1994 23 January 1995 Action US Clean Air Act amended US restricts gasoline imports under Clean Air Act Venezuela complains to Dispute Settlement Body, asks for consultation with US Consultations take place. Fail. Venezuela asks Dispute Settlement Body for a panel Dispute Settlement Body agrees to appoint panel. US does not block. (Brazil starts complaint, requests consultation with US.) Panel appointed. (31 May, panel assigned to Brazilian complaint as well) Panel meets Panel gives interim report to US, Venezuela and Brazil for comment Panel circulates final report to Dispute Settlement Body US appeals Appellate Body submits report Dispute Settlement Body adopts panel and appeal reports US and Venezuela agree on what US should do (implementation period is 15 months from 20 May) US makes first of monthly reports to Dispute Settlement Body on status of implementation US signs new regulation (19th). End of agreed implementation period (20th)

+3 months +6 months +11 months +1 year +1 year, 1 month +1 year, 3 months +1 year, 4 months +1 year, months +1 year, months 10 60 days 30 days 9 months (target is 6 9)

28 April 1995 1012 July and 1315 July 1995 11 December 1995 29 January 1996 21 February 1996 29 April 1996 20 May 1996 3 December 1996 9 January 1997

11

+2 years, 7 months

19-20 1997

August

FAQ
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Que: -Explain the concept of dumping. Discuss commonly practiced antidumping measures. Ans: - Dumping means selling the product of below the on going the market price and or at the price below the cost of production. Haberier defines dumping as the sale of goods abroad at a price, which is lower than the selling price of the same goods at the same time in the same circumstances at home, taking account of difference in transport costs. Types of dumping: - Dumping is of three types i.e. intermittent dumping, persistent dumping and predatorily dumping. Intermittent dumping: - When the production of a product is more than the demand in the home country, the stocks piled up even after sales. In such a case the producer sells the remaining stock in foreign countries at low price without reducing the price in domestic countries. Persistent dumping: - The monopolist sells the remaining production in foreign countries at a low price continuously. This type of dumping is called persistent dumping. Predatory dumping: - The monopolist sells the product in foreign market at a low price initially with a view to drive away the competitors and increase the price after the competitors leave the market. This type of dumping is called predatory dumping. Objectives of dumping: -The objectives of dumping include. To enter the foreign market: - The monopolist adopts the dumping strategy to enter a foreign market by eliminating the competitors in the foreign market. To sells surplus production: - The producers dump the product in the foreign countries in the order to sell their surplus production. To develop trade relations: - The manufacturers sell their output in foreign countries at low price in order to develop trade relation with the foreign counties. Effects of dumping: - Dumping affects both the importing and exporting countries. However, the effects are more on importing country. Effects on importing countries: -The industry of the importing country experiences the decline in sales and profits. For example, china dumped its steel in India and consequently Indian steel industry faced the problems of decline in sales and the deflationary conditions If the dumping is for linger period it affects the survival of the industry and also changes the industrial structure in the foreign country. If the dumping company increases the price at the later stage the importing country would be at loss both in terms of high cost of imports and change in the structure of the domestic industry Dumping changes the preferences of the consumers of the domestic country. But if the dumping is stopped after some time the country is forced to import at high pricesDumping increases the deficit of the balance of payments of the importing country The importing country can benefit from dumping by imposing anti-dumping tariffs an Indian government imposed tariffs on cooking oil dumped by USA and Malaysia. Effects on exporting country: -The consumers of exporting country pay higher price when the consumers of foreign country enjoy the product at lower price. The exports country finds marker for the excess production. The exporting country earns foreign exchange and it contributes for the surplus balance of the balance of payment of payment position. Anti dumping measures: - In view of the negative effects of dumping, the importing countries impose anti-dumping measures like tariff duty, import quota, import embargo and voluntary export restraint. Tariff duty: The importing country imposes high rates of import tariffs on dumping so that the price of the dumping goods would be either equal to or more than that of the domestic goods. Then the
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dumping company finds it uneconomical to dump the goods in a foreign country and stops dumping. Import quota: The importing country in addition to tariffs duty, restricts the volume of import, this measures reduces the dumping Import embargo: The importing country bans the import of particular goods or all the goods from the dumping country. This is a retanatory measure against dumping. Voluntary export restraint: The exporting countries realizing the negative effects of dumping voluntarily come for bilateral agreement to void dumping.

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Que: - Trade related intellectual property rights and TRIMs (TRIPs). Ans: -The agreement sets out the minimum standards of protection to be adopted by the parties, in respect of (a) Copyright and related rights (b) Trade marks (c) Geographical indications (d) Industrial designs (e) Patent (f) Lay out designs of integrated circuits and (g) Protection of undisclosed information and the enforcement of these. A transition period of five years is available to all developing countries to give effect to the provisions of the TRIPs agreement.

Intellectual property rights: -

Intellectual property rights are the rights given to persons over the creation of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Intellectual property rights are customarily divided into two main areas: (1) Copyright and rights related to copyright: - The rights of authors of literary and artistic works are protected by copyright, for a minimum period of 50 years after the death of the author. Also protected through copyright and related rights are the rights of performers producers of phonogram and broadcasting organization. The main social purpose of protection of copyright and related rights is to encourage and reward creative work. (2) Industrial property: - Industrial property can usefully be divided into two main areas. One area can be characterized as the protection of distinctive signs, in particular trademarks and geographical indications which identify a good as originating in a place where a given characteristic of the good is essentially attributable to its geographical origin. The protection of such distinctive signs aims to stimulate and ensure is competition to protect consumers. The protection of last indefinitely provided the sign in question continues to be distinctive. Others types of industrial property are protected primarily to stimulate innovation design and the creation of technology in this category invention protected by patents, industrial designs and trade secrets. The social purpose is to provide protection for the results of investment in the development of new technology thus giving the incentive and means to finance search and development activities. TRIMs: - Trade related investment measures refer to certain conditions or restriction imposed by a government in respect of foreign investment in the country. TRIMs where widely employed by developing countries. The agreement of TRIMs provides that no contracting party shall apply any TRIM, which is inconsistent with the WTO article, an illustrative lists identifies the following TRIMs as inconsistent. (1) Local content requirement i.e. a certain amount of local inputs be used in products. (2) Trade balancing requirement i.e. imports shall not exceed a certain proportion of exports. (3) Trade and foreign exchange balancing requirements. (4) Domestic sales requirements i.e. a company shall sell a certain proportion of its output locally. The agreement requires the notification of all WTO inconsistent TRIMs and their phasing out within two, five and sevens years by industrial, developing and least developed countries respectively transition period can be extended for developing and least developed countries if they face difficulties in eliminating TRIMs. A number of TRIMs were employed in India prior to the liberalization ushered in 1991 and many of them have been phased out since then.

Trade secrets: -

What is trade secret? When a business keeps certain information confidential that is relevant to their subjects that information is considered a trade secret United States law definite a trade secretes any formula pattern device, or completion of information which is in ones business, and which gives opportunity to obtained advantage over competitors who do know or use it. Common types of trade secrets include processes, methods techniques and form a business may use to produce a product. Business strives to protect their trade secrets by enacting corporate security
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measures and confidentially clauses in employment, technology licensing distributorship and joint future agreements. The base of premise of a trade secret is that if information remains confidential others cannot copy it because they dont know about it but, once attract secret becomes public knowledge, it is not protected and is no longer considered a trade secret. Protection of trade secrets scopes on the ability to keep the information confidential. International protection: - Other than the U.S., few countries provide protection of trade secrets protect your trade secrets with foreign distributors with a trade secret licensing agreement that prohibits disclosures of the trade secret by the licensed its employees. Be sure to pay attention to the foreign countrys regulated and controls regarding licenses.

Copyright: -

What is copyright? A copyright protects an authors original work that exists in any tangible medium of express on. It prohibits others from copying how authors express their ideas, but not the ideas the themselves, copyrightable items included. Literary works, musical works, including any accompanying words. Dramatic works including any accompanying music. Pantomimes choreographic works international protection. Works created in the U.S. on or after January 1,1978, are automatically protected by a U.S. copyright from the moment of creation. This protection lasts for the authors life plus fifty years, internationally, the place where the author first published the works is important when determining its copyright status. The United States participates in international agreements for universal copyright that depend on where the work was published. Trade marks: What is trademark? A trademark is a word phrase, symbol or design, which identifies and distinguishes the source of the goods or services of one party from those of other parties. A service mark is the same as trademark except that it identifies and distinguishes the source of a service rather than a product. When you use trademark in connection with some product, it is protected automatically under common law. You can also protect your trademark by registering it with the federal government but you must prove bona fide intended use, or already be using it. Registered trademarks are grated for 10 years, and must be renewed at the end of the term. International protection: - Trademarks are not protected under all nations, and there is no central authority to registered trademarks. The U.S. participates in convention that helps to simplify the trademark fitting procedure under these conventions; you will receive the same treatment under patent and trademark laws as citizens of the member country. The conventions are: (i) Paris union international convention for the protection of industrial property. (ii) General interAmerican convention for trademark and commercial protection Registering a trademark is not very costly, and if you intend to sell in certain countries. You may want to ahead and register it there. This is possible because, unlike the United States, using the trademark is not a requirement to register it. But, since use of the trademark is not a requirement others can register your trademark is not a requirement, others can register your trademark before you actually begin to sell in that country. If this happens, you may have to buy your trademark from them. The TRIPS agreement and trademarks: - The TRIPS agreement addresses a number of international trademark problems. U.S. industry experiences. The agreement requires world prohibit the mandatory linking of trademarks with other marks forbid the compulsory licensing of trademark. Article 16 contains useful protections regarding the protection of well-known marks. Article 16 (2) states that in determining whether a trademark is well known, members shall take account of the knowledge of the trademark in the relevant sector of the public, including knowledge in the member concerned which has been obtained as a result of the promotion of the
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trademark. Moreover article 16 (3) applies article 6 bis of the parts convention to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services and the owner of the registered trademark and provided that the interest of the owner of the registered trademark are likely to be damaged by such use. Que: - Rules of origin: - Agreement on rules of origin: - Noting that ministers on 20 September 1986 agreed that the Uruguay round of multilateral trade negotiations shall aim to bring about further liberalization and expansion of world trade, strengthen the role of GATT and increase the responsiveness of the GATT system to the evolving international economic environment. Describing to further the objectives of GATT 1994: - Recognizing that clear ad predictable rules of origin and their application facilitate the flow of international trade. Desiring to ensure that rules of origin themselves do not create unnecessary obstacles to trade. Desiring to ensure that rules of origin of not nullify or impair the rights of members under GATT1994, recognizing that it is desirable to provide transparency of laws, regulations, and practices regarding rules of origin. Desiring to ensure that rules of origin are prepared and applied in an impartial, transparent, predictable, consistent and neutral manner. Recognizing the availability of a consultation mechanism and procedures for this speedy, effective and equitable resolution of disputes arising under this agreement. Desiring to harmonize and clarify rules of origin. Rules of origin: Article 1: - (1) the purposes of parts I to IV of this agreement rules of origin shall be defined as those laws, regulations and administrative determination the country of general application applied by any member to determine the country of origin of goods provided such rules of origin are not related to contractual or autonomous trade regimes leading to the granting to tariff preference going beyond the application of paragraph 1 of article of GATT 1994. (2) Rules or origin referred to in paragraph 1 shall include all rules of origin used in non-preferential commercial policy instruments such as in the application of most-favoured nation treatment under articles I, II, III, XI and XIII of GATT 1994, safeguard measures under article XIX of GATT 1994, origin making requirement under article IX of GATT 1994, and any discriminatory rules of origin used for government procurement and trade statistics. Article 2: - Disciplines during the transition period: Until the work programme for the harmonization of rules of origin set out in part IV is completed, member shall ensure that: (a) When they issue administrative determinations of general application, the requirements to be fulfilled are clearly defined, in particulars. (i) In cases where the criterion of change of tariff classification is applied, such a rule of origin and any exceptions to the rule, must clearly specify the subheadings or headings within the tariff nomenclature that are addressed by the rule. (ii) In cases where the ad valorem percentage criterion is applied, the method for calculating this percentage shall also be indicated in the rules of origin. (iii) In cases where the criterion of manufacturing or processing operation prescribed, the operation that confers origin on the good concerned shall be precisely specified. (b) Notwithstanding the measure or instrument of commercial policy to which they are linked, their rules of origin are nor used as instruments to pursue trade objectives directly or indirectly. (c) Rules of origin shall not themselves create restrictive, distorting, manufacturing or processing as prerequisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purposes of the application of an ad valorem percentage criterion consistent when subparagraph. (d) The rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to
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determine whether or not a good is domestic and shall not discriminate between other members irrespective of the affiliation of the manufacturers of the good concerned (2). (a) Their rules of origin are administered in a consistent, uniform, impartial and reasonable manner. (b) Their rules of origin are based on positive standard. Rules of origin that state what does not confer origin are permissible as part pf a clarification of a positive standard or in individual cases where a positive determination of origin is not necessary. (c) Their laws, regulations, judicial decisions and administrative rulings of general application relating to rules of origin are published as if they were subject to and in accordance with the provisions of paragraph 1 of article X of GATT 1994. (d) Upon the request of an exporter, importer or any person with a justifiable cause assessments of the origin they would accord to a good are issued as soon as possible but no later than 150 days after a request for a such an assessment provided that all necessary elements have been submitted requests for such assessments shall be accepted before trade in the good concerned begins and may be accepted at any late point in time. Such assessment shall remain valid for three years provided that the facts and conditions, including the rules of origin under which they have been made remain comparable provided that the parties concerned are informed in advance, such assessment will no longer be valid when a decision contrary to the assessment is made in a review as referred to in subparagraph such assessment shall be made publicly available subject to the provisions of subparagraph. (e) When introducing changes to their rules of origin or new rules of origin, they shall not apply such changes retroactively as defied in, and without prejudice to, their laws or regulations. Article 3: - Discipline after the transition period: Taking into account the aim of all members to achieve as result of the harmonization work programme set out in part IV, the establishment of harmonized rules of origin, members shall ensure, upon the implementation of the results of the harmonization work programme that (a) They apply rules of origin equally for all purposes as set out in article 1. (b) Under their rules of origin, the country to be determined as the origin of a particular good is either the country where the good has been obtained or, when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out. (c) The rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic and shall not discriminate between other members irrespective of the affiliation of the manufacturers of the good concerned. (d) The rules of origin are administered in a consistent, uniform impartial and reasonable manner. (e) Their laws, regulations, judicial decisions and administrative rulings of general application relating to rules of origin are published as if they were subject to and in accordance with the provisions of paragraph of article X of GATT 1994. (f) Upon the request of an exporter, importer or any person with a justifiable cause, assessments of the origin they would accord to a good are issued as soon as possible but no later than 150 days after a request for such an assessment provided that all necessary elements have been submitted. Request for such assessments shall be accepted before trade in the good concerned begins and may be accepted at any later point in time. Such assessments shall remain valid for three years provided that the facts and conditions, including the rules of origin under which they have been made remain comparable. Provided that the parties concerned are informed in advance, such assessments will no longer be valid when a decision contrary to the assessments is made in a review as referred to in subparagraph, such assessments shall be made publicly available subject to the provisions of subparagraph. (g) All information which is by nature confidential or which is provided on a confidential basis for the purpose of the application of rules of origin is treated as strictly confidential by the authorities concerned, which shall not disclose it without
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the specific permission of their person or government providing such information, excepts to the extent that it may be required to be disclosed in the context of judicial proceedings. Article 4: - Information and procedures for modification and introduction of new rules of origin: - (1) Each member shall provide to the secretariat within 90 days after the date of entry into force of the WTO agreement for it its rules of origin judicial decisions and administrative rulings of general application relating to rules of origin in effect on that date. If by inadvertence a rule of origin has not been provided, the member concerned shall provide it immediately after this fact becomes known. Lists of information received and available with the secretariat shall be circulated to the members by the secretariat. (2) During the period referred to in article 2 members introducing modification, others than de minimize modifications, to their rules of origin or introducing new rules of origin, which for the purpose of this article, shall include any rule of origin referred to in paragraph 1 and not provided to the secretariat, shall publish a notice to that effect at least 60 days before the entry into force of the modified or new rule in such a manner as to enable interested parties to become acquainted with the intention to modify a rule of origin or to introduced a new rule of origin, unless exceptional circumstances arise or threaten to arise foe a member. Que: - General agreement on tariffs and tread (GATT). Ans: -The general agreement on tariffs and trade, a multilateral treaty between governments was singed in 1947 and came into forced on 1st January 1948. Objective: - The primary objective of GATT is to expand international trade by liberalizing trade so as to bring about all round economic prosperity. The preamble to the GATT mentions the following as its important objectives. (1) Raising standard of living. (2) Ensuring full employment and large and steady growing volume of real income and effective demand. (3) Developing full use of the resources of the world. (4) Expansion of production and international trade. Principals and conservations of GATT: - GATT embodies certain conventions and general principals governing international trade among countries that adhere to the agreement. The rules or conventions of GATT require that: (1) Any proposed change in the tariff, or other types of commercial policy of a member country should not be undertaken without consultation of other parties to the agreement and (2) That the countries that adhere to GATT should work towards the reduction of tariffs and other barriers to international trade, which should be negotiated within the framework of GATT. For the realization of its objectives, GATT has adopted the following principals: (1) Non discrimination: - The principle of non-discrimination requires that no member country shall discriminate between the member of GATT In the conduct of international trade, to ensure non discrimination the member of GATT agree to apply the principle of most favored nation to all import and export duties. This means that each nation shall be treated as well as the most favored nation. As far as quantitative restriction are permitted, they too are to be administered without favour however, certain exceptions to this principle are allowed for instance, GATT does not prohibit economic integration such as free trade areas or customs union, prohibit economic integration such as free trade areas or customs union, provided the purpose of such integration is to facilitate trade between the constituents territories and not to rise barriers to the trade of other parties. The GATT also permits the members to adopt measures to counter dumping and export subsidies. However the application of such measures shall be limited to the offending countries. (2) Prohibition of quantitative restrictions: - GATT rules seek to prohibit quantitative restrictions as far as possible and limit restrictions on trade to the less rigid tariffs. However certain
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exceptions to this prohibition are granted to countries confronted with balance of payments difficulties and to developing countries further, import restrictions are allowed to apply to agricultural and fishery products if domestic production of these articles is subject to equally restrictive production or marketing controls. (3) Consultation: - By providing a forum for continuing consultation, GATT seeks to resolve disagreements through consultation. Importance of GATT: - According to peter Sutherland, Director General of GATT the developing countries will have devastating effect, in the absence of GATT or WTO they will be the victims of dumping of developed countries. Illicit practice will crop up everywhere. Hence smaller and weak countries particularly, need protection, the GATT alone can provide this protection. The importance of GATT lies in: a) Free global trade, which it intended to. b) Increase in the volume of world trade by 12% the trade volume of agriculture, textile and government in particular with increase. c) Developing countries will have their increased share of 31% in the global trade. d) World income will increase to US $ 250 billion by 2005 AD and 46% of it will be shared by the developing countries. e) Standard of living of people in the world will go up. f) Countries will be specialized in trade and production. g) Weaker and smaller countries will be protected. h) Developed countries will oblige to reduce duty on industrial goods by about 40%, which will benefit developing countries. I) Developed countries will scrap duty on imports of pharmaceuticals, construction equipment, medical equipment, steel, beer, furniture, farm equipment, spirits, wood paper and toys.

