Case Study: Impact of Rupee Appreciation

Introduction
From 2003-07 Indian market is booming at leap & bound manner, today after China India is 2 nd
fastest growing economy of the world with the growth rate of 9.4% in the first quarter. Its a
trillion dollar country surpassed Russia & become worlds 10th largest economy, today (till 30th
march, 2007) Indian forex reserve is around $200 bn.
From July 2006- to Sep 2007 the value of rupee is highly appreciated by 13.9% from Rs.46 to Rs
39.58. There is a big dilemma in everyone that does it will adversely effect our economic growth
or its an indicator of Indian growing economy.
There are so many research are going on this issue and there are two school of thoughts are there
one: some believes that its a symbol of booming economy & its beneficial for our economic
growth rate while another school of thought: its a impact of recession in US economy and will
adversely effect our countrys economy.

Causes
Huge Foreign investment in our country: Nokia, Elcoteq, LG, Motorola, Samsung are going to
set up mobile handset plants. Dell Computers, Flextronics are setting up plants for PCs & laptops
to match growing demand in the country & nearby countries. Samsung, Taiwan based Foxconn
are setting up their plants in India and many more investments are in pipeline.
Initially rupee strengthened (3.52% march) on the back of the stronger Asian markets.
FII inflow: The rupee's gains have been mostly on account of continued capital inflows into the
country, while the central banks sterilization programmed has helped fuel inflation. The
countrys foreign exchange reserve is surged by $11.871 billion to touch $247.762 billion for the
week ended September 28, 2007. The rise in reserves is easily an all-time record. (Over $3.9bn
net inflows in the first 10 months of this Fiscal). In India there is a Current Account surplus for
the first time in years due to Increased Merchandise exports and Invisible, resulted in supplies of
Foreign Currency going up sharply and thereby creating demand for Rupee in FOREX Market.

(Refer: Report on Foreign Exchange Reserves, www.rbi.org.in).

ECB borrowings: The External Commercial Borrowings (ECB) is foreign currency borrowings
by Indian companies outside India. ECB provides medium to long term funds, bridging the gap
between domestic savings and capital expenditure. ECB are permitted as an additional source of
finance to Indian companies for financing import of capital goods, new projects, and
modernization etc especially of SMEs.
Since ECB carries the benefits of low cost of capital (LIBOR rates 1.3% to 6.3% as compared to
10-14% of Indian Public Sector banks), international pricing flexible instruments; has flooded
foreign cash inflows in the country especially in the last months the ECB is 16.1% of the
FOREX.
Note: More attractive ECB even at unchanged interest rate differential. Even if the rupee can fall
over overvalued, then the balance would tie up the other way.
If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has to
discourage ECB. Given the higher and rising interest rates in India, it is difficult to do so, unless
the RBI puts more restrictions on ECB. But the RBI is unlikely to do this.
Slowdown of US economy: The dollar has lost about 5% against the pound and the euro this
year. From Indias perspective, a decline in the dollar against the major currencies invariably
means appreciation for the rupee.
2

US Fed Reserve rate was cut by 50 basis points there by making the interest rate more attractive
in the emerging markets especially Indian markets, which lured inflows there by appreciating the
rupee.

Impact of rupee appreciation

From Exporters Point of View:
Most developing countries have economies based largely on exports that are competitive in
global markets because of low prices. When those countries' currency gains value, they are no
longer able to offer exports to the global market at the same low prices that they planned to. This
may cause importers to look elsewhere to country's with lower valued currency and thus prices
or to order less than they would have otherwise.
Around 30% of share of exports in economy which will surely be affected at one hand.
According to commerce ministry report (Oct, 2006) around 86% of export & 89% import
deals invoiced in USD. So, in this case exports houses will suffer badly.
Today IT industry is growing by 31%, but major operations around 80-85% are
outsourced from US based companies, so this event hampers its growth by few points but
if it will continue for long time then companies like INFOSYS will be in trap because its
90& operations are for US based companies.
Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50% of revenues are in
dollar terms.
Silk industry had to bear the maximum burnt as it was 71% sensitive to the hardening of
the currency, cotton and jute were less sensitive to the rising rupee at 23% and 18%
respectively and IT sector companies were up to 90% sensitive to rupee appreciation.
China is the main competitor of Indian textiles in the global market.
Manufacturing industry: It is also facing the same problem because major chunk of the
customers are US Companies and due to that this industry is also suffering but on other
side it have profit also because 70% or above raw material is imported in USD which
gives relief to the company but in this around 11,000 workers lost their job due to this
event.

Refer: Strong Rupee Hits Textile Sector, Business Standard, 1st Aug 2007)
From importers point of view:
Oil companies are highly benefitted more than 80% crude oil import gulf and other

counties. According to IOC manager: for every Rs1 appreciation crude oil price dip by
2%
Recent acquisitions made by Indian companies:
UB Group - Whyte & Mackay.
TATA steel Corus are Benefitted.
International borrowing (from US Banks) by Indian Companies
Beneficial for country external debts because 10% increase in Rs reduce the debt amount
by 10%.
Consumer electronic goods, imported apparels etc. will be available at cheaper price.
The sectors like gems and jewellery were not much affected as Indias competitor
Thailand was also hurt by rising currency.

According to an industry analyst - Every 10 paisa appreciation in rupee negates one dollar
upward movement in international prices
Other Impacts:
Small exporters are hit badly by rupee appreciation as they have limited access to
hedging products.
Companies like Hyundai plans to reduce the dollar-denominated exports of its cars to
counter the appreciation of the rupee against dollar.
Rupee appreciation has helped control inflation. The appreciation of the rupee has
dampening effect on inflation.

Role of Government
Government initiative to protect exporters:
Tax incentives, interest reductions, reduction in service taxes. The interest on exports
reduced to below five per cent and allowing conversion of shipping bills.

Export duty reduction & waive custom duty

Forward contracts with customers to protect exporters interest.
5

 Purchase of dollars from the markets by RBI to stem the rise of rupee appreciation by
curbing the liquidity; however is a short term remedy.
Other Measures:
Establishment of various councils such as Engineering Export Promotion Council
(EEPC) in which DEPB (Duty Entitlement Passbook) Scheme has been launched in
which duty drawback rates had been increased by 1.5% for engineering items.
Exchange stabilization scheme has been launched which can compensate a portion of the
loss suffered by exporters on account of rupee appreciation.