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Chapter-6
Role of Financial Institution and Export Finance
The growth and development in any sphere of life or its activities is a natural phenomenon and the same principle applies to the industrial, commercial and trading activities, both at domestic center as well as in international trade. To achieve this goal all countries are striving to increase their international trade, improve balance of payments and bargaining power. With growing activities with particular reference to increasing exports, there is an increased demand for finance. Indias foreign trade, both imports and exports, receive a considerable amount of assistance extended from the commercial banks and other financial institutions. The assistance is forthcoming in different forms, both fiscal and financial, out of which financial assistance is of prime importance. Thus, the role of financial institution is a crucial one in promoting the exports. We will discuss the role of various agencies and commercial banks in the financing of foreign trade.

1. The Export Credit and Guarantee Corporation Limited (ECGC):


This is an autonomous body, functional under the guidance and supervision of the Ministry of Foreign Trades, has been modeled on the line of Export Credit & Guarantee Department functioning in Britain. To provide certain amount of cover against the inherent risks involved in export finance, the Government of India established Export Risk Corporation in 1964 as a Department of the Ministry of Foreign Trade. This corporation was established to provide the financial institutions cover against the failure of exporters or overseas buyers and against the risks not usually covered by marine insurance policies. The importance was soon realized and was converted into an autonomous body with its own Board of Directors and renamed as Export Credit & Guarantee Corporation Limited. This Corporation provides the cover in various forms against different types financial assistance given by the banks and the study of which is of great importance to the exporters and financial institutions. The details of the schemes and activities operated by ECGC have been discussed in details in the book (Chapter 4)

2.International Agencies:
A notable feature of the international economy in the Post WW-II period has been the development of international co-operation in the areas of money and trade. Various international institutions have been established for the objective of promotion and expansion of world trade. Some of the prominent international agencies which help in smooth trade are International Monitory Fund, International Bank for Reconstruction and Development, Asian Development Bank & Global System of Trade Preferences Among Developing Countries (GSTP). a. International Monitory Fund was established in December 1945. The basic purpose is to proved member countries with the facility to acquire foreign exchange to cover a temporary deficit in the balance of payment. The fund holds currencies of member countries, which are made available under specific conditions to one another
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to help them tide over any balance of payment difficulties. The objectives of the Fund are as follows: To promote international monitory co-operation through permanent institution which provides machinery for consultation and collaboration on international monetory problems. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high level of employment and real income. To promote exchange stability to maintain orderly exchange arrangements. To assist in the establishment of a multilateral system of payments in respect of current transaction between members. b. International Bank for Reconstruction and Development (IBRD): IBRD was established on 27th December 1945. While IMF is concerned with exchange stability the removal of exchange controls and helping members to correct disequilibrium in their current balance of payments by giving short-term credits, the Bank provides long-term capital to members for expansion and improvement of their productive resources. The main objectives of the Bank are 1) Assistance to members countries in Reconstruction and Development. 2) Encouragement to Private Foreign Investment in Member countries 3) Supplementing private investment and 4) Balanced growth of trade. c. Asian Development Bank: is one of the regional development banks se up to assist the economic development of Asian countries. The major functions of the Bank are 1) to promote public and private investment in the Asian region. To assist the members in their developmental policies to achieve better utilization of resources and orderly expansion of their foreign trade and harmonious growth of the region. d. GSTP: The GSTP agreement which was adopted in April 1988 established a system of trade preferences among developing countries. The Agreement incorporates the tariff concessions in order to promote free trade among the member countries.

3. Commercial Banks
In India, the banks are the major source of finance, are encouraged in several ways to extend export finance, to achieve the objective of the foreign trade policy. The banks provide export finance to the exporters through various channels from time to time depending upon the nature of the export business and terms and conditions of the contract entered. This financial assistance is provided on the lines on directives issued by the Reserve Bank of India from time to time. Export finance is broadly classified in two categories. The type of financing required by the exporter depends on the stage of export of activity.

These classifications are: 1. Pre-shipment Finance

2. Post-shipment Finance.

1. Pre-shipment Finance: which is more popularly known as Packing Credit Advance is short term working capital finance specifically provided to an exporter against the documentary evidence of having entered into export commitment. This credit is given for procuring raw materials, for paying manufacturing ad packing charges and payment of insurance premium and freight. As and when the goods are shipped and shipping documents are obtained, the pre-shipment finance is to be liquidated against the proceeds of export documents tendered. To ensured that banks are not starved of funds in other sectors, reserve Bank provides refinance to banks on their export finance portfolio.
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Pre-shipment credit is specially important to small-scale manufacturers and exporters who might not have sufficient financial resources to meet the expenditure involved in the production of goods for exports. Pre-shipment Finance Pre-shipment finance is provided to the exporters for the purchase of raw materials, process-ing them and convertingthem into finished goods for the purpose of export. Packing Credit The basic purpose of packing credit is to enable the eligible exporters to procure, process, manufacture or store the goods meant for export. Packing credit refers to any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods as defamed by the Reserve Bank of India. It is a short-term credit against exportable goods. Packing credit is normally granted on secured basis. Sometimes clear advance may also be granted. Many advances are clean at their initial stage when goods are not yet acquired. Once the goods are acquired and are in the custody of the exporter banks usually convert the clean advance into hypothecation! pledge. Letus first discuss the detail procedure of packing credit. Eligibility: Packing credit is available to all exporters whether merchant exporter, Export/ Trading/ Star Trading/ Super Star Trading Houses and manufacturer exporter. Manufacturers of goods supplying to Export/ Trading/ ST/ SST Houses and Merchant exporters are eligible for packing credit. The-foreign buyer through the medium of a reputed bank gives the credit to eligible exporters, for specified purposes against irrevocable letter of credit. It is also available against a confirmed or firm export order/contract placed by the buyer for export of goods from India. Running Account Facility: The RBI has permitted banks to grant packing credit advances even without lodgement of-L/ C or firm-order/ contract under the scheme of Running Ac-count Facility subject to, the fol1owing.conditions . (i) The facility may be extended, J1rcwid.ed the need for Running Account facility has been established by the exporters to the satisfaction of the bank. ii) The bank may extend this facility only to those exporters whose track record has been good. iii) L/C or firm order is produced within a reasonable period of time. For Commodities under selective credit control, banks should insist on production of LlCs or firm orders within one month from the date of sanction. iv) The concessive credit available ~in respect of individual pre-shipment credit should not go beyond 180 days. Packing credit may also be given under the Red Clause letter of credit. In this method, credit is given at the instance and responsibility of the foreign bank establishing the LlC. Here, the packing credit advance is made against a simple receipt and is unsecured. Amount:- The loan amount is decided on the basis of export order and the credit rating of the exporter by the bank. Generally the amount of packing credit will not exceed FOB value of the export goods or their domestic value whichever is less. It can be to the extent of domestic value of the goods even though such value is higher than their FOB value provided the goods are entitled to duty draw back and also covered by the Export Production Finance Guarantee of the ECGC. Period:- The packing credit can be granted for a maximum period of 180 days from the date of disbursement. The banks are authorised by RBI to extend this period. This period can be extended for a further period of 90 days, in case of nonshipment of goods within 180 days. The extension can be done provided the banks are satisfied that the reasons for extension are due to circumstances beyond the control of the
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exporters. Pre-shipment credit may be given for a longer period upto a maximum of270 days, if the banks are satisfied about the need for longer duration of credit. Rate of Interest:-The interest payable on pre-shipment finance is usually lower than the normal rate, provided the credit is extinguished by lodging the export bills on remittances from abroad. If the exporter fails to do so they would not be able to avail concessional rate of interest. In order to avail the packing credit; exporters are expected to make a formal application to the bank giving details of credit requirements along with the required documents. Advance Against Incentives When the value of the materials to be procured for export is more than FOB value of the contract, the exporters may get packing credit advance more than the FOB value of the goods. The excess of cost of production over the FOB value of the contract represents incentives receivables. For example, when the domestic price of goods exceeds the value of export orders, the difference represents duty drawback entitlement. Banks can grant ad-vances against duty drawback at pre-shipment stage subject to the condition that the loan is covered by Export Production Finance Guarantee of Export Credit Guarantee Corporation (ECGC). This guarantee enables banks to sanction advances at the pre-shipment stage to the full extent of cost of production. The extent of cover and the premium are the, same as for packing credit guarantee. Pre-shipment Credit in Foreign Currency This is an additional window to rupee packing credit scheme. This credit is available to cover both the domestic and imported inputs of the goods exported from India. The facility is available in any of the convertible currencies. The credit will be selfliquidating in nature and accordingly after the shipment of goods the bills will be eligible for discounting/ rediscounting or for post-shipment credit in foreign currency. The exporters can avail this finance under the following two options. i) The exporters may avail pre-shipment credit in rupees and, then, the postshipment credit either in rupees or in foreign currency denominated credit or discounting/ rediscounting of export bills. ii) The exporters may avail pre-shipment credit in foreign currency and discounting/ rediscounting of the export bills in foreign currency. PCFC credit will also be available both to the supplier units of EPZ/ EOU and the receiver units of EPZ/ EOU. The credit in foreign currency shall also be available on exports to Asian Clearing Union (ACU) Countries. This will be extended only the basis of confirmed! firm export orders or confirmed L/Cs. The Running Account facility will not be available under the scheme. 2. Post-shipment Finance: This type of credit bridges the gap between the time of shipment and the date of payment. Such financing is usually obtained through negotiation of bill of exchange drawn by the exporter and accepted by the importer. The post-shipment financing can be of three forms: a. Short term financing b. Medium term financing c. Long term financing a. Short-term Financing : is generally provided by the banks. This finance is provided to exporters against valid export bills, whether backed by the letter of credit or not. This financing is done on the basis of F.O.B value of exports and may not exceed 80 to 90 percent of export bill valued. Short term financing is eligible for refinancing by the Reserve Bank at concessional rates of interest. Under such schemes the exporter can avail the post shipment credit denominated in foreign currency and pay interest at internationally competitive rates. The rates however are
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administered by RBI. b. Medium term Financing : Medium term financing ranges from the credit arrangement spread over for the period of six months to five years. To provide medium term credit, specialized instructions exist which make available the credit(export bank, consortium of banks, insurance companies and export financing funds) in various countries and ant the same time sufficient refinancing facilities are available. The supply of medium term finance is low because banks provide only short-term finance. c. Long term Financing: The long term financing is to extended till fifteen year period. Usually this type of financing is needed when the companies invest in infrastructure or heavy capital good industry. This type of credit is more required by the companies of developed countries. This type of credit is usually granted in cases where the goods are sol on deferred payment basis. Deferred payment exports mean where exports are realizable beyond the statuatory time limit of 6 months from the date of shipment. The long term financing can take the form of buyers credit and suppliers credit. Buyers Credit is when the supplier i.e. the exporter gets the full payment of the goods supplied but the buyer gets the deferred payment facilities either through his own bank or through one of the development agencies involved in financing the international trade. Suppliers Credit is when the supplier takes the lead. In this case, the exporter is providing the deferred payment credit facilities to the buyers, giving him facilities to spread over his payment schedule in more than one installment and over a long period of time. However, the suppliers credit in more inflexible, therefore the buyers credit is more desirable. A Apex Institutions: 1 Reserve Bank of India 2 National Bank for Agriculture and Rural Development 3 National Housing Bank 4 Export Import Bank of India B Commercial Banks a Public Sector Banks - 27 a SBI and associates 1 State Bank of India 2 State Bank of Hyderabad 3 State Bank of Indore 4 State Bank of Patiala 5 State Bank of Saurashtra 6 State Bank of Mysore 7 State Bank of Travancore 8 State Bank of Bikaner & Jaipur b Nationalised Banks 1 Allahabad Bank 2 Andhra Bank 3 Bank of Baroda 4 Bank of India 5 Bank of Maharashtra 6 Corporation Bank 7 Canara Bank 8 Central Bank of India 9 Dena Bank 10 Indian Bank 11 Oriental Bank of Commerce 12 Indian Overseas Bank 13 Punjab & Sind Bank 14 Punjab National Bank* 15 Syndicate Bank 16 Union Bank of India 17 United Bank of India 18 UCO Bank 19 Vijaya Bank *New Bank of India merged with PNB on 04.09.93

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4. Reserve Bank of India (RBI)


Establishment and Preamble
Established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Central Office at Mumbai since inception .Though originally privately owned, since nationalisation in 1949 fully owned by the Government of India The Preamble prescribes the objective as: "to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Nagpur - Reserve Bank of India

Organization and Setup


1. Offices Has 22 regional offices, most of them in state capitals. 2. Training Establishments Has six training establishments Three, namely, College of Agricultural Banking, Bankers Training College and Reserve Bank of India Staff College as part of RBI Others autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT) 3. Subsidiaries Fully owned: National Housing Bank(NHB), National Bank for Agriculture and Rural Development(NABARD), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL) Majority stake: State Bank of India Minority stake: Infrastructure Development Finance Company(IDFC) 4. External Relations and Customer Service Publications Annual: Annual Report, Report on Trends and Progress of Banking in India, Report on Currency and Finance, Report on State Finances Quarterly: Occasional Papers (based on research), Banking Statistics Monthly: RBI Bulletin, Credit Information Review Weekly: Statistical Supplement Press Releases: issued every day to convey policy decisions Website: updated daily with all publications, press releases, speeches of Governor/Deputy Governors - Address: www.rbi.org.in Customer Service Helpdesks: in all departments and all offices to give general guidance to public Regulations Review Authority: constantly reviews rules and regulations to make them more customer-friendly.

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Internal Organisation and Structure


Central Board of Directors Governor Deputy Governors Executive Directors Principal Chief General Manager Chief General Managers-in-charge Chief General Managers General Managers Deputy General Managers Asstt. General Managers Managers Asstt. Managers Support Staff

Main Functions
1. Monetary Authority: Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. 2. Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. 3. Manager of Exchange Control: Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 4. Issuer of currency: Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. 5. Developmental role Performs a wide range of promotional functions to support national objectives. 6. Related Functions Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

A) Industrial and Export Credit Department


Historically, Industrial and Export Credit Department (IECD) laid down detailed policy prescriptions for lending operations of banks. This involved formulating inventory and receivable norms for various industries, issuance of guidelines on matters such as Maximum Permissible Bank Finance (MPBF), consortium arrangement and scrutiny of credit proposals under the Credit Authorisation Scheme (CAS)/Credit Monitoring Arrangement (CMA). The stance of the Reserve Bank's policy now is to move away

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from micro regulation and to undertake only macro monitoring. IECD thus withdrew from prescribing detailed lending norms for banks. It now: Formulates macro level policies in regard to credit to non-SSI industries, export, housing and infrastructure development, designed to speed up the credit delivery system of banks. Formulates policy regarding bank credit for rehabilitation of sick/weak non-SSI units. Authorises food credit limits for Food Corporation of India and various State Governments and limits for procurement of oilseeds and pulses to National Agricultural Co-operative Marketing Federation of India Limited and procurement of jute to Jute Corporation of India Ltd., for drawing credit from a consortium of banks. Acts as a nodal department for monitoring the activities of National Housing Bank and Infrastructure Development Finance Company Ltd. Monitors the flow of credit to industries, housing and export sectors through a reporting system. Holds meetings of the Export Advisory Committee where members are banks and export promotion organisations, to deliberate on finance related and exchange control related issues affecting exporters.

B) Foreign Exchange Department


With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect from June 1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to "facilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India". The new Act has brought about structural changes in the exchange control administration. Regulations have been framed for dealing with various types of transactions. These regulations are transparent and have eliminated case-bycase approvals. All current account transactions are free from restrictions except 8 transactions prohibited by the Government of India. 11 transactions which require prior permission of the Government of India and 16 transactions on which indicative limits are fixed by the Government and release of foreign exchange beyond those limits requires permission from the Reserve Bank. All Regional Offices of the Department have in turn been authorised to release exchange for such transactions. For capital account transactions, the Reserve Bank regulations provide for general permissions/automatic routes for investments in India by non-residents, investments overseas by residents and borrowings abroad, etc. The Department ensures timely realisation of export proceeds and reviews, on a continuous basis, the existing rules in the light of suggestions received from various trade bodies and exporters' fora. The Department collects data relating to forex transactions from authorised dealers on a daily basis for exchange rate management and on a fortnightly basis for monthly quick estimates of balance of payments and quarterly balance of payments compilation. The Department lays down policy guidelines for risk management relating to forex transactions in banks.
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The Department is also entrusted with the responsibility of licensing banks/money changers to deal in foreign exchange and inspecting them. There is a "Standing Consultative Committee on Exchange Control" consisting of representatives from various trade bodies and authorised dealers which meets twice a year and makes recommendations for policy formulation. With a view of further improving facilities available to NRIs and removing irritants, the Department is also engaged, on an ongoing basis, in reviewing and simplifying the procedures and rules.

C) Department Operations

of

External

Investments

and

Functions The main activities of the Department are management of exchange rate of the Indian rupee and management and investment of foreign exchange reserves of the Reserve Bank of India. This involves: Management of the exchange rate of the rupee in accordance with the policy laid down from time to time. Management and investment of the foreign currency and gold assets of the Reserve Bank of India. Handling external transactions on behalf of Government of India (GOI) including transactions relating to IMF. Implementation of exchange guarantee schemes. All matters incidental to Indias membership of the Asian Clearing Union. Other matters relating to gold policy, membership of the Bank for International Settlements (BIS) and banking arrangements between India and Russia Exchange Rate Management The day-to-day movements in exchange rates are market determined. The primary objective of the Reserve Bank in regard to the management of the exchange rate continues to be the maintenance of orderly conditions in the foreign exchange market, meeting temporary supply-demand gaps which may arise due to certainties or other reasons, and curbing destabilising and self-fulfilling speculative activities. To this end, the Reserve Bank closely monitors the developments in the financial markets at home and abroad, and carefully coordinates its market operations with appropriate monetary, administrative and other measures as it considers necessary from time to time.

5. Export Import Bank of India


It is apex institution for co-ordinating the working of institutions in India engaged in financing exports and import of goods and services. With initial authorized capital of Rs. 200 crore (increased to Rs.500 and then to Rs.2000 crore) Exim Bank was established on Jan 01, 1982 (and started functioning wef March 01, 1982) under Export Import Bank of India Act 1982, which took over the export finance activities of IDBI. It raises funds by way of bonds and debentures, borrowing from RBI or other institutions, raising foreign deposits.

Exim Bank - Business Profile

Exim Bank is fully owned by the Government of India and is managed by a Board of Directors with representation from Government, financial institutions, banks, business community. The Bank is professionally run with a total staff of 190 who are drawn from six major streams: commercial and development banking,
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engineering, economics, accountancy, computer technology and business school graduates . EXIM INDIA offers a range of financing programmes that match the menu of Exim Banks of the industrialised countries. However, the Bank is atypical in the universe of Exim Banks in that it has over the years evolved, so as to anticipate and meet the special needs of a developing country. The Bank provides competitive finance at various stages of the export cycle . EXIM INDIA operates a wide range of financing and promotional programmes. The Bank finances exports of Indian machinery, manufactured goods, consultancy and technology services on deferred payment terms. EXIM INDIA also seeks to cofinance projects with global and regional development agencies to assist Indian exporters in their efforts to participate in such overseas projects.

It undertakes following kind of functions: -direct finance to exporter of goods. -direct finance to software exports and consultancy services. -finance for overseas joint ventures and turnkey construction project -finance for import and export of machinery and equipment on lease basis -finance for deferred payment facility -issue of guarantees -multi-currency financing facility to project exporters. -export bills re-discounting -refinance to commercial banks in India -guaranteeing the obligations.
The Bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian joint ventures overseas and foreign direct investment flow into India. EXIM INDIA is also a Partner Institution with European Union and operates for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union.

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1. Advisory services
Multilateral Agencies Funded Projects Overseas (MFPO)
Services Information and support services to Indian companies to help improve their prospects for securing business in multilateral agencies funded projects. Dissemination of business opportunities in funded projects Providing detailed information on projects of interest Information on Procurement Guidelines, Policies, Practices of Multilateral Agencies Assistance for Registration with Multilateral Agencies Advising Indian companies on preparation of Expression of Interest, Capability Profile Bid Intervention

Promoting Indian Consultancy

Tie-up with International Finance Corporation, Washington D.C. o Africa Project Development Facility o Africa Enterprise Fund o Technical Assistance & Trust Funds o Mekong Project Development Facility Eastern & Southern African Trade & Development Bank (PTA Bank) African Management Services Company (AMSCO), Netherlands

Examples
Gems & Jewellery - Zambia Financial Training - Kenya

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Study Cement Project Wool Knitting Refrigeration - Cameroon - Vietnam - Ghana

Mission Software Textile Financial Training - Madagascar - Nigeria - Poland

Exim Bank as a consultant


Feasibility study for establishment of an export credit and guarantee facility for Gulf Cooperation Council countries. Regional cooperation in export finance and export credit guarantees for ESCAP. Study on promotion of international competitiveness and exports of manufactured goods for ESCAP. Setting up the Afrexim Bank Designing of Export Financing Programmes - Turkey Setting up an Exim Bank in Malaysia Design of Export Marketing Seminars for SMEs in Vietnam Export Development Project: Ukraine Enterprise Support Fund: Armenia Establishing an Export Credit Guarantee Company in Zimbabwe Advisory services to Industrial Development Corporation of South Africa for international finance products

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2. Knowledge Building
Eximius centre for learning, Bangalore Set up, in October 1994, to organise seminars and workshops in areas such as international trade & investment, export marketing, quality, packaging, business opportunities in multilateral agencies funded projects, sector and country specific programmes Guest faculty from network partners such as IFC, World Bank, EBRD, UNIDO. Number of Programmes Conducted: 53 Research Studies Research Studies on products, sectors, countries, macro economic issues relevant to international trade and investment Number of research studies published as Occasional Papers : 85

3. Information
1. 2. 3. 4. 5. 6. 7.

Exporters/Importers Industry/Market Reports Trade Regulations & Laws Country Reports International Quality Standards Partner Identification Product Display Examples of Information Services Hungarian Pharmaceutical Sector Importers of Sanitaryware, Castings in North America Importers of Agro-chemicals in Eastern Europe Study for ear buds market in Hungary Study of the Indian Wine market for a Hungarian Company Partner identification for an Italian Sanitaryware manufacturer Study of the Indian Crane Industry for a Finnish company Regulatory Framework for setting up a Pharma Project in China Market report for Computer Monitors in India for a Singaporean firm Study on Bicycle market in Eastern Europe for Indian Cycle exporter Market Potential for Denim in South East Asia

The operations are grouped as below:


1. Export credits Bank provides exports of Indian machinery, manufactured goods, consultancy and technology services on deferred payment terms Lines of credit/buyer's credits are extended to overseas entities i.e. governments, central banks, commercial banks, development finance institutions, regional development banks for financing export of goods and services from India 1. Project Finance 2. Trade Finance 2. Export capability creation Export Product Development Export Marketing Finance Export Oriented Units 1. Project Finance 2. Working Capital 3. Production Equipment Finance European Community Investment Partners (ECIP) Asian Country Investment Partners (ACIP)
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Overseas Investment Finance Export Facilitation Programmes 1. Software Training Institutes 2. Minor Ports Development 3. Export services In addition to finance, Bank provides a range of information and advisory services to Indian companies to supplement their efforts aimed at globalisation of Indian business. 4. Supporting groups 1. Planning & Research 2. Corporate Finance 3. Legal 4. Corporate Affairs 5. Human Resource Management 6. Establishment

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Chapter-7
Exchange Rate
In finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese Yen to the Dollar means that 120 is worth the same as $1. An exchange rate is also known as a foreign exchange rate, or FX rate. An exchange rate quotation is given by stating the number of units of a price currency can be bought in terms of a unit currency. For example in a quotation that says the euro-United States dollar exchange rate is 1.2 dollars per euro, the price currency is the dollar and the unit currency is the euro. The usual unit currency varies by geographic location. For example British newspapers quote exchage rates with British pounds as the unit currency. Quotes using the US dollar as the unit currency are more common than any other. Note if a unit currency is strengthening (i.e. if the currency is becoming more valuable) then the exchange rate number increases. Conversely if the price currency is strengthening the exchage rate number decreases. In practice it is rarely possible to exchange currency at the exact rate quoted. Market makers who match together buyers and sellers will take a commission. This is achieved by quoting a bid/offer spread. For example if you are bidding to buy Japanese yen you would do so at the bid price of say, 115 per dollar, and if you were offering to sell yen you might do so at 125 yen per dollar. If a currency is free-floating its exchange rate against other countries can vary against other such currencies. In fact such exchange rates are likely to be changing almost constantly as quoted by financial markets and banks around the world. Big foreign exchange trading centres are located in New York, Tokyo, London, Hong Kong, Singapore, Paris and Frankfurt amongst others. If the value of the currency is "pegged" its value is maintained by the government in question at a fixed rate relative to the other currency. For example, in 2003 the Hong Kong dollar was pegged to the United States dollar. The need for foreign exchange rate also arises while making payments for imports or receiving payments for exports. When an Indian trader buys goods from an American trader, American trader would accept payments in Dollars whereas the Indian trader has rupees to pay. So the Indian trader will have to purchase dollars with rupees. What is the price of one Dollar in Rupees? In other words, what is the exchange rate between Dollar and Rupee? From where will he buy the Dollars? These are very important questions, which we will answer in the next section of this lesson. However, it must have been clear to you that foreign exchange rate is the rate at which two currencies can be exchanged. These exchange rates would be different for different currencies.
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Over the years the currencies of some countries have become acceptable to all the countries such as US $ and sterling etc. It does not mean that currencies of these countries are legal tenders in the world. It only means that these are acceptable to other countries for payments of their exports. For example, exporters from India accept payments in US $ or in sterlings. Most of the developing countries imports are more than their exports, so they face a problem of foreign exchange. Their receipts in foreign currencies i.e. foreign exchange, fall short of the payments they have to make in foreign currencies.