Flaws in the Government / RBI measures to control rupee acceleration

1. Weaker Currency is not a cure at all

One School of Thoughts: A Policy maker wants a weaker rupee so that Indias competitiveness
will rise. They do not think that it is normal for the rupee to appreciate as a result of greater
foreign exchange inflows into the economy. This absurdity will continue until policy-makers turn
their attention to raising productivity of governance and the competitiveness of the aggregate
supply chain. It is a pity that many of Indias exporters have chosen to rely on a weak rupee to
sustain their competitiveness. They are now deeply disturbed. Their future rupee profitability is
in jeopardy. They are horrified that the Reserve Bank of India (RBI) has allowed the rupee to
strengthen. They are nervous that the RBI may have given up its policy of weakening through
intervention in the foreign exchange markets.
What they want is a weaker rupee so that Indias export competitiveness will rise. They want
more exports to lead to greater foreign exchange inflows. They want these inflows to rise so that
India can fund its imports. But the rupee will inevitably strengthen if inflows of foreign exchange
exceed outflows. They will then argue that the strong rupee is a threat to Indias competitiveness.
There will be more sops.
6

Other School of thoughts (Modern Approach) or Productivity & Competitiveness: The

reason for the above schools of thoughts is simple ad straight forward, that the sops turns
unprofitable exports profitable. But latest approach states that Competitiveness stems from
productivity. National competitiveness and economic welfare are determined primarily by
productivity in both the traded and non-traded sectors. It is important to emphasize that
governance is a non-traded sector.
Productivity is the amount of output produced relative to the amount of resources (human effort,
and physical and technological assets) that go into the production. It is quantitative. It does not
depend on the monetary value of the output relative to the inputs. Productivity and
competitiveness improve when the quantity of output increases relative to the quantity of input.
By contrast, profitability is the value of output relative to the cost of inputs used. Profitability
improves when the cost of inputs used is reduced relative to the value of output. Sops are aimed
at reducing the cost of inputs without reducing the quantity of inputs. It is no surprise that
superficial commentators love sops.
Profitability also improves when the value of output is raised. The weak rupee is aimed at raising
the rupee value of output without raising the quantity. It is no surprise once again that the merits
of the weak rupee are presented most assertively by those who have no clue about making the
Indian economy more productive and more competitive.
2. Change In Monetary Policy (CRR, Repo, Reverse Repo rate):
Recently govt. has hiked the CRR to 7% , repo rate to 7.75% to curb the inflation rate(5.5%) ,
which increased the floating interest rate and its adversely affects many of the businesses like
real estate and exporters too. According to manufacturing Industry analyst, SMEs share in
exports is 30-35% , a huge part and these SMEs work on credit basis they took loan from banks
sometime at fixed rate & floating rate too so this RBI announcement is also going to affect them.
Its a cyclic process each change affects the whole economy of country.
Rupee Vs. Dollar, Yen, Euro & GBP
Currencies

Year May 2007

July 2007

Oct 2007

Rs. in terms of
USD
Rs. in term of
EURO
Rs. in term of
Yen
Rs. in term of
GBP

46.2

41.05

39.58

% Change w.e.f.
may 2006
14.32%

59.05

55.35

56.14

4.9%

41.1

33.2

34.06

17.12%

86.6

82.2

80.72

6.78%

Conclusion
7

According to the given above we can conclude that rupee is appreciating with all currencies
given above which reflects that Indian economy is doing very well, though it carries with it
certain demerits (mentioned above). But these demerits can be worked upon and transformed
into a blessing for the economy. But following are the things that have to be taken into
consideration too:
By boosting productivity and improving business conditions, the export growth can remain
buoyant despite stronger rupee. Rapid productivity growth plays an important role in explaining
why a countrys export performance can remain robust even when its currency strengthens.
All currencies would ultimately have to move towards a flexible exchange rate regime, and by
moving upwards first rather than downwards, economies would be in a better position to deal
with crises. (Source: www. Sifybusiness.com is rupee appreciation healthy)
Normally foreign currency exposures are covered for a maximum of a year, but now exporters
are contracting forward contracts for 3-5 years to curb the impact of an appreciating rupee on
their profits. Hedging of commodity exposures also rose sharply with volatility in global
markets. (Source: Business standard: 26th Sep 2007 Exporters go long to cover Re Effect)
In any case, weaker rupee would provide no guarantee that the exports would grow faster.
(Source: Stronger rupee: End of Indias export boom; Business Standard: date 6 Aug 2007,
page 13).
th

Bibliography:
Newspaper Referred:
Business Standard
Business Line (e news paper)
Financial Express
Websites Referred:

www.ficci.org
www.businessline.com
www.rbi.org.in
www.ndtvprofit.com
www.hindu.com
www.indianexpress.com

Magazines Referred:
Business World
Business Line
Case Study: External Commercial Borrowing of Public Sector Companies
8

External Commercial Borrowing

External Commercial Borrowing (ECB) refers to commercial loans [in the form of bank
loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and
fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3
years.
In India, External Commercial Borrowings are permitted by the Government for providing an
additional source of funds to Indian corporate and Public Sector Units for financing the
expansion of existing capacity and as well as for fresh investment, to augment the resources
available domestically. They can be used for any purpose (rupee-related expenditure as well
as imports) except for investment in stock market and speculation in real estate. The term
external commercial borrowings in fact refer to the total debt that a sovereign entity has
borrowed outside the country in commercial terms. It is defined to include
1. Commercial bank loans
2. Buyers credit
3. Suppliers credit
4. Securitized instruments such as floating rate notes, fixed rate bonds etc.
5. Credit from official export credit agencies
6. Commercial borrowings from the private sector window of multilateral financial
institutions such as IFC, ADB, AFIC, CDC etc.
7. Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds.
Applicants are free to raise ECB from any internationally recognized source like:
a. Banks
b. Export credit agencies
c. Suppliers of equipment
d. Foreign collaborations
e. Foreign equity holders
f. International capital markets etc.

The department of Economic Affairs, Ministry of Finance and Government of India with
support of Reserve Bank of India monitors and regulates Indian firms access to global capital
markets. From time to time, they announce guidelines on policies and procedures for
External Commercial Borrowings.
External Commercial Borrowing Policy

ECB can be accessed under two routes, viz.; (1) Automatic Route outlined (2) Approval
Route.