Fluctuations in Exchange Rates


An exchange rate will change whenever the value of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the countries level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accomodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accomodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a countries interest rates, the greater the demand for that currency. In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the countries level of inflation is relatively higher, if the counties level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on Feburary 24 2004, the price of the Ruble dropped. When China announced plans for its first manned space mission the price of the Yuan jumped. Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. One device for doing this is foreign exchange options, which are derivatives of exchange rates.

How is foreign exchange rate determined?


As explained earlier, the foreign exchange rate is nothing but the price of one currency in terms of other currency. There are primarily two ways of determining the foreign exchange rate: (a) Fixed by the Central Bank of a country (b) Determined by the foreign exchange market

A) Fixed Foreign Exchange Rate


When the exchange rate between a country's currency and foreign currency is fixed by the monetary authority (Central Bank) of that country, it is called fixed foreign exchange rate. In India till 1991, the foreign exchange rate used to be fixed by the Reserve Bank of India (Central Bank of the country). We will not discuss the
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mechanism of fixation of foreign exchange rate by the Reserve Bank of India as it is not required at this stage of learning. The foreign exchange rate fixed by the Reserve Bank of India is called the fixed exchange rate. However, it does not mean that this rate does not change. It only means that only the central bank can change it. In fact a change in the foreign exchange rate may be helpful in increasing exports and decreasing imports. The Reserve Bank of India not only fixes the foreign exchange rate, it also controls and regulates inflow and outflow of foreign exchange. The exporters were required to surrender their receipts of foreign exchange as payments for exports to authorised dealers and get rupee in exchange at a fixed rate. Imports were also rigidly controlled as it results in outflow of foreign exchange. All licenced importers could get foreign exchange from authorised dealers at the fixed rate. All these measures were necessary to conserve India's foreign exchange reserves, which were very limited, and to avoid the problem of shortage of foreign exchange. These strict exchange controls helped in preventing the misuse of available foreign exchange reserves and utilising them for importing only essential goods. The Reserve Bank changed the fixed exchange rate many a times in order to promote exports and discourage imports. This was done by lowering the value of domestic currency in terms of a foreign currency. This is called devaluation.

Devaluation

(i) Meaning of devaluation Devaluation means a fall in the value of domestic currency in terms of foreign currency / currencies. For example, suppose the exchange rate between rupee and dollar is Rs. 25= $1. If this exchange rate is fixed at Rs. 30 = $1 then it is called devaluation of rupee. Earlier Rs. 25 could purchase a dollar and now more rupees (Rs. 30) are required to get a dollar. So the value of rupee in terms of dollar has declined. (ii) Need for devaluation When the foreign exchange rate is fixed by the Central Bank of a country, the Central Bank sometimes devalues its currency in terms of foreign currency. This is done primarily to promote exports and reduce imports so that inflow of foreign exchange from exports may increase and outflow of foreign exchange on account of import may decrease. Let us take an example to understand the effects of devaluation on exports and imports. Suppose, an Indian trader exports to USA. Suppose, the exchange rate of rupee and dollar is 20:1 i.e. Rs. 20 = $1. This means that a U.S. trader can buy from Indian trader goods-worth Rs.20 by paying one dollar. Suppose, the rupee is devalued i.e. the exchange rate between rupee and dollar is changed from Rs.20 = $1 to Rs. 25 = $1. Now the American trader can buy from Indian trader goods worth Rs. 25 by spending one dollar. So, for him Indian goods have become cheaper and he may buy more of these goods. Hence, exports will increase. Thus devaluation can help in increasing exports. Devaluation has an adverse effect on imports. Taking the same example, when the exchange rate between rupee and dollar is 20:1, an Indian importer has to spend Rs.20 for importing goods worth $1 from USA. After devaluation the exchange rate is Rs.25 = $1. Now the importer has to spend Rs.25 for importing goods worth $1 from USA. So imports have become costlier. This may reduce the imports. However, devaluation will increase exports and reduce imports only under certain conditions. These conditions are: (i) When exports are cheaper, their demand must increase and when imports are costlier. their demand must decrease. (ii) It should be possible for exporter to increase production to meet the increased demand. Similarly, the production of import substitutes should also increase in order to make up for the reduced imports.
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(iii) The prices in the domestic markets of export and import goods should not rise. (iv) Fiscal deficit must be checked.

B) Market determined foreign exchange rate


When foreign exchange rate is determined in foreign exchange market by demand for .and supply of foreign currencies, it is generally called flexible exchange rate. Let us first understand the meaning of foreign exchange market and sources of demand and supply of foreign exchange. (i) Foreign Exchange Market Foreign exchange market is a market in which foreign currencies are bought and sold. Those who deal in foreign currencies are authorised dealers. They are authorised by the monetary authority i.e. the central bank of a country. The price of foreign currencies in such a market is determined by the demand and supply of foreign currencies. (ii) Demand for Foreign Exchange Demand for foreign currency is made by the importers to make payment for imports and by the people who wish to go abroad. Just as the demand for a commodity is affected by its price, the demand for foreign currency is also affected by its price; For example, if the price of British pound in terms of Indian Rupee falls, its demand may rise. And if its price rises, its demand may fall Thus like the demand curve of a commodity, the demand curve for foreign currency is downward sloping from left to right. We can construct a hypothetical demand schedule for foreign currency. Such a schedule is given in the following table . Demand Schedule for Foreign Currency (British Pound) Price of l (in Rupees) (Foreign exchange rate) Rs. 30 Rs. 40 Rs. 50 Rs. 60 Rs. 70 Quantity demanded of 5,000 4,000 3,000 2,000 1,000

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The above table shows that as the price of a pound rises from Rs 30 to Rs 40 and above. The demand for pounds falls. Similarly, it also shows that as the price of pound falls from Rs. 70 to Rs. 60 and below, the demand for pounds rises. On the basis of this table we can draw a demand curve for pounds as shown in figure

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(iii) Supply of Foreign Currency Foreign currencies are also like commodities. The supply of a foreign currency is affected by its price in the same way as the supply of a commodity is affected by its price. A rise in its price leads to a rise in its supply and a fall in its price leads to a fall in its supply. (iv) Sources of Supply of Foreign Exchange Exporters are main source of supply of foreign exchange. They receive foreign exchange as payment for the goods and services exported by them. For example, when an Indian seller exports its goods to UK, he receives payments in British pounds. The amount of British pounds received by our exporters as a whole constitute the supply of British pounds in our country. The total supply depends upon the value of exports. Similarly, the British tourists coming to our country bring British pounds and sell them for rupees for meeting their expenses while in India. So they are also the source of supply of British pound in India Remittances by Non-Resident Indians in U.K. and direct investment by Britishers in India are other sources of pounds in India. We can construct a hypothetical supply schedule of foreign currency as shown in following table.

Supply Schedule of Foreign Currency (British Pound)


Price of Rs.30 Rs.40 Rs.50 Rs.60 Rs.70 Quantity supplied of 1,000 2,000 3,000 4,000 5,000

The table shows that when the price of pound in rupees rises the quantity supplied of 1 pounds rises and when price of pound falls its quantity supplied falls. On the basis of this table we can draw a supply curve of foreign currency () as shown in figure below.

(v) Determination of Equilibrium Foreign Exchange Rate


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The price of a foreign currency when determined in the foreign exchange market, is determined in the same way as the price of a commodity is determined in the market, ft is determined by the forces of demand and supply. DD is the demand curve and SS is the supply curve of foreign currency (). At a price of Rs. 50 per pound the demand and supply of pounds are equal. It is shown by point E, the point of intersection of demand curve and supply curve. Price of foreign currency in rupee Rs. Rs. Rs. Rs. Rs. 30 40 50 60 70 Quantity demanded of foreign currency 5,000 4,000 3,000 2,000 1,000 Quantity supplied of currency 1,000 2,000 3,000 4,000 5,000

The equilibrium exchange rate for 1 is Rs. 50. For any exchange rate higher than equilibrium exchange rate, the supply of foreign currency is greater than its demand and for any exchange rate lower than the equilibrium rate, supply would be less than demand. In such situation, price, demand and supply of foreign currency will change and these changes will restore the equilibrium rate.

Changes in equilibrium rate of exchange


As we have mentioned above that equilibrium exchange rate is one at which demand for and supply of foreign currency is equal. However, this equilibrium rate may itself change. Such a change will take place when demand for a foreign currency or its supply or both may increase or decrease at a given equilibrium rate (Such changes result in changes in demand and supply schedules.) As we know that imports create demand for foreign currency and exports create the supply of foreign currency. Therefore, any change in imports, in their quantity or
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price or both, changes demand for foreign currency, and any change in exports, changes supply of foreign currency. Such changes will shift the demand curve or supply curve or both as the case may be. These shifts in demand and supply curves are similar to the shifts in the demand and supply curves of a commodity. The effects of these changes on the equilibrium price of foreign currency are also similar to the effects of such changes in case of a commodity. The demand and supply of foreign exchange keeps on changing because of changes in exports, imports, foreign investments, foreign tourism etc. As a result of this the equilibrium rate of foreign exchange also keeps on changing. You can read in the daily newspapers the exchange rate of various currencies and notice the changes. The fluctuations in exchange rate may be very wide. Wide fluctuations may adversely affect those engaged in foreign trade and also the economy as a whole. In India, the Reserve Bank of India keeps a watch on these fluctuations. If the foreign exchange rate rises sharply, the Reserve Bank of India intervenes in the foreign exchange market. It enters the market as a supplier of foreign exchange and thus checks the rise in foreign exchange rate. The Reserve Bank of India has a stock of foreign exchange, so it sells foreign exchange in the market and thus increases the supply. Similarly, if the foreign exchange rate falls sharply, it indicates that the supply of foreign exchange is greater than demand. In such a situation, the Reserve Bank of India increases the demand for foreign exchange by entering the market as a buyer. It will increase its stock of foreign exchange. A rise in the equilibrium rate of foreign exchange i.e. a rise in the price of, say, dollar in terms of rupees is called depreciation of Indian currency. In a regime of fixed foreign exchange rate such a situation was called depreciation. The effect of depreciation of domestic currency would be same as the effects of devaluation of a currency.

Role played by RBI

At Rs. 45.39 to a U.S. dollar as on October 10, 2003, the rupee has appreciated by as much as 7 per cent against the greenback over the March 2002 levels. A year ago, this possibility would have been difficult to envisage. Interestingly, following the introduction of the Liberalised Exchange Rate Mechanism (LERM) by the Reserve Bank of India in March 1993, the rupee experienced remarkable tranquility for an unbroken stretch of 27 months till July 1995. Overall, instances of the rupee appreciating against the dollar have been few and far between. Hence, the current strengthening of the rupee against the dollar over such a prolonged period is noteworthy. Given the abundance of literature available on the exchange rate, this topic is limited to a discussion of two aspects. The first is a summary of the evolution of the RBI's exchange rate policy till date. The second is an overview of the alternative exchange rate systems in use across the world and India's position in this regard.

History of RBI policy

The RBI's forex policy in the 1980s was limited to pegging the rupee rate in the morning and responding to volatility in the market during the day by changing its reference dollar rates every time the market threatened to break out of the controlled range. It would also change the rupee rate in case undue movements were noticed. The devaluation of the rupee in 1991 brought about a sharp drop in its value against the dollar. The decline was hardly surprising, given the great strain on the economy during the 1990s, what with the external account perilously close to breaking point. A host of factors, including domestic political crises and increase in oil prices, contributed to the decline in the rupee value. India's credit rating was downgraded twice (with the second downgrade placing the country in the "speculative grade'') and
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with installment payments against some foreign loans coming due, the economy nearly collapsed. Meanwhile, in 1991 a new government was sworn in and the rupee was devalued (in two quick steps) by a total of 22 per cent. Simultaneously, dramatic changes were made in trade policy: the negative list for imports was significantly shortened and a new instrument (the Exim scrip) created to provide exporters with additional returns. Thus began the process of economic liberalisation. This was clearly the first step towards the supposed market-determination of the rupee. In the Union budget for 1992-93, the rupee was made "partly convertible,'' or more correctly, partly floating, thus ushering in LERM. Under the new scheme, 40 per cent of the export receipts (denominated in dollars) was to be surrendered to the RBI at a predefined (official) rate; the proceeds would be used for import of "essential'' items (such as petroleum, fertilizers and edible oils). The balance 60 per cent could be sold in the "free market'' to importers. The official (RBI buying) rate was virtually at the same level as it had been since the devaluation in July 1991; initially, the free market rate was extremely volatile but settled down finally. Beginning December 1992, ostensibly in acknowledgement of the dollar's sharp gains overseas (which had rendered exports in non-dollar currencies much less profitable), the RBI signalled a change in policy by lowering (devaluing) its official rate. The market knee-jerked to the sudden move and the rupee slipped immediately. A political crisis at home only aggravated the situation and there was a steady decline in dollar inflows; by February 1993, the rupee was falling fast. Finally, in the Union budget for 1993-94, "full float'' of the rupee was allowed.

The `managed float' system

Although the exchange rate system in India is supposed to be a full float, the RBI intervenes in the market at regular intervals to direct the movement in rupee values (thus the term "managed float''). The intervention by the RBI in the market could be passive (whereby the apex bank engages in off-market deals) or active (whereby it purchases or sells dollars). Intervention could also be made through statements (to the press or otherwise) in times of exchange rate crises, or in extreme circumstances, through a package of monetary and other measures. Therefore, it may well be stated that the exchange rate system in India is not exactly full float. The exchange rate system in India is quite flexible (the managed float system is second only to free float in terms of flexibility) and has worked well so far. Interestingly, although the Indian system is flexible, the RBI has not hesitated to intervene in the forex market (both spot and forward). And, it has always intervened with a definite purpose (either implicit or explicit) and sometimes continuously for several days. For instance, it has now prioritised its intervention patterns in the foreign exchange markets, given the adverse effects of exchange rate volatility on export growth. Now for two observations on the RBI's exchange rate policy. One, the RBI practice of issuing press statements in times of disturbance in the forex market has made the policy more transparent. Such press statements, given that they are interpreted as signals, are likely to continue influencing the expectations of market participants. Two, the RBI has sought to reduce volatility in the market by making arbitrage activities more expensive and also by ensuring higher availability of foreign currencies, either through enhanced repatriation from foreign accounts or lower outflow of funds from the domestic markets. In fact, these measures at augmenting the supply of foreign currencies have already borne fruit (the country's foreign exchange reserves now stand at over $87 billion). It must however be noted that while the Indian rupee has, in recent times, strengthened against the dollar, it has
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lost steadily against the euro and the pound sterling. Presumably, the phenomenon points to wider trends in cross-currency movements.