ECB for investment in real sector -industrial sector, especially infrastructure sector-in
India, are under Automatic Route, i.e. do not require RBI / Government approval. In case
of doubt as regards eligibility to access Automatic Route, applicants may take recourse to
the Approval Route.
1. AUTOMATIC ROUTE

I ) Eligible Borrowers : (a) Corporate (registered under the Companies Act except financial
intermediaries (such as banks, financial institutions (FIs), housing finance companies and
NBFCs) are eligible to raise ECB. Individuals, Trusts and Non-Profit making Organizations
are not eligible to raise ECB.
(b) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own
requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any
unit in the Domestic Tariff Area.
ii) Recognized Lenders:
Borrowers can raise ECB from internationally recognized sources such as (i) international
banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC,
ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign
collaborators and (vii) foreign equity holders (other than erstwhile OCBs). A "foreign equity
holder" to be eligible as recognized lender under the automatic route would require
minimum holding of equity in the borrower company as set out below:
10

(i) For ECB up to USD 5 million - minimum equity of 25 per cent held directly by the lender,
(ii) For ECB more than USD 5 million - minimum equity of 25 per cent held directly by the
lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four
times the direct foreign equity holding).
iii) Amount and Maturity
(a) The maximum amount of ECB which can be raised by a corporate is USD 500 million or
equivalent during a financial year.
(b) ECB up to USD 20 million or equivalent in a financial year with minimum average
maturity of three years.
(c) ECB above USD 20 million and up to USD 500 million or equivalent with a minimum
average maturity of five years.
(d) ECB up to USD 20 million can have call/put option provided the minimum average
maturity of three years is complied with before exercising call/put option.
iv) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the
payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are
valid till reviewed:
Average Maturity Period
Three years and up to five years
More than five years

All-in-cost Ceilings over 6 month LIBOR*

200 basis points
350 basis points

11

v) End-use
a) Investment e.g., import of capital goods (as classified by DGFT in the Foreign Trade
Policy), by new or existing production units, in real sector - industrial sector including small
and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is
defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v)
sea port and airport, (vi) industrial parks, and (vii) urban infrastructure (water supply,
sanitation and sewage projects);
(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)
subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
vi) End-uses not permitted
(a) Utilization of ECB proceeds is not permitted for on-lending or investment in capital
market or acquiring a company (or a part thereof) in India by a corporate,
(b)

Utilization

of

ECB

proceeds

is

not

permitted

in

real

estate,

(c ) Utilization of ECB proceeds is not permitted for working capital, general corporate
purpose and repayment of existing Rupee loans.
vii) Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by
banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) relating to
ECB is not permitted.
viii) Security
The choice of security to be provided to the lender/supplier is left to the borrower. However,
creation of charge over immoveable assets and financial securities, such as shares, in favour
of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000
dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3,
2000, respectively, as amended from time to time.
12

ix) Parking of ECB proceeds overseas

ECB raised for foreign currency expenditure for permissible end-uses shall be parked
overseas and not to be remitted to India. ECB proceeds parked overseas can be invested in
the following liquid assets (a) deposits or Certificate of Deposit or other products offered by
banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys; (b)
deposits with overseas branch of an Authorized Dealer in India; and (c)Treasury bills and
other monetary instruments of one year maturity having minimum rating as indicated above.
The funds should be invested in such a way that the investments can be liquidated as and
when funds are required by the borrower in India.
x) Prepayment
Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior
approval of RBI subject to compliance with the stipulated minimum average maturity period
as applicable to the loan.
xi) Refinancing of an existing ECB
The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the
fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is
maintained.
xii) Debt Servicing
The designated Authorized Dealer (AD bank) has the general permission to make remittances
of installments of principal, interest and other charges in conformity with ECB guidelines
issued by Government / Reserve Bank of India from time to time.
xiii) Procedure
Borrowers may enter into loan agreement complying with ECB guidelines with recognized
lender for raising ECB under Automatic Route without prior approval of RBI. The borrower

13

must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before
drawing down the ECB. The procedure for obtaining LRN is detailed in para II (i) (b).
2. APPROVAL ROUTE
1) Eligible Borrowers
a) Financial institutions dealing exclusively with infrastructure or export finance such as
IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM
Bank are considered on a case by case basis.
b) Banks and financial institutions which had participated in the textile or steel sector
restructuring package as approved by the Government are also permitted to the extent of their
investment in the package and assessment by Reserve Bank based on prudential norms. Any
ECB availed for this purpose so far will be deducted from their entitlement.
c) ECB with minimum average maturity of 5 years by Non-Banking Financial Companies
(NBFCs) from multilateral financial institutions, reputable regional financial institutions,
official export credit agencies and international banks to finance import of infrastructure
equipment for leasing to infrastructure projects.
d) Foreign Currency Convertible Bonds (FCCBs) by housing finance companies satisfying
the following minimum criteria: (i) the minimum net worth of the financial intermediary
during the previous three years shall not be less than Rs. 500 crore, (ii) a listing on the BSE
or NSE, (iii) minimum size of FCCB is USD 100 million, (iv) the applicant should submit
the purpose / plan of utilization of funds.
e) Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to
finance infrastructure companies / projects exclusively, will be treated as Financial
Institutions and ECB by such entities will be considered under the Approval Route.
f) Multi-State Co-operative Societies engaged in manufacturing activity satisfying the
following criteria i) the Co-operative Society is financially solvent and ii) the Co-operative
Society submits its up-to-date audited balance sheet.
14

g) Corporates engaged in industrial sector and infrastructure sector in India can avail ECB for
Rupee expenditure for permissible end-uses.
h) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to
avail ECB for Rupee expenditure for permissible end-uses. Such NGO
ii) Recognized Lenders
a. should have a satisfactory borrowing relationship for at least 3 years with a
scheduled commercial bank authorized to deal in foreign exchange and
b.

Would require a certificate of due diligence on `fit and proper status of the
board/committee of management of the borrowing entity from the designated AD
bank.

iii) Amount and Maturity

Cases falling outside the purview of the automatic route limits and maturity period indicated
at paragraph I A (iii).
(a) Borrowers can raise ECB from internationally recognized sources such as (i) international
banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC,
ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers' of equipment, (vi) foreign
collaborators and (vii) foreign equity holders (other than erstwhile OCBs).
(b) From 'foreign equity holder' where the minimum equity held directly by the foreign
equity lender is 25 per cent but debt-equity ratio exceeds 4:1(i.e. the proposed ECB exceeds
four times the direct foreign equity holding).
(c) Overseas organizations and individuals complying with following safeguards may
provide ECB to Non-Government Organizations (NGOs) engaged in micro finance activities.
(I) Overseas Organizations proposing to lend ECB would have to furnish a certificate of
due diligence from an overseas bank which in turn is subject to regulation of host-country