Purchasing Power Parity


In economics, purchasing power parity (PPP) is a method used to calculate exchange rates between the currencies of different countries. PPP exchange rates are used in international comparisons of standard of living. They calculate the relative value of currencies based on what those currencies will buy in their nation of origin. Typically, the prices of many goods will be considered, and weighted according to their importance in the economy. Method The PPP method considers a bundle of goods, then calculates the price of this bundle in each country (using the country's local currency.) To calculate the exchange rate between two currencies, one takes the ratio of the prices. A simple and humorous example of a measure of absolute PPP is the Big Mac index popularised by The Economist, which looks at the prices of a Big Mac burger in McDonald's restaurants in different countries. If a Big Mac costs USD$4 in the US and GBP3 in Britain, the PPP exchange rate would be 3 for $4. Relative PPP is concerned with change of price levels over different periods, also known as inflation rate. The equation looks like, whereby St is the spot_rate and Pt is the price in period t (Foreign values are marked by an asterisk). The change in the exchange rate is determined by price level changes in both countries. For example, if prices in the USA rise by 3% and prices in the European_union rise by 1% the USD has to depreciate by 2% compared to the EUR (or alternatively the EUR will appreciate by 2%). Application A common measure of the standard of living is the per capita Gross Domestic Product, which is calculated by dividing the GDP of a country by its population. In order to compare the standard of living in two nations, one first needs to express these numbers in the same currency. Using actual exchange rates when making these comparisons can give a very misleading picture of living standards. The PPP method is used to as an alternative. For example, if the value of the Mexican peso falls by half compared to the US dollar, the Gross Domestic Product measured in dollars will also halve. However, this exchange rate results from international trade and financial markets. It does not necessarily mean that Mexicans are any poorer if incomes and prices measured in pesos stay the same, they will be no worse off assuming that imported goods are not essential to the quality of life of individuals. Measuring income in different countries using PPP exchange rates helps to avoid this problem. Difficulties with PPP comparisons While using PPP exchange rates for comparison is an improvement over using actual exchange rates, it is still imperfect, and comparisons using the PPP method can still be misleading. Comparing standards of living using the PPP method implicitly assumes that the real value placed on goods is the same in different countries. In reality, what is considered a luxury in one culture could be considered a necessity in another. The PPP method does not account for this. A PPP exchange rate varies depending on the choice of goods used for the index. Hence, it is possible to deliberately or accidentally bias a PPP exchange rate by the choice of a bundle. PPP could also have difficulty accounting for differences in quality between goods in one country and equivalent goods in another. Even if a good PPP is used, GDP per capita is still a measure of the economic output of the whole economy, not a direct measure of the mean or median person's quality of life. Other factors such as the quality of homes and schools, access to public services,
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the extent of pollution, and strength of consumer protection laws are hard to quantify and generally not fully reflected in the GDP. Thus, even a PPP-adjusted measure of GDP per capita must be used with caution, as it is only one component of quality of life. For example, in 2002, the GDP per capita for Japan was about US$40,000 and the PPP was estimated as $27,000, while in the US, GDP per capita was about $27,500 and the PPP was $36,000. The US has higher crime rates and a greater extent of poverty and slums than Japan, while Japan has much less physical space per person and arguably less individual freedom. Ultimately, the quality of life will depend on subjective judgement and individual preferences. Per capita income also does not take into account inequalities in wealth distribution.

Types of exchange rate


In Foreign exchange market at a particular time, there exists, not one unique exchange rate.

Major types of exchange rates are as follows:


1.Spot Rate: Spot rate of exchange is the rate at which foreign exchange is made available on the spot .It is also known as the cable rate or telegraphic transfer rate because at this rate cable or telegraphic sale and purchase of foreign exchange can be arranged immediately. Spot rate is the day-to-day rate of exchange. The spot is quoted differentially for buyers and sellers. For example $1 = Rs. 15.50 for buyers and $ 1 = 15.80 for the sellers. This difference is due to the transport charges, insurance charges, dealers commission etc. These costs are to be borne by the buyers. 2.Forward Rate: Forward rate or exchange is the rate at which the future contract for foreign currency is made. In such cases details of rates to be applied, the delivery when the foreign currency will be delivered or received, the amount of foreign currency and details of buyer and seller are settled in advance. For example, an importer, who is to pay a given amount of money after 3 months, can approach a foreign exchange dealer and ask the rate which will be applied for the transaction after three months. The dealer calculation the rate based on the current market and will quote the rate that will be applied at the time when the documents will be retired after three months. 3.Direct rate and indirect rate: The rate of exchange between two currencies is quoted in two ways as Direct method and b) Indirect method. It is expressed either as given number of units of local currency per unit of foreign currency elgl. In Indian dollar could be quoted as US $ 1 = Rs. 45.45 or in New York, the dollar sterling rate could be quoted as 1 = US $ 2.236. these quotes are direct quotes. Under the indirect method of rate quotation, a given number of units of foreign currency are expressed per unit of home currency. For example, in India rates of US dollar could be quoted under indirect method as US $ 2.2 = Rs. 100. Direct rates are called home currency rates and indirect rates are called currency rates 4. Long rate: Long rate of exchange is the rate at which a bank purchases or sells foreign currency bills which are payable at a fixed future date. The basis of long rate of exchange is the interest on the delayed payment. The long rate of exchange is calculated by adding premium to the spot rate of exchange in the case credit purchase of foreign exchange and deducting premium from the spot rate in the case of credit sale. If the spot rate is 1 = $ 2.80 and the rate of interest is 6%, then on 30 day bill, $ 0.014
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will be added per pound in case of credit sale of dollar a deducted in case of sale of dollars.

Forward Exchange Rate Market


The foreign exchange market is volatile and there are large fluctuations in the foreign exchange rate. To reduce the impact of fluctuation in this market the forward contracts are brought and sol at forward exchange rates. Hedging and Speculation are the main activities, which pertain to forward markets. Forward Exchange Rates are the rates for delivery and payment at specified future dates. Rates are denoted by F(.) where F(.) specifies a relationship between domestic and foreign currency. The forward exchange rate is contracted in the present for future delivery of foreign exchange e.g. 60 days forward rate between rupees and dollar is the rate at which the foreign exchange dealer can arrange a transaction between rupee and dollar 60 days hence. Forward exchange rate are determined by forward demand and forward supply of various currencies e.g. an Indian exporter of software, who expects to receive payment in dollars after three months might seek to reduce risk due to an unfavourable movement of exchange rate in the future by contracting a sale of dollars in future. In this process, he guarantees future price of dollars in terms of rupees and this increases the supply of dollars in the forward market. The forward rate of a currency is determined by the discount and premium in the forward market. A foreign currency is said to be selling at a forward discount, when forward price of foreign currency is lower in terms of domestic currency than its spot rate. Conversely, a foreign currency is said to be selling at a premium, when its forward price in terms of domestic currency is higher than the spot rate. The domestic currency Rs. is quoted at discount against dollar is spot rate is S(Rs/$) = Rs. 31.9802/$ and the three month forward is F3(Rs/$) = Rs. 32.1345/$. The same currency (rupees) is at a premium if spot rate is S (Rs/$) = Rs. 31.9802/$ and the six month forward is F6(Rs/$) = Rs. 30.0112/$.

Factors affecting Forward Margins:


Like other prices, the prices of forward exchange depend on demand and supply. The margins between spot and forward exchange principally depend upon the following factors. 1. Interest Rate Difference: When an exchange dealer in India covers a forward sale of dollars by a spot purchase, he comes in possession of balance in New York by reducing the balance in India. If the interest rates in short term investments in New York are higher than the interest rates in India, the spot purchase of dollars gives line gain. He will therefore, be in a position to provide more dollars per rupee, and forward dollars will be at a discount. Conversely, forward dollars would be at a premium when the short-term interest rates in New York are lower than in India. 2 Demand and Supply mismatch: If for some reasons it is felt that the funds held in a particular center are excess or falling short, the equilibrium for demand and supply takes place. The forward premium on currency, which is in demand, will rise resulting in the demand for that currency. 3. Economic Conditions: One of the reasons affecting the forward margins is also loss of confidence in the economic conditions of a particular country for a considerable period to come, which will keep on depreciating the value of their currency against other trading partners and so the currency will remain weak and forward margins will be quoted at discount.

Cost of forward Contract:


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Suppose an Indian trader has exported goods worth $100,000 to U.S. and payment is expected to be received after three months. Spot price of dollar is S(Rs/$) = Rs. 36.3500/$. During the period of 90 days, the value of dollar may fluctuate and as a consequence the rupees receipts of the exporter also fluctuate. Therefore trader sells forward the dollars receivables to protect himself against fluctuations. Suppose in 90 days the future spot rate is Rs. 36.1500/$. The exporter gains because of forward contract by Rs. (36.35 36.15) per dollar sold. The gains and losses of the forward contract is called the cost of forward trade. The following table shows the payoff in case of forward contract: Realised Exchange Rates 36.5500 36.4500 36.3500 36.2500 36.1500 The rate at which currency was sold 36.3500 36.3500 36.3500 36.3500 36.3500 Unanticipated change in Exchange Rates -0.200 -0.100 0 0.100 0.200 Profit/loss on Forward contract -100,000 x 0.2 = - Rs. 20,000 -100,000 x 0.1 = - Rs. 10,000 0 100,000 X 0.1 = Rs. 10000 100000 x 0.2 = Rs. 20000

Methods of fluctuations
1.Hedging

covering

against

foreign

exchange

The existence of uncertainty, in the value of receivables/payables denominated in foreign currencies due to exchange rate movements, generate exchange risk. Hedging in the foreign exchange market is the avoidance or eliminations of risk. It is achieved by avoiding open position in foreign exchange. A long position arises when foreign currency assets exceed foreign currency liabilities. A short position arises when foreign currency liabilities exceed foreign currency assets. Both positions involve risk because these open positions expose the holders of assets and liabilities to potential losses resulting from advance movements in foreign exchange rates. Losses due to depreciation and appreciation can be avoided by hedging in the foreign exchange market which involves a forward sale/purchase of these assets or liabilities but this involves cost. The cost of hedging on forward cover in percentage terms is given by :

Cost

The purpose of hedging is loss minimization, and not profit maximization i.e hedging is non-profit centred activity. Hedging can be short term or long term and therefore the ways and instruments of hedging are different for each other, short term hedging can be done with the help of a) Forward contract (b) Future contract c) Money market hedge and d) Currency option contract. Long term hedging is done through a) Long term forward contract, b) Currency swap c) Parallel loan d) Cross currency hedging e) Currency diversification 2) Arbitrage.
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S1 - F = ---------- x 100 So

2. Arbitrage
In economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur. Conditions for arbitrage Arbitrage is possible when one of three conditions is not met: 1. The same asset must trade at the same price on all markets ("the law of one price"). 2. Two assets with identical cash flows must trade at the same price. 3. An asset with a known price in the future, must today trade at its future price discounted at the risk free rate. The term "arbitrage", is usually applied only to trading in money and investment instruments (such as stocks, bonds, and other securities), not to goods, and the difference in asset prices is usually referred to as "the spread", so arbitrage is often defined as "playing the spread" in the money market. Examples Suppose that the exchange rates (after taking out the fees for making the exchange) in London are 5 = $10 = 1000 and the exchange rates in Tokyo are 1000 = 6 = $10. Converting $10 to 6 in Tokyo and converting that 6 into $12 in London, for a profit of $2, would be arbitrage. One real-life example of arbitrage involves the stock market in New York and the futures market in Chicago. When the price of a stock in New York and its corresponding future in Chicago are out of sync, one can buy the less expensive one and sell the more expensive. Because the differences between the prices are likely to be small (and not to last very long), this can only be done profitably with computers examining a large number of prices and automatically exercising a trade when the prices are far enough out of balance. The activity of other arbitrageurs can make this risky. Those with the fastest computers and the smartest mathematicians take advantage of series of small differentials that would not be profitable if taken individually. If you can buy items at one price at a factory outlet and sell them for a higher price on an internet auction website such as eBay, you can exploit the imbalance between those two markets for those items.

Price convergence
Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets all tend to converge to a fixed price. The speed at which the prices converge is one measure of the efficiency of a market. Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low and resell where the price is high. Sellers of goods and services often attempt to prohibit or discourage arbitrage. Arbitrage is an important factor of reaching Purchasing power parity between different currencies. For example if American cars are relatively cheaper than cars in Canada, Canadians would buy their car across the border to exploit the arbitrage condition. If this happens on a larger scale, the higher demand for US Dollars and the higher supply of Canadian Dollars (The Canadians would have to exchange their Dollars into US Dollars.) would lead to a appreciation of the US Dollar and would eventually make US cars more expensive for Canadian buyers.

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Risks

Arbitrage transactions in modern securities markets involve fairly low risks. Generally it is impossible to close two or three transactions at the same instant; therefore, there is the possibility that when one part of the deal is closed, a quick shift in prices makes it impossible to close the other at a profitable price. There is also counter-party risk, that the other party to one of the deals fails to deliver as agreed; though unlikely, this hazard is serious because of the large quantities one must trade in order to make a profit on small price differences. These risks become magnified when leverage or borrowed money is used. Another risk occurs if the items being bought and sold are not identical and the arbitrage is conducted under the assumption that the prices of the items are correlated or predictable. In the extreme case this is risk arbitrage, described below. In comparison to the classical quick arbitrage transaction, such an operation can produce disastrous losses.

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Chapter-8
Capital Account Convertibility
What is meant by Capital Account Convertibility (CAC)?
The basic aim of all exporters is to convert their export proceedings, that is dollars to rupees. The basic aim of all importers is to convert rupees to dollars to enable them pay for their imports. Before 1991 the only LEGAL way this could be done was RBI (Reserve Bank of India). RBI was the only official body authorized to convert currency. The rate of conversion in the case of RBI was determined on the basis of administrative considerations. The also existed an illegal market called Hawala for the conversion of currency. Though illegal people preferred this since the rate here was determined by the market forces and not on administrative considerations. In order to deal with the Hawala market the government authorized certain dealers after 1991 to deal with foreign currency. These dealers had the advantages of both; the RBI since it was legal as well as the Hawala since its rates were determined by the working of market forces. By doing this government was to a large extent able to curb the influence of the Hawala and as we have it today the influence of Hawala is almost negligible. Origin of the convertible currency system Till 1934 all the countries of the world followed the fully convertible currency system. People from various countries were free to trade with one another without any barriers. People from one country could exchange currency with those of another country on mutually agreed terms. There was no system of import licensing or exchange controls. However, in 1934 Hitler's finance minister introduced the system of import licensing and exchange controls. From then on, the various control systems have dominated trade between two countries. However, during the late 60's and early 70's countries of the world have expressed a desire to move back to the fully convertible system. According to the IMF almost 70 countries have already made their currency convertible at least with regard to the current account. They are now trying to achieve the same end where the capital account is considered. Many countries in Latin America and Russia are trying to make their currency fully convertible. Among our neighbours, Pakistan has made its rupee fully convertible for all practical purposes. Sri Lanka too is moving towards the same. In India, the need for making the rupee fully convertible was first felt in 1990 at the meeting of the national development council. A noted economist of the 60's also said that only if India were to make its rupee fully convertible will she be able to attain her full potentialities.