15

regulator and adheres to Financial Action Task Force (FATF) guidelines to the AD bank of
the borrower. The certificate of due diligence should comprise the following
(I) That the lender maintains an account with the bank for at least a period of two years,
(ii) That the lending entity is organized as per the local law and held in good esteem by the
business/local community and
(iii) That there is no criminal action pending against it.
(Ii) Individual Lender has to obtain a certificate of due diligence from an overseas bank
indicating that the lender maintains an account with the bank for at least a period of two
years. Other evidence /documents such as audited statement of account and income tax return
which the overseas lender may furnish need to be certified and forwarded by the overseas
bank. Individual lenders from countries wherein banks are not required to adhere to Know
Your Customer (KYC) guidelines are not eligible to extend ECB.
(a) Corporate can avail of ECB of an additional amount of USD 250 million with average
maturity of more than 10 years under the approval route, over and above the existing limit of
USD 500 million under the automatic route, during a financial year. Other ECB criteria such as
end-use, all-in-cost ceiling, recognized lender, etc. need to be complied with. Prepayment and
call/put options, however, would not be permissible for such ECB up to a period of 10 years.
(b) Corporate in infrastructure sector {as defined in paragraph 1(A) (v) (a)} can avail ECB up
to USD 100 million and corporate in industrial sector can avail ECB up to USD 50 million for
Rupee capital expenditure for permissible end-uses within the overall limit of USD 500 million
per borrower, per financial year, under Automatic Route.
(c) NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a
financial year. Designated AD bank has to ensure that at the time of drawdown the forex
exposure of the borrower is hedged.

16

(d) Corporate in the services sector viz. hotels, hospitals and software companies can avail ECB
up to USD 100 million, per borrower, per financial year, for import of capital goods.
iv) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of
withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The current all-incost ceilings are as under:
The following ceilings are valid till reviewed:
Average Maturity Period
All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years 200 basis points
More than five years
350 basis points
v) End-use
a) Investment [such as import of capital goods (as classified by DGFT in the Foreign Trade
Policy), implementation of new projects, modernization/expansion of existing production units]
in real sector - industrial sector including small and medium enterprises (SME) and infrastructure
sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii)
railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks and (vii) urban
infrastructure (water supply, sanitation and sewage projects);
b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject
to

the

existing

guidelines

on

Indian

Direct

Investment

in

JV/WOS

abroad.

c) The first stage acquisition of shares in the disinvestment process and also in the mandatory
second stage offer to the public under the Governments disinvestment programme of PSU
shares.
d) Import of capital goods by corporate in the service sector, viz., hotels, hospitals and software
companies.
vi) End-uses not permitted
17

(a) Utilization of ECB proceeds is not permitted for on-lending or investment in capital
market or acquiring a company (or a part thereof) in India by a corporate except banks
and financial institutions eligible under paragraph I (B) (i) (a) and I (B) (i) (b)
(b) Utilization of ECB proceeds is not permitted in real estate,
(c) Utilization of ECB proceeds is not permitted for working capital, general corporate
purpose and repayment of existing Rupee loans.
vii) Guarantee
Issuance of guarantee, standby letter of credit, and letter of undertaking or letter of comfort
by banks, financial institutions and NBFCs relating to ECB is not normally permitted.
Applications for providing guarantee/standby letter of credit or letter of comfort by banks,
financial institutions relating to ECB in the case of SME will be considered on merit subject
to prudential norms. With a view to facilitating capacity expansion and technological up
gradation in Indian Textile industry, issue of guarantees, standby letters of credit, letters of
undertaking and letters of comfort by banks in respect of ECB by textile companies for
modernization or expansion of textile units will be considered under the Approval Route
subject to prudential norms.
viii) Security
The choice of security to be provided to the lender / supplier is left to the borrower. However,
creation of charge over immovable assets and financial securities, such as shares, in favour of
the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated
May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as
amended from time to time, respectively.
ix) Parking of ECB proceeds overseas
ECB raised for foreign currency expenditure for permissible end-uses shall be parked
overseas and not remitted to India and ECB raised for Rupee expenditure for permissible
end-uses shall be parked overseas until actual requirement in India. ECB proceeds parked
overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit
18

or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch
IBCA or Aa3 by Moodys; (b) deposits with overseas branch of an AD bank in India; and (c)
Treasury bills and other monetary instruments of one year maturity having minimum rating
as indicated above. The funds should be invested in such a way that the investments can be
liquidated as and when funds are required by the borrower in India.
x) Prepayment
(a) Prepayment of ECB up to USD 500 million may be allowed by the AD bank without
prior approval of Reserve Bank subject to compliance with the stipulated minimum
average maturity period as applicable to the loan. (b) Pre-payment of ECB for amounts
exceeding USD 500 million would be considered by the Reserve Bank under the
Approval Route.
xi) Refinancing of an existing ECB
Existing ECB may be refinanced by raising a fresh ECB subject to the condition that the
fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is
maintained.

xii) Debt Servicing

The designated AD bank has general permission to make remittances of installments of principal,
interest and other charges in conformity with ECB guidelines issued by Government / Reserve
Bank from time to time
xiii) Procedure
Applicants are required to submit an application in form ECB through designated AD bank to
the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of
19

India, Central Office, External Commercial Borrowings Division, Mumbai 400 001, along
with necessary documents.
FORMAT FOR PROVIDING INFORMATION TO DEPARTMENT OF ECONOMIC AFFAIRS,
MINISTRY OF FINANCE FOR SEEKING ECB APPROVAL
1. (i) Name of the Company;
(ii) Private Sector/Joint Sector/Public Sector, etc.
(iii) Activities, in brief :
2. In case (i) is a subsidiary, then name of the Group Company
3. (i) Name of the Project :
(ii) Whether new/expansion/up gradation
4. Location of the project (Address) :
5. Total Project cost ;
(i) in USD equivalent
(ii) in Rs. crores
6. Overall financing plan : USD Million Rs. crore
(i) Debt
Domestic:

Commercial Banks
Financial Institutions
Others (please specify)

Foreign : Loans
FRNs/Bonds
FCCBs
Others
(ii) Equity
Domestic: Promoter's
20

Public
Corporate
Financial Institutions
Others (please specify)
Foreign : Promoter's
Others (please specify)

(iii) Grand Total (i.e. total project cost as in item 5 above):

7. Date of commissioning of the project :
8. Amount of ECB proposed to be availed :
(i) In Foreign Currency
(ii) In USD equivalent
9. Nature of ECB :
(i) Supplier's Credit
(ii) Buyer's Credit
(iii) Syndicated Loan
(iv) Export Credit
(v) Loan from foreign collaborator/equity-holder
(vi) FRN/Bonds
(vii) Others (please specify)
10. Name of Lender/Supplier :
11. Terms and Conditions in brief :
(i) Rate of Interest
(ii) All-in-cost
(iii) Repayment schedule
(iv) Average maturity
12. Purpose of raising ECB :
(i) For financing capital goods (please attach a list of the items :
21

a. Imports
b. Indigenous
(ii) For general corporate objectives
(iii) if (I) (a), then a confirmation that they
are not in the negative list of
Export-Import Policy.
13. Expected schedule of drawdown, with date of first drawdown :
14. Whether the project has been appraised by a Financial Institution/ Bank: Yes/No (if yes, a copy
thereof to be enclosed).
15. Financial ratios ;
(i) Foreign debt to foreign equity ratio :
(ii) Total debt to total equity ratio :
(iii) Total ECB as a percentage of total Project cost :
16. Export performance of the Company (in USD equivalent; with evidence) if any :(i) During
current and last 3 years;
17. ECB availed by the Company during the current and the last 3 year :
Amount

Year of approval

Purpose (USD eq.)

18. ECB availed by other Group Companies during the current and the last 3 year ;
Name of the Co.

Amount Year of approval

Purpose (USD eq.)

Please attach a certificate from Statutory Auditor regarding the amount utilized.
19. Details of contact person (such as name, designation, postal address, tele/fax number), to enable
quick references for information/clarifications required, if any, relating to the application.
20. Certified that the information given above is true to the best of my knowledge.
Place:
Authorized signatory
22

(Name of the Company)

External Commercial Borrowing of public sector companies like

(a) NTPC is in advanced stage of negotiations for loans amounting to $1.2 billion with
various multilateral and bilateral funding agencies such as JBIC, ADB and NIB and the
revised ECB guidelines are likely to impact not only these arrangements but NTPCs
future borrowing programme as well, Mr. Sankaralingam said. Domestic borrowings are
being pegged at Rs45,199 crore while external commercial borrowings (ECB) are being
tentatively pegged at Rs60,309 crore
(b) Oil and Natural Gas Corporation (ONGC) plans to tap the external commercial
borrowing (ECB) route to raise funds to acquire oil equity abroad through its subsidiary
ONGC Videsh (OVL). Sources said ONGC has an investment commitment of around Rs
20,000 crore in overseas projects through OVL. The largest profit-making oil production
major is currently working on various possibilities, including ECB, to meet its future
investment needs. Although it is at a premature level, one can expect that about 50 per
cent of the total investment needs will be generated from the ECB route. Given the oil
majors international reputation, it will not be a problem to fulfill its needs, a senior
ONGC official said.
(c) Public sector Company SCI, which has already placed orders for 32 ships worth $1.87
billion, will now be inviting bids for its $3 billion order of 40 ships. Though the
liquidity crunch has affected the borrowing rate, well able to sustain the orders. We plan
to 25% through internal accruals and rest 75% through external commercial borrowings
(ECB), said S Hajara, chairman & MD, SCI. The company, however, has spread out the
period of the order over three years (2008-11).
(d) None of the public sector oil companies, including BPCL, are facing any kind of
liquidity problem, Mr. Pandey (official) told. BPCL has informed that out of the
current ECB level of $300 million, around $100 million is due for repayment in October
2009 and the balance in March 2012,
23

(e) Heavy Engineering Corp, BHEL to start joint venture ... ($452.4 million) through
external commercial borrowing (ECB) or bond issue
(f) SAIL has charted out capex plans of Rs 37,000 crore for scaling up its capacity to 22
million tones per annum (mtpa) from the current level of 14 mtpa over the next five
years. The company is looking to raise money from overseas market through external
commercial borrowing (ECB) to part finance this project.
(g) Mr. R.K. Goel, Director (Finance) GAIL, said that expanding the pipeline infrastructure
to 12,000 km will cost about Rs 20,000 crore by 2011-12. Of the total borrowings of Rs
6,000-7,000 crore, around 30 per cent will be through foreign loans and remaining
through the domestic market, He, however, said that if the Government relaxes the
external commercial borrowings (ECB) norms for public sector undertakings, the
company may consider raising 40 per cent through this route.
(h) Refining major, Hindustan Petroleum Corporation has signed an agreement to raise
Japanese yen equivalent of $200 million through the external commercial borrowings
route.
(i) In 2008-09, the National Aviation Company of India Ltd, the government-owned
company formed after the merger of Air India and Indian Airlines, was supposed to raise
Rs 9,572.42 crore (Rs 95.72 billion) from internal resources and external commercial
borrowings
(j) Bharat Sanchar Nigam Ltd (BSNL) hopes to raise Rs3, 000 crore from debt market to
part-finance its cellular, wireless-in- local-loop, broadband and international longdistance (ILD) projects. BSNL may go for a combination of rupee loans and foreign debt
through the external commercial borrowing (ECB). The board.

Modifications in external commercial borrowing policy

Modified (and liberalized?) guidelines
24

On 29th May 2008 a few decisions were made which came into effect immediately. At
present, borrowers proposing to avail ECB up to USD 20 million for rupee expenditure for
permissible end-uses require prior approval of the Reserve Bank under the Approval Route.
It has been decided that, henceforth:

Borrowers in infrastructure sector may avail up to USD 100 million for Rupee
expenditure for permissible end-uses under the Approval Route.

In the case of other borrowers, the existing limit of USD 20 million for Rupee
expenditure for permissible end-uses under the Approval Route has been enhanced to
USD 50 million

. The all-in-cost ceilings in respect of ECB are modified as follows:

Average Maturity Period All-in-Cost ceilings over 6 Months

Three years and up to five years 150 bps (Existing) 200 bps (Revised)

More than five years 250 bps (Existing) 350 bps (Revised)

The above changes will apply to ECB both under the automatic route and the approval route.
Under the modified ECB guidelines, borrowers in the services sector are not eligible to avail
ECB under the Automatic Route. The government decided on 2 June 2008 to allow entities in
the service sector viz. hotels, hospitals and software companies to avail ECB up to USD 100
million, per financial year, for the purpose of import of capital goods under the Approval
Route. All other aspects of ECB policy shall remain unchanged.
The RBI also clarified that the existing guidelines on trade credit, allowing companies
including those in the services sector, to avail trade credit up to USD 20 million per import
transaction, for a period less than 3 years, for import of capital goods, shall continue.
Another element of this policy was:

to eliminate external commercial borrowing by government,

25

increase scrutiny of borrowing by public sector companies, and

to increase the share of private sector in ECB.