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Why did strict capital controls exist before the reform of the 90's
Before the reform of the 90s, strict capital controls existed.
The major reasons for this are listed below: The British rule: It is a known fact that the British came to India as traders and became rulers. Right from 1947,that is after gaining independence India has looked at foreign trade suspiciously. It was a common belief that the other countries will come to India as traders and consequently become rulers. Hence, the government of India was never open to foreign trade. The BOP crisis: As a natural consequence there are concerns about capital outflows also, reinforced by repeated stress on balance of payment often due to droughts, wars and supply shock mainly oil. Economic self-reliance: With the adoption of the planned approach to development, the emphasis has been on utilizing domestic savings for domestic investments, a logical extension of the preference economic self reliance in trade. Restrictions on world trade: Till the eighties influential assessment among policy makers was that world trade was not open enough to promote strong export led growth of a large economy like India. Usually it was argued that strong protectionism would be put in place by industrial countries if India attempted a thousand Singapore's. Similarly it was felt that, given the level of capital flows which was mainly on official account, India's large needs may not be met in any single way. In other words possible quantities of capital inflow to India in that view did not justify the risk of opening the economy. Belief that India could be self reliant: It has also been felt that the domestic economy was endowed with a reasonable base of human skills, institutional social and physical infrastructure and diversified industrial base so that the country could successfully launch on the path of self reliance with relatively low level of dependence on the external world. However, with the liberalisation and globalisation process initiated in 1990 the working of the Indian economy changed in general and the external sector changed in particular. Foreign trade was almost deregulated. Import of gold and silver was permitted albeit with duties. The current account is virtually deregulated except in the case of certain consumer goods imports and the repatriation of certain dividend. The capital account is partially deregulated. NRI deposits require no permission. In the case of FDI's permission is almost automatic. Portfolio investments flow in through various forms. Indian companies are free to go aboard and invest in GDR's and maintain off shore funds. However, whether the capital account should be made fully convertible or not is still a topic of debate.

If capital account is made fully convertible it will imply the following:


Market forces will regulate all current and capital account transactions and there will be no restriction on the inflow or the outflow of capital either by non-resident Indians or by foreigners. There will be no restriction on foreign exchange transactions and the RBI and the government will not intervene even where the cost or the quantity of the transaction is concerned. Purely market forces will determine the exchange rate of rupee in relation to any foreign currency.

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RBI can intervene in relation to foreign currency only by buying and selling of the rupee in the market. Indian companies will be free to go aboard and raise money. They will also be free to invest in GDR's and maintain offshore funds. Similarly foreign companies will be free to invest in India without any intervention of the RBI or the government Indian's will be free to maintain foreign bank accounts and deposit withdraw and maintain foreign currency in any bank without any restriction. There will be no restriction on the repatriation of capital by foreigners. Convertibility of the Rupee Current Account Convertibility The rupee was made convertible on the current account of the balance of payments in August 1994. Current account transactions refer to transactions in goods and services. There has been further relaxation of restrictions on current transactions in 1995-96 and 1996-97. Indian exporters exporting to Asian Clearing Union (ACU) countries and receiving the export proceeds in rupees or in Asian Monetary Units (AMU), or in the currency of the participating country, were permitted to receive payments in any permitted currency through banking channels provided it is offered by the overseas buyer in the ACU country. Authorised Dealers (ADs) were empowered to release exchange without prior approval of the Reserve Bank in certain types of foreign travel even in excess of the indicative limits provided that they are satisfied about the bonafides of the applicant and the need to release exchange in excess of the prescribed scale. Interest income on Non-Resident Non-repatriable (NRNR) Rupee deposits which were not eligible for renewal could be renewed along with principal for deposit accounts opened on or after October 1, 1994. ADs were empowered to allow remittances by a family unit of residential Indian nationals to their close relatives residing abroad for their maintenance expenses up to US $5,000 in a calendar year per beneficiary subject to certain conditions. ADs were permitted to allow Exchange Earners' Foreign Currency (EEFC) account holders to utilise funds held in such accounts for making remittances in foreign exchange connected with their trade and business related transactions, which are of a current account nature. ADs were permitted to export their surplus stocks of foreign currency notes and coins for realisation of proceeds to private money changers abroad, in addition to their overseas branches or correspondents. In January 1997, the Reserve Bank of India announced major relaxations in exchange control. The monetary ceilings prescribed for remittance of foreign exchange for a wide range of purposes were removed and ADs can now allow remittances for these purposes without prior clearance from the Reserve Bank of India (RBI). This will reduce delay and thus further facilitate all current transactions. Capital AccountConvertibility Capital account convertibility implies the right to transact in financial assets with foreign countries without restrictions. Although the rupee is not fully convertible on the capital account, convertibility exists in respect of certain constituent elements of the capital account. Capital account convertibility exists for foreign investors and Non-Resident
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Indians (NRIs) for undertaking direct and portfolio investment in India. Indian investment abroad upto US $4 million is eligible for automatic approval by the RBI subject to certain conditions. In September 1995, the RBI appointed a special committee to process all applications involving Indian direct foreign investment abroad beyond US $4 million or those not qualifying for fast track clearance.

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Tarapore Committee on Capital Account Convertibility


A committee on capital account convertibility, setup by the Reserve Bank of India (RBI) under the chairmanship of former RBI deputy governor S.S. Tarapore to "lay the road map" to capital account convertibility. At the moment it is still a report and central bank has to accept the recommendations of the committee. The five-member committee has recommended a three-year time frame for complete convertibility by 1999-2000. The highlights of the report including the preconditions to be achieved for the full float of money are as follows:Pre-Conditions Gross fiscal deficit to GDP ratio has to come down from a budgeted 4.5 per cent in 1997-98 to 3.5% in 1999-2000. A consolidated sinking fund has to be set up to meet government's debt repayment needs; to be financed by increased in RBI's profit transfer to the govt. and disinvestment proceeds. Inflation rate should remain between an average 3-5 per cent for the 3-year period 1997-2000 Gross NPAs of the public sector banking system needs to be brought down from the present 13.7% to 5% by 2000. At the same time, average effective CRR needs to be brought down from the current 9.3% to 3% RBI should have a Monitoring Exchange Rate Band of plus minus 5% around a neutral Real Effective Exchange Rate RBI should be transparent about the changes in REER External sector policies should be designed to increase current receipts to GDP ratio and bring down the debt servicing ratio from 25% to 20% Four indicators should be used for evaluating adequacy of foreign exchange reserves to safeguard against any contingency. Plus, law in the RBI Act should prescribe a minimum net foreign asset to currency ratio of 40 per cent. Phased liberalisation of capital controls The Committee's recommendations for a phased liberalisation of controls on capital outflows over the three year period which have been set out in detail in a tabular form in Chapter 4 of the Report, inter alia, include:(i) Indian Joint Venture/Wholly Owned Subsidiaries (JVs/WOSs) should be allowed to invest up to US $ 50 million in ventures abroad at the level of the Authorised Dealers (ADs) in phase 1 with transparent and comprehensive guidelines set out by the RBI. The existing requirement of repatriation of the amount of investment by way of dividend etc., within a period of 5 years may be removed. Furthermore, JVs/WOs could be allowed to be set up by any party and not be restricted to only exporters/exchange earners. ii) Exporters/exchange earners may be allowed 100 per cent retention of earnings in Exchange Earners Foreign Currency (EEFC) accounts with complete flexibility in operation of these accounts including cheque writing facility in Phase I. iii) Individual residents may be allowed to invest in assets in financial market abroad up to $ 25,000 in Phase I with progressive increase to US $ 50,000 in Phase II and US$ 100,000 in Phase III. Similar limits may be allowed for non-residents out of their nonrepatriable assets in India. iv) SEBI registered Indian investors may be allowed to set funds for investments abroad subject to overall limits of $ 500 million in Phase I, $ 1 billion in Phase II and $ 2 billion in Phase III. v) Banks may be allowed much more liberal limits in regard to borrowings from abroad and deployment of funds outside India. Borrowings (short and long term) may be subject to an overall limit of 50 per cent of unimpaired Tier 1 capital in Phase 1, 75
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per cent in Phase II and 100 per cent in Phase III with a sub-limit for short term borrowing. in case of deployment of funds abroad, the requirement of section 25 of Banking Regulation Act and the prudential norms for open position and gap limits would apply. vi) Foreign direct and portfolio investment and disinvestment should be governed by comprehensive and transparent guidelines, and prior RBI approval at various stages may be dispensed with subject to reporting by ADs. All non-residents may be treated on part purposes of such investments. vii) In order to develop and enable the integration of forex, money and securities market, all participants on the spot market should be permitted to operate in the forward markets; FIIs, non-residents and non-resident banks may be allowed forward cover to the extent of their assets in India; all India Financial Institutions (FIs) fulfilling requisite criteria should be allowed to become full-fledged ADs; currency futures may be introduced with screen based trading and efficient settlement system; participation in money markets may be widened, market segmentation removed and interest rates deregulated; the RBI should withdraw from the primary market in Government securities; the role of primary and satellite dealers should be increased; fiscal incentives should be provided for individuals investing in Government securities; the Government should set up its own office of public debt. viii) There is a strong case for liberalising the overall policy regime on gold; Banks and FIs fulfilling well defined criteria may be allowed to participate in gold markets in India and abroad and deal in gold products.

Dangers from capital account convertibility in India


At present very few countries permit absolute free market in foreign exchange. Among developing countries only a handful at present has, what may be called, full convertibility in both current and capital accounts. Even many industrial countries still do not allow free flows of capital account transactions. Some of the Latin American countries notably Uruguay, Argentina and Chile, which had prematurely liberalised capital account in the early eighties, have subsequently imposed a very tight control on capital mobility in the subsequent periods. It has been estimated that eventual capital flights out of these countries have been much more that initial capital inflows after capital account liberalisation. Some countries have however, notably, The U.K. and New Zealand, implemented capital account convertibility successfully. An examination of case study of successful and unsuccessful capital account liberalisation suggest that capital account liberalisation be best introduced as one of the last steps of economic reforms. Whenever it was introduced prematurely it had been disastrous. In general it has been observed that capital account liberalisation and full convertibility of exchange rate succeeds when it follows (and definitely not precedes) Fiscal reform, price stability, domestic financial reform, balance of payments stability and acceleration in growth of domestic output, particularly industrial output. In India very few of these objectives are fulfilled by now. Fiscal deficit of the Centre after falling from 8.3% of GDP in 1990-91 to 6.0% of GDP in 1991-92, has remained around that level since then. What is worst is that while real public investment has fallen sharply, unwarranted subsidies and bureaucratic expenditure have remained virtually at their pre-reform levels. In fact in some states, subsides, instead of falling have actually increased after the reform. Inflation continued at 10% per annum for many years after the reform in spite of many favourable conditions, including good monsoon and low oil price. It has now come down to around 6% after a very tight squeeze on money and credit since 1995-96. But the credit squeeze increased both nominal and real interest rates, and
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currently the interest rates in India are well above the international levels. The credit squeeze also hampered the growth of industry and overall growth. Balance of payments situation is far from satisfactory. The improvement in foreign exchange reserve is more due to special factors like NRI remittances and deposits and portfolio capital inflow. There is no notable improvement in either trade balance and balance of payments. There is a dangerous illusion about capital account liberalisation. It is generally assumed that it can encourage only inflow of capital, ignoring the possibility that once deregulation is introduced it may also lead to outflow of capital. Experiences suggest that initially inflow is more than outflow because foreigners take advantage of initial low prices of shares and properties. Besides domestic residents may also bring back illegal capital held abroad. But if the real sector of the economy does not improve, especially lags behind more dynamic economy elsewhere in the world, then capital later goes out. The outflow can be more than inflow because not only foreigners can take back capital but even domestic residents can take advantage of the deregulated environment and invest abroad. It would therefore be prudent to wait for the real improvement of the economy, particular in current account balance, industrial growth rate, fiscal deficit and financial reform, before entering into an adventurous path of capital account liberalisation and full convertibility of rupee. Thus India will have to gradually move towards capital account convertibility, step by step, one reform after the other and then finally introduce full convertibility of rupee as the last step of economic reforms when all of the above listed objectives are fulfilled and as Dr. Y.V.Reddy, Deputy Governor RBI, put it as," In India, it is recognised that the pace of liberalisation of the capital account would depend on both domestic factors, especially progress in the financial sector reform and the evolving international financial architecture."

FAQ
Is the Indian Rupee fully convertible to U.S.$? The Indian Rupee is: 1) For all intents and purposes, fully Convertible to the US$ on the Trade Account and Current Account. This means Indians can buy US$ for their Trade, Travel, Fees, Education, Interest, Dividend payments etc. S Dollars can also be converted into Rupees 2) Largely, NOT convertible to US$ on the Capital Account, especially when the flow of capital is from India to outside. However, degrees of convertibility have been brought in. For instance, - Indian companies can invest in/ set up subsidiaries abroad. Limits are placed on the amount of investment - Indian mutual funds, since last year, have been allowed to invest in overseas markets, though we doubt if activity has picked up on this front - Dividend and Interest payments to investors abroad are unhindered Flow of Capital from outside India (investments into India) are unencumbered from the "convertibility" point of view. Investors may need to garner various necessary permissions as required to invest in the equity market, debt market or to set up greenfield projects or buy over existing companies. These are, essentially, outside the ambit of "convertibility" And while you have not asked, we think it might be useful to clarify that the Indian Rupee is not legally pegged to the Dollar. It is market traded currency, though the trading itself is controlled by various measures.
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Foreign exchange glossary