Bibliography
(a) http://iic.nic.in/iic3_f24.htm
(b) http://www.moneycontrol.com/india/news/economy/ecb-norms-for-core-sectorraised-to-36500m/12/37/357665
(c) http://www.domainb.com/companies/companies_n/National_Thermal_Power/200808
26_overseas_bonds.html

Case Study: Foreign Trade potential for Agricultural

26

INTRODUCTION
Agriculture is the dominant sector of Indian economy, which determines the growth and
sustainability. About 65% of the population still relies on agriculture for employment and
livelihood.
Indian agriculture however, has milestones. The green revolution transformed India form a food
deficient stage to a surplus food market. In a span of 3 decades, India became a net exporter of
food grains. Remarkable results were achieved in these fields of dairying and oil seeds through
white and yellow revolutions. The sector could not however maintain its growth momentum in
the post green revolution years, the strategic growth in agriculture and the accelerated growth in
industry reversed the structure of national GDP in Indian economy.
Despite these major structural transformations, the agriculture sector continues to accommodate
the major share of the workforce. The sector is prone to output fluctuations even after
establishing better input facilities and technology like irrigation, High yielding seeds, changes in
cropping pattern etc.
India is yet to emerge as significant trade partner in the world agriculture market. India holds
around 1% of the global trade-in agricultural commodities. With the ongoing trade negotiations
under the WTO, Indian Agriculture needs to reorient its outlook and enhance competitiveness to
sustain growth from a demand side.
With India being a major negotiator on world agriculture trade, it can be expected that Indian
agriculture trade will expand in the years to come. This process started with the India signing the
Agreement on Agriculture (AOA) during the Uruguay Round. Now that the fourth Ministerial of
WTO at Doha has mandated further negotiations on agriculture trade to improve market access
India can look forward to a bright trade prospects in agriculture with proper policy support.
The Indian Agriculture Industry is on the brink of a revolution that will modernize the entire food
chain, as the total food production in India is likely to double in the next ten years.
As per recent studies the turnover of the total food market is approximately Rs.250000 crores
(US $ 69.4 billion) out of which value-added food products comprise Rs.80000 crores (US $
22.2 billion). The Government of India has also approved proposals for joint ventures, foreign
collaborations, industrial licenses and 100% export oriented units envisaging an investment of
Rs.19100 crores (US $ 4.80 billion) out of which foreign investment is over Rs. 9100 crores (US
$ 18.2 Billion). The agricultural food industry also assumes significance owing to India's sizable
agrarian economy, which accounts for over 35% of GDP and employs around 65 per cent of the
population. Both in terms of foreign investment and number of joint- ventures / foreign
collaborations, the consumer food segment has the top priority. The other attractive features of
the indian agro industry that have the capacity to lure foreigners with promising benefits are the
deep sea fishing, aqua culture, milk and milk products, meat and poultry segments.
Excellent export prospects, competitive pricing of agricultural products and standards that are
internationally comparable has created trade opportunities in the agro industry. This further has
enabled the Indian Agriculture Industry Portal to serve as a means by which every exporter and
27

importer of India and abroad, can fulfill their requirements and avail the benefits of agro related
buy sell trade leads and other business opportunities.
This Indian agro industry revolution brings along the opportunities of profitable investment and
agriculture-industry-india.com provides you the B2B platform with agro related trade leads,
exporters & importers directory etc. that help you make your way to profit easy.
To lead yourself to the destination of profit through the Indian Agriculture Industry, know
maximum about the EXIM policy, programs & schemes, price policy, seed policy and statistics
at the Indian agro portal and harvest benefits from India, world's second largest producer of food
and a country with a billion people. From canned, dairy, processed, frozen food to fisheries,
meat, poultry, food grains, alcoholic beverages & soft drinks, the Indian agro industry has dainty
areas to choose for business.

PROBLEMS
Low Productivity:The low productivity in India is result of the following reasons:

According to "India: Priorities for Agriculture and Rural Development" by World Bank,
India's large agricultural subsidies are hampering productivity-enhancing investment.
Overregulation of agriculture has increased costs, price risks and uncertainty.
Government interventions in labor, land, and credit markets are hurting the market.
Infrastructure and services are inadequate.
Illiteracy, general socio-economic backwardness, slow progress in implementing land
reforms and inadequate or inefficient finance and marketing services for farm produce.

The average size of land holdings is very small (less than 20,000 m) and is subject to
fragmentation, due to land ceiling acts and in some cases, family disputes. Such small
holdings are often over-manned, resulting in disguised unemployment and low
productivity of labor.

Adoption of modern agricultural practices and use of technology is inadequate, hampered

by ignorance of such practices, high costs and impracticality in the case of small land
holdings.

World Bank says that the allocation of water is inefficient, unsustainable and inequitable.
The irrigation infrastructure is deteriorating. Irrigation facilities are inadequate, as
revealed by the fact that only 52.6% of the land was irrigated in 200304, which result in
farmers still being dependent on rainfall, specifically the Monsoon season. A good
monsoon results in a robust growth for the economy as a whole, while a poor monsoon
leads to a sluggish growth. Farm credit is regulated by NABARD, which is the statutory
apex agent for rural development in the subcontinent.
28

PROSPECTS

Presently a small percentage of farm produced processed in to value added products.

India needs US $28 billion of investment to raise food processing level by 8-10%.

Rapid urbanization, increased literacy, changing life style, more and more women in
workforce, rising per capita income leading to rapid growth and new opportunities in
food and beverages sector

Indians spend about 50% of household expenditure on food items.

OPPORTUNITIES

Excellent export prospects, competitive pricing of agricultural products and standards

that are internationally comparable has created trade opportunities in the agro industry.
An average Indian spends out about 50% of his/her household expenditure on food items.
With a population of over 1 billion and a 350 million strong urban middle class and their
changing food habits

The relatively low cost but skilled workforce can be effectively utilized to set up a large,
low cost production base for domestic and export market.

Foreign Direct Investment is not directly allowed in agriculture but there exist ample
opportunities in related sectors.

Biotechnology refers to the techniques that allow scientists to modify the DNA of crops
to enhance their tolerance to pests and diseases, increase yields and improve quality and
nutritional value.

Indian agricultural trade underwent significant changes in the post liberalization era. This book
Indian Agricultural Trade in the 21st Century examines these changes in terms of production
trends, trade patterns as well as policy initiatives. The various articles in the book trace the
Indian agricultural evolution in a general perspective, and also track specific commodities in
their trade patterns, with special focus on the post-1991 period. The articles in the initial section
on agriculture in general help identify those commodities, which hold high export prospects, and
track their progress in international trade. Trade policy initiatives are also examined in the light
of trade facilitation in the country. Trade in food crops is determined by the domestic
requirements, in order to ensure domestic food self-sufficiency and security. Hence, trade
policies strike a balance between domestic pricing, demand, and external trade prospects.
Agricultural Export Zones and trade in agriculture in the light of Sanitary and Phyto Sanitary
measures of the WTO are also examined. The section on Horticulture and dairy products reveals
the dominant position of India in fresh fruit and dairy production, and the huge export potential
that remains to be tapped. Impact of trade liberalization on dairy farming is examined, besides
looking at floriculture as a viable commercial option, in view of the growing international
floricultural market. A recent phenomenon of terminal markets in fresh fruits is also examined.
Export oriented perspective is being provided in articles on sea farming, and Indian fisheries,
29

along with an economic analysis of shrimp farming in India. The final section discusses
plantation crops, oilseeds and cash crops. Plantation crops are examined in view of their export
potential with a special focus on the rubber industry in India. Oilseeds, an important contributor
to India s foreign exchange, are examined in the light of the WTO regime. The last article deals
with the cashew nut industry tracing its origin, growth and trade trends in India. Some of the
recommendations of the National Commission on Agriculture to promote international trade are
also examined.
STATUS OF THE SECTOR PRE-LIBERALISATION ERA
Before independence, Indian agricultural foreign trade was controlled by the British
Government to serve colonial interests. India, which used to export a variety of valuable
goods including fine variety of textiles, was forced to export only foodstuffs and agricultural
raw-materials and import the manufactured goods from England. Indian farmers were made
to produce raw-materials like cotton and jute for the British Factories. The domestic Textile
industry was and India was compelled to import manufactured Textiles from England. In this
colonial foreign trade regime, India was made to export more resulting in favorable trade
balance with England.
Ten years after the World Trade Organisation (WTO) came into existence, and some 20 years
after the holy grail of economic liberalization for more open markets and less government
intervention in the developing world based on the idea that economies must grow if poor
people are to reap the benefits of globalization, the tragedy is that the process of economic
liberalization may already have set poor communities back a generation.2 No where has the
negative impacts been felt more severely than in agriculture the first line of defense against
poverty. The role of agriculture is central to poverty eradication and removal of hunger and is
fundamental to sustainable development and thereby ensuring global peace and political
stability. As an overview, Mark Malloch Brown, former administrator of the UN
Development Programme, decried the faulty economic prescription being doled out for
reducing global economic inequalities. Releasing the Human Development Report 2003, he
had stated:
In the so-called great decade, a very significant hard core of countries ended further behind
with more poor people. Explaining the socio-economic debacle, he had said that fifty-four
countries, almost half of them in Africa, were poorer than in the 1990s, and some will not
meet the development goals for 50 years. The UNDP had earlier pointed out that before
globalization became the buzz word, the richest fifth of the worlds population in 1960 were
30 times better off than the poorest fifth. By 1997, the figure had increased to 74. The impact
on farming communities has been more pronounced --- the past decade saw rural livelihoods
collapsing in the developing countries, leading to more unemployment and more migration
from the rural to the urban areas. Poverty and hunger multiplied thereby leading to further
marginalization of the rural communities. Although many economists have now begun to
concede that the relationship between economic liberalization and growth is uncertain at
best,3 the fact remains that the world hasnt learnt any meaningful lesson from the unethical
dichotomy that prevails at the economic and policy planning level.
30

The liberalization of the Indian economy initiated during the early 1990s was launched with a
view to accelerating agricultural growth by ending discrimination against agriculture. The idea
was to turn the terms of trade in favor of agriculture through a large, real devaluation of the
currency and increase in output prices of agriculture. The Economic Survey was in an upbeat
mood, and predicted a substantial gain to India, running into billions of dollars from increased
agricultural exports.4 such an exponentional growth was expected to have a significant impact on
poverty reduction and thereby have a positive impact on livelihood security of hundreds of
millions of rural poor.
STATUS OF THE SECTOR POST-LIBERALISATION
Table-2:
Annual Compound Growth of Crop Area, Production and Productivity
(Percent)
Crop
1980-81 to 1989-90
1990-91 to 2000-01
Area
Pro
Y
Are
Producti
Yield
duction
ield
a
on
Rice&Wheat
0.4
3
3.1
0.84
2 1.42
3
.59
5
.27
Rice
0.4
3
3.1
0.63
1 1.16
1
.62
9
.79
Wheat
0.4
3
3.1
1.21
3
7
.57
0
.04
Coarse
0
1.6
-1.84
0
Cereal
1.34
.40
2
.06
Pulses
1
1.6
-1.20
0.09
.52
1
0.58
Total
2
2.7
-0.20
1
Foodgrains
0.23
.85
4
.66
Non-Food
1.1
3
2.3
0.84
1
Crops
2
.77
1
.86
Oilseeds
5
2.4
0.44
0
1.51
.20
3
.66
Sugar
1.4
2
1.2
1.72
2
Cane
4
.70
4
.62
Cotton
2
4.1
2.21
0
1.25
.80
0
.92
All Crops
0.1
3
2.5
0.08
1
0
.19
6
.73
India is looking for investment in infrastructure, packaging and marketing.
India- one of the largest food producers of the world

1.81
1.65
0.27
1.34
0.59
0.61
0.89
-1.26
1.02

The Indian scientific and research talent had boomed up after liberalization because of
various MNC are investing bid money in R&D.
31