Capital Inflow/Outflow The capital account transaction mainly includes long term short borrowings, loans, foreign direct investments etc. there are mainly three factors, which affect the capital flow. They are: economic conditions, nature of foreign trade and the exchange rate regime. In a flexible exchange rate regime the capital outflow depreciates the currency which affects inflation and real income. On the other hand, it improves the current account balance, thus generating growth and employment in the long run. In case of capital inflow the currency is appreciated and it adversely affects the current account balance .In a managed exchange rate regime the capital outflow tends to reduce the official reserves and money supply, putting a downward pressure on the price. Whereas capital inflow leads to reserve accumulation which causes an inflationary pressure. Excess capital outflow causes BOP crisis and excess of capital inflow through borrowings causes debt-management problems. Capital Flight It means the flow of capital through illegal methods. It takes place through various means such as: smuggling, under invoicing of export or over invoicing of import. It mainly occurs when there is a difference between the domestic and international rates of return on financial assets. Some other reasons which lead to capital flight are: Expectation of a depreciation in currency, high volatile inflation, political instability, social unrest, fluctuations in exchange rate and other macro economic problems. Capital Control Every country in the world exerts some capital control. Generally it is the developing country which exerts more control then the developed ones. Some of the causes for having a capital control are: 1] Preventing excess outflow of capital. 2] Utilising the domestic savings for domestic investments only. 3] Preventing foreign ownership of domestic means of production. 4] To stabilise the economy 5] to avoid evasion of income and wealth from taxes. But capital account liberalisation has certain advantages also such as the standard of financial sector will be at par with the international standards due to competence and there will be maximum utilisation of savings due to global allocation of resources. It is mostly seen that countries that exert more control have difficulty in implementing them, especially when there is current account liberalisation. Suppose there is an expectation of currency depreciation then the domestic investors would convert his domestic currency to foreign currency through illegal methods. In this case it is not possible even for the capital control to prevent it. To maximize the potential benefits and minimize the risks of an open capital account, countries must pursue an orderly approach to establishing and sustaining full convertibility. Fiscal policy: A prudent fiscal policy is an important element in achieving and maintaining capital convertibility. Large fiscal deficits that require financing through money creation may destabilize the exchange rate and discourage both foreign and domestic investment. Reliance on foreign loans with high interest rates creates debtmanagement problems, reduces creditworthiness, and weakens an economy's ability to manage external shocks. Monetary policy: A sound monetary policy that complements and is facilitated by fiscal discipline is another critical element, because excess liquidity expansion will spill over into the external sector.
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Exchange rate and reserves: A market-clearing exchange rate is essential to ensure external balance. Furthermore, to avoid wide exchange rate fluctuations, prudent macroeconomic policies need to be coupled with adequate international reserves. Financial sector: An efficient and sound financial sector is an essential ingredient of capital account convertibility, enabling banks to invest capital inflows prudently and weather shocks. Efficiency requires market-based monetary instruments and a liberal regulatory framework. The sector's soundness depends on, among other things, effective banking supervision and observance of prudential ratios. Market orientation: A well-functioning price mechanism is essential to avoid distortions that reduce the efficiency of resource allocation; affect capital flows adversely, and hinders growth. Thus, subsidies, tax concessions, and price controls need to be phased out. Nostro Accounts: A foreign currency account, which is maintained by a bank in India with branch of its correspondents at a foreign centre, is called Nostro Account i.e our account with you. Vostro Accounts: Rupee accounts of foreign banks would be designated by banks as Vostro Accounts i.e your accounts with us. Loro Accounts: A foreign bank or one of its branches is maintaining an account with some other bank in 3rd country, which is called Loro Account or their account with you. Buying Rate: Buying rate is the rate at which the bank acquires foreign currency and pays the customer in Indian Rupees. Selling Rate: Selling rate is the rate at which the bank parts with foreign currency and receives from the customer in Indian Rupees. Direct Rates: The direct rate is method of quoting the rates when the value of foreign currency is quoted in terms of varying units of Indian Rupees say Pound 1 = Rs. 49.00. With effect from August 2, 1993, RBI has directed banks to follow direct quotation system in inter-bank dealings in all currencies. With the new system coming into force, dealers expected market activity to pick up. Indirect Rates: The indirect rate is method of quoting rates of foreign exchanges when the value of Indian rupee is kept constant and price is quoted in terms of varying units of foreign currency say Rs. 100 = Pound 1.99. Spot rates: Spot rate is the rate applicable for transaction in which exchange of currencies take place immediately (48 hours). Forward rate: It is the rate applicable for contracts entered into now but the exchange of currencies will take place on a pre-determined future date. Forward rates are quoted at a discount or premium over spot rate. Discount is added and premium is deducted from the spot rate to arrive at the forward rate. Arbitrage: The purchase and sale of a foreign currency in different centres to take advantage of the difference in the rates of exchange. Swap: Simultaneous sale of forward and purchase of spot or vice-versa is known as swap. Canalisation :of exports and imports means exports and imports only through agencies designated by the Central Govt. DEEC :stands for Duty Exemption Entitlement Certificate issued under the Duty Exemption Scheme. Drawback: in relation to any goods manufactured in India and exported, means the rebate of duty chargeable on any imported material or excisable material used in the manufacture of such goods in India. The goods include imported spares, if supplied, with capital goods manufactured in India.

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Special import license or SIL,: means freely transferable special import licenses issued under the policy. It allows exporters to import goods, which are otherwise restricted, subject to payment of normal customs duty. Negative list: consists of goods, the import or export of which is prohibited, restricted through licensing or otherwise or canalised. Duty free licenses :include advance licenses, advance intermediate license and special import licenses, import f raw materials, intermediates, components, consumables, parts, accessories, mandatory spare and packing material may be permitted against a duty free license. Restricted goods: refer to any goods the import or export of which is restricted through licensing, may be exported or imported only in accordance with a license issued in this behalf. Private bonded warehouses:are the warehouses set up in domestic tariff are. Any person may import goods which are freely importable or which may be imported against special import licenses and warehouse them in such private bonded warehouses. Such goods are cleared for home consumption as per the provisions of the policy and against special import license, wherever needed. The customs duty is paid at the time of clearance of such goods. Export Declaration forms: All exports are to be declared by the exporters in the appropriate form and these forms are submitted alongwith other shipping documents. For different type of transactions following types of forms are submitted: Exports made other than by post - GR form Exports by post parcel other than on value payable or cash on delivery basis - PP form Export by post on value payable or cash on delivery basis- VP/COD While GR and PP forms are in set of two copies, the VP/COD forms is in single copy. First copy of GR form is sent through Customs direct to RBI and second copy is returned by Customs to the exporters which should be submitted to the bank through which the export bill is collected, within 21 days of shipment. The bank which takes the bill on collection or purchase or negotiation includes the details of the ill in the fortnightly statement ENC to RBI. The duplicate GR form is sent to RBI by the bank on full receipt of export proceeds. Project exports: The export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively called project export. These are to get clearance of Working Group constituted of RBI, EXIM Bank, ECGC and the financing bank and in case of high value of contract, representative of Finance and Commerce Ministries of Govt. of India, also. Free Trade Zones: FTZ or Export Processing Zones are those industrial estates cordoned off from domestic tariff areas, where trade barriers applicable to the rest of the economy do not apply and where export-oriented units can operate free of import duties or quantitative restrictions and are given other advantages including tax exemption. Fixed Exchange rates: These refer to the system under the gold standard where the rate of exchange tends to stablise around the mint par value. Any large variation of the rate of exchange from the mint par value would entail flow of gold into or from the country. This would have the effect of bringing the exchange rate back to the mint par value. Floating/flexible exchange rates: Free or floating rates refer to the system where the exchange rate are determined by the conditions of demand and supply of foreign exchange in the market. The rates are free to fluctuate according to the changes in demand and supply forces with no restriction on buying and selling of foreign currencies in the exchange market. Flexible rate of exchange refers to the system where exchange rate is fixed but is subject to frequent adjustments depending upon the market conditions. Thus it is not a free or floating rate with cent percent flexibility
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but is a system providing for adjustments as and when required. Pegging: Pegging a currency means having a parity between the domestic currency and the currency to which it is pegged. Then any change in the external value of the link currency would have sympathetic change in the value of domestic currency. Intervention currency: It means a currency in terms of which the value of the domestic currency of a country is expressed in relation to all other currencies. Basket of currencies: The intervention currency is only an index of the value of the domestic currency. The value of the domestic currency may be determined by another unit like SDR or a basket of currencies. Indian rupee is valued on the basis of basket of currencies. The value of the constituents of the basket are first determined in terms of US dollars which is the intervention currency. Convertibility :The rupee has been made fully convertible on the current account of the balance of payment wef 1.3.93 by which India has attained Clause VIII status of the IMF. Convertibility indicates non-intervention of the Govt. in the foreign exchange transactions emanating in the current account. When imports are higher than exports, the country has general deficit in the current account which is made good by the inflow of economic assistance in the capital account. The rate of converting the foreign currencies into Indian rupees, is fixed by the market forces of demand and supply. This system is beneficial to exporters and for inward remittances of the NRIs. The rupee is not yet fully convertible on the capital account. This would mean full repatriation of all investments, both principal and interest, at the will of the investors, in the capital account of Indias balance of payment.The situation warrants a healthy BOP position, comfortable foreign exchange reserves and a stable price level. In the long run, the convertibility affects a country positively, full globalisation, incentive to route remittances through official channels, increase in foreign directed investments, stabilisation of interest rate at international levels, free flow of foreign capital and India as a business enterprise would need to be more efficient and profitable. In the short run, however, if the economic fundamentals are not set right in a phased manner, the going may be traumatic, flight of capital to more secure economies, increase in fiscal deficits, high inflation, depreciation of home currency, slipping into a debt trap etc. Foreign Direct Investment: Long term financial investments brought into the country from abroad through subscribing to the stocks and debentures of companies in India. This helps to relieve pressure on the Govt. budget to finance the vital development projects in India. Foreign Institutional Investors: FII are the investors who make investment in Indian Capital market such as mutual funds, pension funds, investment trusts, asset management companies etc. Since Sept 92, the FIIs were allowed to invest in India capital market under a concessional tax regulation. FIIs need to be registered with SEBI and approval from RBI is also required. External commercial borrowing: represents cross boarder financing wherein overseas loan syndication market provides loans to India corporates. ECB are defined to include commercial bank loans, buyer credit, suppliers credit, scrutinised instruments such as floating rate notes and fixed rate bonds etc. credit from multilateral financial institutions such as International Finance Corporation, ADB etc. The Deptt. of Economic Affairs in the Ministry of Finance monitors the applications for ECBs. These are permitted as a source of finance for expansion for existing as well as for fresh investment. EPCG SCHEME: The export promotion capital goods scheme permits the exporters to import machinery duty free or at a concessional duty if the importer agrees to achieve a fixed export target within a specified period of time. Presently under the scheme import of capital goods carry 10% customs duty though duty free imports are also permitted, subject to a minimum import volume. Exemptions are available for
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certain sectors like agriculture and garments even if the minimum floor limit is not met. COUNTER TRADE: It is a general term used to describe a variety of commercial transactions for mutual international trade between companies or organisations in two or more countries. The common characteristic of counter-trade arrangement is that an export sale to a particular market is made conditional upon undertaking to accept import from the market. The main growth in counter-trade has been among the less developed and developing countries of Asia, Africa and South America. LIBOR: It is the London Inter-Bank offered rate and represents the rate at which the banks in London will lend a currency to other banks for a given period of time. SIBOR: It is Singapore Inter-Bank Offered rate similar to Libor at which principal banks in Singapore offer to lend Asian Dollars and other currencies to other banks. It forms the basis for interest rate on Asian dollar syndicated loans. Prime Rate: It is the rate of interest charged by the first class banks in United State on advances to their first class borrowers. GLOBALISATION: Globalisation means adoption of a global outlook for the business and business strategy aimed at enhancing global competitiveness. A truly global corporation views the entire world as a single market and does not differentiate between domestic and foreign markets. Planning of manufacturing facilities, logistical systems, financial flows, marketing policies and quality controls are done considering a borderless world. FOREX RESERVES: These are the reserves with the country which are used to finance imports/make payments to countries abroad in settlement of transactions. The movement in forex reserves is the net result of all external transactions. In India the forex reserves include special drawing rights (SDRs), gold and foreign currency assets. SUPPLIER CREDITs: Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital goods. The terms can be down payment with the balance payable in instalments. The interest on such deferred payments will have to be paid on the rates determined at the time of entering into such arrangement. The deferred payments are supported by the promissory notes or bills of exchange often carrying the guarantee of importers bank. To finance the credit given to the importer under such arrangement, the exporter raises a loan from his banker under the export credit schemes in force. In general, the export credit insurance will be an inherent part of the mechanism. BUYER CREDITs:In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporters country under the export credit scheme in force on the terms conforming to the OECD consensus. The loan is drawn to pay the exporter in full and thus for the exporter, the transaction is a cash sale. The buyers credit are also generally subject to export credit insurance requirements. A variation of the buyer credit arrangement is for a bank in the exporters country to establish a line of credit in favour of a bank or financial institutions in the importing country. The later makes available loans under the line of credit to its importer clients for the purchase of capital goods from the credit giving country. In India EXIM Bank makes available supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of capital goods from India. EURO-CURRENCY MARKETs This is also known as Euro-dollar market and is international capital market which specialises in borrowing and lending of currencies outside the country of issue. Thus the deposits in dollars with a bank in London are Euro-dollars. Similarly French Francs held by banks in London are Euro-Franc and Pound Sterling held by banks in Germany are Euro-Sterling. These are all Eurocurrencies. Pre-dominantly the dealing in the market are in dollars. EURO CREDITs: Euro credit are medium and long term loans provided by
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international group of Banks in currencies which need not be those of the lenders or borrowers. Euro-credit belongs to wholesale sector of the international capital market and normally involves large amounts. Each Euro-credit runs into a huge amount of a few hundred million dollars. It is not safe or possible for a single bank to undertake the entire amount. Thus few banks form a syndicate (similar to consortium lending) to provide funds to the borrowers. EURO BONDs: A major source of borrowing at Euro markets is through the issue of international bonds known as Euro Bonds. These are sold for international borrowers( multinational corporations, international agencies and Govt.) in several markets simultaneously by international group of banks. These are of following categories: a: Straight or fixed rate bonds, which are fixed interest bearing securities payable normally at yearly intervals. b: Convertible bonds are also fixed interest bearing securities and investors have option to convert them into equity share. c: Currency option bonds are similar to straight bonds with the difference that these are issued in one currency with the option to take payment of interest and principal in a second currency. Normally option bonds are issued in Sterling and provide option of payment in Dollar or Deutsche Mark. d: Floating rate notes (FRNs) are those on which interest is paid on varying rates according to market conditions unlike to fixed rate payable on a straight bond. EURO CURRENCY BONDs: While Euro bonds represent the funds amassed by the banks on behalf of international borrowers, the Euro currency deposits represent the funds accepted by the banks themselves. It consists of all deposits of currencies placed with banks outside their home currency. The deposits are accepted in Euro currencies or in currency cocktails (representing a basket of currencies) like SDR and ECU. OFFSHORE BANKING: It refers to the international banking business involving nonresident foreign currency denoted assets and liabilities. An off-shore banking centre is a place where deliberate attempt is made to attract international banking by offering many concessions in the form of taxes and levies being imposed at lower rates or not being charged. A more important relaxation is the exemption of the off-shore banks from the restrictions on operations. Off-shore banking is carried out in about 20 centres throughout the world. DEEMED EXPORTs: As against the physical exports where the goods actually move out of the country, certain types of trading activity and supplies made within India are also considered exports for the purpose of providing incentives and other facilities as are available in case of actual exports. These are called deemed exports. In these, the FOR value instead of FOB value, is taken into account and date of supply is taken as date of export. These are also covered by banks under Whole Turnover Packing Credit Guarantee and Whole Turnover Post-shipment Guarantee scheme of ECGC. The following are some examples of transactions falling under the category of deemed exports: a: Sales to foreign tourists of items in India. b: Sales to foreigners against surrender of free foreign exchange at trade fairs and exhibitions arranged for special visiting delegations. c: Supplies made to IBRD/IDA aided projects in India under the procedure of International Competitive Bidding. d: Supplies to foreign shipping companies. e: Supplies made in India to Free Trade Zones or 100% exportoriented units. f: Other supplies made in India against International Competitive Biddings where the payment is received in free foreign exchange. INVISIBLE IMPORTS & EXPORTS: Invisible is a generic term that covers transactions such as remittances, payment of interest, dividend, charges for transport by shipping and insurance payments. The nomenclature is justified on the ostensible ground that it does not involve physical commodities, though it is often derived from their movements. Invisibles have played an important role in sustaining our balance of payments. The net surplus in the invisible account bridges a substantial part of the
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trade deficit. (Most of the invisibles are not subject to reporting requirements) One of the important segments of invisibles is the private transfers from abroad. These represented nearly 50% of the total inflow of $ 23 billions in 1996-97 compared with 30% in 1989-90, thus growing 6 times, whereas the total invisibles have grown only three fold. Tourism is another area where the invisibles have been substantial, though it is lower than other countries.

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Chapter-9
INCOTERMS Explained
Incoterms or international commerce terms is a series of international sales terms that is widely used throughout the world, divides transaction costs and responsibilities between buy and seller, reflects state of the art transportation practices and closely corresponds to the U.N. Convention on Contracts for the International Sale 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. What are INCOTERMS? Incoterms are a set of simple three letter codes which represent the different ways international shipments may be organised. They allow sellers and buyers from different cultures and legal systems to decide at what point the ownership and paying for freight,insurance and customs costs transfer from one to the other. Who decides what INCOTERMS mean? The International Chamber of Commerce has set up strict definitions for each incoterm. Choosing a suitable incoterm allows the buyer and seller to negotiate a price best suited to their needs and to be confident that there will be no confusion over who pays the costs. To ensure that the latest version is being used shipping contracts should refer to "INCOTERMS 2000". When should INCOTERMS be used? It is not compulsory to use incoterms. However when things go wrong and disputes arise it is much easier to sort out who is responsible for what if incoterms have been written into the shipping contract. To be safe, incoterms should be decided upon in the negotiationphase of any international purchasing contract. How do INCOTERMS work? Each INCOTERM is a three letter acronym related to where the seller's responsibility ends. They should be written into the purchasing or shipping contracts. Some incoterms require the changeover point to be named. As well as buyer and sellers there are "carriers". They are the people who have a contract to transport the goods by land, sea, air or a combination of modes. A seller will be given a bill of lading, way bill or carrier's receipt,that document can be used to prove that the goods have been taken on by the carrier.
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INCOTERMS 2000
Incoterms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce (ICC), they are at the heart of world trade. In order to ensure the new Incoterms 2000 terms are being applied, buyers and sellers should specify Incoterms 2000 on all contracts, thus clearly identifying the source of reference for the definition. Traders using these rules should also clearly specify any and all agreed to variations of the terms. For a brief summary of each of the Incoterms please click on the available links below. Also available is a summary chart. Every effort has been made to ensure the accuracy of the definitions and chart; however, Beacon accepts no responsibility for errors or omissions in the chart or any of the summary descriptions. EXW EX WORKS (named place) "Ex works" means that the seller delivers when he places the goods at the disposal of the buyer at the seller's premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. This term thus represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller's premises. However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all the costs of such loading, this should be made clear by adding explicit wording to this effect in the contract of sale'. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In such circumstances, the FCA term should be used, provided seller agrees that he will load at his cost and risk. FCA FREE CARRIER (... named place) "Free Carrier" means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller's premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading. This term may be used irrespective of the mode of transport, including multimodal transport. "Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes. If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person. FAS FREE ALONGSIDE SHIP (... named port of shipment) "Free Alongside Ship" means that the seller delivers when the goods are placed alongside the vessel at, the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment The FAS term requires the seller to clear the goods for export. THIS IS A REVERSAL FROM PREVIOUS INCOTERMS VERSIONS WHICH REQUIRED THE BUYER TO ARRANGE FOR EXPORT CLEARANCE.
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However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale'. This term can be used only for sea or inland waterway transport. FOB FREE ON BOARD (... named port of shipment) "Free on Board" means that the seller delivers when the goods pass the ship's rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used. CPT CARRIAGE PAID TO (... named place of destination) "Carriage paid to..." means that the 'seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any other costs occurring after the goods have been so delivered. "Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport, by rail, road, air, sea, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. The CPT term requires the seller to clear the goods for export, This term may be used irrespective of the mode of transport including multimodal transport. CIF COST INSURANCE AND FREIGHT (... named port of destination) "Cost, Insurance and Freight" means that the seller delivers when the goods pass the ship's rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination BUT the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. However, in CIF the seller also has to procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage. Consequently, the seller contracts for insurance and pays the insurance premium. The buyer should note that under the CIF term the seller is required to obtain insurance only on minimum cover'. Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangements. The CIF term requires the seller to clear the goods for export. This term can be used only for sea and inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the CIP term should be used. DES DELIVERED EX SHIP (... named port of destination) "Delivered Ex Ship" means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared 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 named port of destination before discharging. If the parties wish the
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seller to bear the costs and risks of discharging the goods, then the DEQ term should be used. This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on a vessel in the port of destination. DEQ DELIVERED EX QUAY (... named port of des destination) "Delivered Ex Quay" means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay (wharf) at the named port destination. The seller has to bear costs and risks involved in bringing the goods to the named port of destination and discharging the goods on the quay (wharf). The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import. THIS IS A REVERSAL FROM PREVIOUS INCOTERMS VERSIONS, WHICH REQUIRED THE SELLER TO ARRANGE FOR IMPORT CLEARANCE. If the parties wish to include in the seller's obligations all or part of the costs payable upon import of the goods, this should be made clear by adding explicit wording to th is effect in the contract of sale'. This term can be used only when when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging from a vessel onto the quay (wharf) in the port of destination. However if the parties wish to include in the seller's obligations the risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station, etc.) in or outside the port, the DDU or DDP terms should be used. DDU DELIVERED DUTY UNPAID (... named place of destination) "Delivered duty unpaid" means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the costs and risks involved in bringing the goods thereto, other than, where applicable, any "duty' (which term includes the responsibility for and the risks of the carrying out of customs formalities, and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination. Such "duty" has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time. However, if the parties wish the seller to carry out customs formalities and bear the costs and risks resulting therefrom as well as some of costs payable upon import of the goods, this should be made clear by adding explicit wording to this effect in the contract of sale,. This term may be used irrespective of the mode of transport but when delivery is to take place in port of destination on board the vessel or on the quay (wharf), the DES or DEQ terms should be used. DDP DELIVERED, DUTY PAID (... named place of destination) "Delivered duty paid" means that the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear all the costs and risks involved in bringing the goods thereto including, where applicable', any "duty" (which term includes the responsibility for and the risk of the carrying out of customs formalities and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination.

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Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation. This term should not be used if the seller is unable directly or indirectly to obtain the import licence. However, if the parties wish to exclude from the seller's obligations some of the costs payable upon import of the goods (such as value added tax: VAT), this should be made clear by adding explicit wording to this effectin the contract of sale'. If the parties wish the buyer to bear all risks and costs of the import, the DDU term should be used. This term may be used irrespective of the mode of transport but when delivery is to take place in the port of destination on board the vessel or on the quay (wharf), the DES or DEQ terms should be used.

Franco
A term in an export sales contract to show that goods will be delivered free of transport costs to a place specified by the buyer.

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Appendix
Winter 2002 First semester Master of Business Administration (M. B. A.) Examination Paper VII INTERNATIONAL Business Time: Three Hours] 80 N. B. :- 1) Attempt any five question. 2) All question carry equal marks 1) Write notes on (any two) a) Heckscher-Ohlin theory of international Trade. b) Dispute settlement mechanism of WTO c) Forward exchange cover. d) Recent Exim policy of India. 2) Discuss market entry strategies adopted by Indian exporters. Give examples. 3) Some argue that WTO is the third Piller of global business, but many argue that WTO is a wrong trade organization. Critically evaluate. 4) Discuss comparative cost theory and opportunity cost theory of international trade. 5) Explain the role played by various institutions in exports promotion. 6) Discuss the important of organizational preparation and review before globalizing the business operations. State the critical issues involved in it. 7) Write a exhaustive note on Trade related aspects of intellectual property right and Trade related aspects of investment measures. 8) State the function and services provided by the Alpha Commercial banks in export financing. 9) Describe the various ways by which countries protect their domestic industries from imported products. 10) Write a detailed note on exchange control aspects of exports. [Full Marks:

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Winter 2003 First semester Master of Business Administration ( MBA) Examination Paper VII INTERNATIONAL Business Time: Three Hours] Marks: 80 N. B. :- 1) Attempt any five question. 2) All question carry equal marks 1) Market entry stratagy depends on several parameters and differs from firm to firm. Discuss. 2) Elaborate on role played by ITPO in export promotion. 3) WTO is backbone of global business Discuss. 4) Discuss the features of recent exim policy of India. 5) TRIPS and TRIMS are very important in globalize business scenario Discuss. 6) Elaborate on export financing activities undertaken by RBI. 7) Write a detailed note on setting up of an export company. 8) Explain the concept of Dumping. Discuss. 9) Exchange rate fluctuations are affecting the profitability Indian IT companies. Discuss. 10) Write Notes on ( Any two) a) Organization of WTO b) Polycentric approach of global trade. c) Factoring. d) FRANCO Pricing Agreement. [Full

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Summer 2005

First semester Master of Business Administration ( M B A) Examination Paper VII INTERNATIONAL Business [ Full

Time : Three Hours ] Marks : 80 N. B. :- 1) Attempt any five question. 2) All question carry equal marks 1) Explain in detailed various foreign market entry strategies. 2) Write a detailed note on any two of the following :i) EPCG Scheme ii) Vishesh Krishi Upaj Yojana. iii) SEZs and EOUs

3) Explain the importance of Urguway Round in view of emergence of WTO and extinction of GATT. 4) WTO stands for wrong Trade Organization. Do you agree? Why? 5) Write in detail the emergence of new foreign trade policy ( 2004-2009) in the perspective of our countrys volume. Composition and direction of trade. 6) What is the role played by ICC in evolving global agreements relating to transportation of cargo? Explain in detail the various types agreement relating to transportation of cargo. 7) Explain in brief the role played by the following institutions in promoting exports i) ITPO ii) ECGC 8) Explain in detail the post shipment finance facilities available to the exporter. 9) Explain the various types of exchange rates prevailing in national and international markets and describe the transactions in which they are used. 10) Write notes on ( any two) i) Dispute settlement Body. ii) TRIPS iii) Packing credit iv) - Commercial Banks.

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Winter 2005 First semester Master of Business Administration ( M. B. A.) Examination Paper VII INTERNATIONAL Business Time: Three Hours] Marks: 80 N. B. :- 1) Attempt any five question. 2) All question carry equal marks 1) Draw and explain the structure of WTO. How does WTO function? 2) What do you understand by status exporters? What benefits these status exporters enjoy under the EXIM policy 2004-2009? Explain in detail Target plus scheme. 3) Write detail note on the following :a) EPCG Scheme b) Towns of Excellence. 4) What are the objectives of Dispute settlement body and Trade policy review body of WTO? How do these bodies function? 5) Write an explanatory note on IMF on the following aspects :i) Structure ii) Resources iii) Objectives iv) SDR 6) Explain the role played by International chambers of commerce in facilitating global trade. 7) Explain the following in context with the packing credit facility available to the exporters in India. a) Types of goods to be exported b) Types of exporters c) Sources of repayment of loan and interest rates. d) PCFC. 8) Explain the difference between conversion of rupee and convertibility of rupee. Explain the various factor on which rupee Foreign currency rates depend. 9) Explain the Export Import Bank of Indias Following schemes :a) Lending to the exporters b) Lending of foreign governments c) Loan to commercial banks. 10) Write notes on any two of the following :a) Foreign exchange reserves and its effect on our economy b) I.T.P.O. c) Focus LAC, CIS and North African countries schemes. d) Duty Draw back scheme.

[Full

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Summer 2006 First semester Master of Business Administration (M. B. A.) Examination Paper VII INTERNATIONAL Business Time: Three Hours] Marks : 80 N. B. :- 1) Attempt any five question. 2) All question carry equal marks 1) What are the objectives of recent EXIM policy 2004-2009? What benefit it provides to the agriculture sector? Explain in detail Vishesh Krishi Upaj Yojna. 2) Why was GATT replaced with WTO? Explain the provision under WTO regarding membership, status and with drawl. 3) Explain the effect on economies of developed, developing and under developed countries in the light of WTO compatible changes in TRIPS and TRIMS. 4) Write detail note on the following: a) Served from India. b) SEZ 5) Explain various incoterms used in international trade in context with the cost and risk to be assumed by importer and exporter. 6) What you understand by Packing Credit? Give the details about packing credit on the following points :i) Period of loan and interest rate ii) Quantum of advance iii) Types of accounts 7) How does ECGC help exporters in promoting exports? Explain in detail. 8) Explain the difference between cash or value today, Spot and forward transactions. How will you interpreter the following inter-bank quotation Spot USD 1 = Rs. 44.4000/4200 Spot/1 m 2000/2100 Spot/2 m 3500/3600 9) Write explanatory note on IBRD taking into account following points :a) Organization b) Resources c) Functions and d) Lending activities. 10) Write notes on any two of the following a) Antidumping and rules origin b) Post shipment finance facilities c) Advance license scheme d) Software export from India.

[Full

Summer 05

First Semester Master of Business Administration (MBA) Examination Study Material on International Business by - Nagpur
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INTERNATIONAL BUSINESS Paper VII

Time: Three Hours} Marks: 80 1. 2. Explain in details various foreign market entry strategies. Write a detailed note on any two of the following: (i) EPCG Scheme, (ii) Vishesh Krishi Upaj Yojana, (iii) SEZs and EOUs

[Full

3. 4. 5. 6.

Explain the importance of Urguway Round in view of emergence of WTO and extinction of GATT. WTO stands for Wrong Trade Organisation. Do you agree? Why? Write in detail the emergence of new foreign trade policy (2004-2009) in the perspective of our Countrys Volume, Composition and Direction of Trade. What is the role-played by ICC in evolving global agreements relating to transportation of cargo? Explain in detail the various types of global agreements relating to transportation of cargo. Explain in brief the role played by the following institutions in promoting exports :(i) (ii) ITPO ECGC

7.

8. 9. 10. (i) (ii) (iii) (iv)

Explain in details the post shipment finance facilities available to the exporter. Explain the various types of exchange rates prevailing in national and international markets and describe the transactions in which they are used. Write notes on (any two): Dispute Settlement Body, TRIPS Packing Credit - Commercial banks.

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First Semester Master of Business Administration (MBA) Examination INTERNATIONAL BUSINESS Paper VII Time: Three Hours] 80 [Full Marks:

1. What do you understand by Globalization? Explain in detail the various drivers of globalize talon. 2. Write a detailed note on any two of the following I] Duty Drawback scheme and DEPB rates II] Served from India Scheme. III] Target plus scheme. 3. Singapore Issues and Subsidies have become a bone of contention between the developed and developing countries. The fate of WTO hangs between these two issues DO you agree? Why? 4. Describe the structure of WTO .How does Dispute Settlement Body Function? 5. What are the objectives of latest Foreign Trade policy [2004---2009]? How does it help exporters of agriculture related products? 6. Discuss the implications of various incomers with reference to risks and costs to the exporters and importer. 7. Explain the role played by the following institute tins in promoting expomoting exports I] Exim Bank Ii] ICC 8. Explain in detail the preshipment finance facillties available to the exporter . 9. Explain in deference between Convertibility of Rupee and Conversion of Rupee in other coherencies. Explain how the exchangn rates fxed between two currencies 10. Write notes on [any two] I] Anti-dumping II] TRIMs III] Various stages of globalization IV] Forward Exchange cover

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