Numerous studies have shown that the sector that has the most beneficial effect on poverty
reduction is agriculture. Considering that agriculture is a major sector for India, accounting for
38 per cent of the Gross Domestic Product (GDP) in 1980, declining but still remaining at a
significant 27 per cent, and accounting for 62 per cent of employment even in 1998, any
significant growth in agriculture is not only viewed as a means towards food security, but as a
strategy to achieve the broader goal of poverty eradication. After all, for a country which alone
has over 600 million farmers, sustainable agriculture is the only means to provide viable
livelihoods. Nearly 15 years after ushering in of economic liberalization, instead of experiencing
an unprecedented boom in growth, the agricultural sector is faced with a serious crisis. This is
reflected in a significant deceleration of growth rate of agriculture, both in terms of gross product
and in terms of output. Taking the output of the crop sector alone, as compared with a growth
rate of 3.5 per cent during the 1980s, the growth rate of agricultural output decelerated to only
2.37 per cent per annum during the 1990s. This was the lowest growth achieved during any
period.5 It has now slumped still further, reaching an abysmal low of 1.5 per cent in 2004-05.
The alarm bells have been ringing for quite some time. The spectacular yield growth recorded in
the post-Green Revolution years in Punjab and Haryana have receded into history. Among the
multiplicity of problems confronting agriculture, rapid fragmentation of land holdings is keeping
pace with increasing population. In 1976-77, the average size of the holdings was estimated at
two hectares, and in 1980-81, it came down to 1.8hectares. Today, it stands at a mere 1.47
hectares. The number of land holdings in 1981 was around 89 million; today these have crossed
110 million. As intensive farming began to bare its fangs, mining the ground water, and
destroying the soil fertility, sustainable livelihoods began to fall apart. At the same time, by the
turn of the century, per capita food grain availability had dropped to an abysmal low of 152 Kg,
nearly 23 kgs less than early nineties.6 this compared favorably with the stark hunger that
prevailed in sub-Saharan Africa, and was no better than the crisis-laden food situation that
existed at the time of the Bengal Famine. Green revolution had not only gone sour, it has now
turned red. The unexplained number of huge number of farmer suicides is a testimony to the
entire equation going wrong.7 The philosophy of agricultural planning is changing.8 Gone are
the days when the Nations emphasis was solely on attaining self-sufficiency in food grain
production. Gone are the days when a set of policy mix helped keep hunger and sure starvation at
bay. At the beginning of the new millennium, at a time when food production struggles to barely
keep pace with the burgeoning population growth, farmers are being asked to diversify, produce
crops that are suitable for export and to compete in the international market. With promise of
cheap food available off the shelf in the global market, the focus has shifted from agriculture to
industry, trade and commerce, from the small and marginal farmers to the agri-processing
companies. Cultivation of staple food is being replaced by cash crops, tomatoes in place of
wheat, durum wheat (for bakery purposes) replaces wheat as a staple diet in Punjab and Haryana,
flowers in place of rice, and so on. In the coastal areas, private enterprise isntaking away the fish
catch depriving the local communities of a livelihood and the only nutrition source. In Kerala,
for instance, vast tracts of forests and paddy fields have been converted into rubber, coffee and
coconut plantations. Commercial crops are eating into the fertile land tracts meant for growing
essential food grains. The diversion of good agricultural land, which in any case is limited, to
commercial farming and even industries, is further exacerbating the crisis in sustainability.
WTOs Agreement on Agriculture and other trade liberalization measures have not only shifted
the focus to export-oriented cash crop agriculture but also opened the door to cheap imports in
32

the developing countries, and India is no exception. Cheap food imports depress prices for
domestic produce, and large scale cash crop cultivation has not only.
Shifted land away from basic food production but has led to concentration of land and resources
in the hands of big farmers, landlords and private companies. It also accelerates the depletion of
the natural resource base. Meanwhile, withdrawal of state subsidies and institutional support to
agriculture has pushed up production costs and supplies of agricultural inputs.
All this has led to marginalization, displacement, loss of land and greater poverty among small
farmers. Many small farmers have become daily wage workers, receiving low wages. Others
have migrated to urban centers in search of menial jobs, often leaving an extra burden (of farm as
well as domestic work and the responsibility of looking after the family) on women. In other
words, economic liberalization is not only impacting food security at the household level but also
impacting the sustainability of livelihoods. Unlike the conventional growth and trickle-down
assessment approach, where human lives are portrayed as mere economic figures, the sustainable
livelihoods approach emphasizes assessing communitys assets and strengths. Agriculture in
India therefore is facing multiple challenges. It needs to become more productive to meet the
growing need for food and, it has to provide income and employment for the rural population so
as to reduce migration and combat the inequalities and poverty.9 At the same time, agriculture
has also to maintain the balance between enhanced production, sustainable use of natural
resources and environmental degradation. In addition, because of declining efficiency of inputs,
the profit margin of farmers is declining very sharply. Many farmers have been squeezed
between the rising costs of key inputs (as subsidies have been phased out) and unsure market for
their produce, because of the diminishing role of the procurement agencies.

FUTURISTIC ASSESMENT OF THE SECTOR

. Crop land 100,000 to 1.8 MN HA
33

. Long term rate sustainability 2005-06

. Yield growth in vegetable sector at 6 % per year.
. Annual rate og increase in Crop Area at around 0.5%.
Agricultural commodity futures are market based instruments for managing risks and orderly
establishment of efficient agricultural markets. These are used to hedge commodity price risks.
The hedging and price discovery function of the future markets promote more efficient
production, storage, marketing and agro-processing operations and help in improving overall
agricultural marketing performance. Commodity trading is just one step in solving the complex
Indian agriculture problems. Although formalized future trading in agricultural commodities has
been in place since 1918-19, the future trading in commodity through commodity exchanges
came to its own very recently. But the trade was mostly in the form of forward contracts.
Although India has a long history of trade in commodity derivatives, this sector remained
underdeveloped due to government intervention in many commodity markets to control prices.
Free trade in many agricultural commodities is restricted under the Essential Commodities Act
(ECA)-1955 and Agriculture Produce Marketing Committees Act (APMC) of various states.
The forward and futures Contracts till April 2003, was limited to only a few commodities items
under the Forward Contracts Regulation Act (FCRA)-1952. However, in 2003 Government of
India removed all restrictions on commodities which could be traded on commodity exchanges.
At present 25 commodity exchanges are in operation in India carrying out futures trading in as
many as 81 commodity items. Most of these exchanges are regional and commodity specific.
National Multi Commodity Exchange (NMCE) status has been accorded to four commodity
exchanges, namely, National Mutli Commodity Exchange (NMCE) Ahmedabad, National
Board of Trade (NBOT), Indore, National Commodity Derivative Exchange (NCDEX)
Mumbai and Multi Commodity Exchange (MCX) Mumbai during 2003. These exchanges have
excellent financial backing, demutualized ownership structure and more transparent electronic
trading system. The Forward Markets Commission (FMC) established under FCRA-1952 is the
agency which regulates commodity derivatives trading in India in the same way as SEBI does for
securities markets.
In some areas farmers are gradually getting aware of futures prices which are disseminated
through exchanges. In the capital market, spot market developed before the derivatives market
which made the things easier. In the commodity space, the derivatives have come before the so
called integrated spot market. Future market is a boon to the farmers. Under the prevailing
scenario, Commission for Agricultural Costs and Prices (CACP) recommends Minimum
34

Support Prices (MSP) with no guarantee that farmers will get that price. Generally, MSP acts as
the maximum price that is paid to farmers. Open-ended purchase could continue to be made at
MSP as floor price, exchanges should be able to offer market based options at strike prices
higher than the MSP. Be able to offer market based options at strike prices higher than MSP.
Budget fails to meet the expectations of participants in the commodity future markets as the
needed reforms facilitating the growth of commodity markets have been avoided. Introduction of
Commodity Transaction Tax (CTT) on line with Securities Transaction Tax (STT) is a negative
move for the commodity market when market is still evolving seeking larger participants and
volumes. Moreover, the long and short term capital gains benefits extended to securities market
has not been extended to commodities trading. On the other hand, the decision is significant in
the wake of commodities markets regulator to institutionalize the development of market
mechanism, support institutions capacity building and development of strong forward and
backward linkages between market, producers, traders and consumers and the Forward Markets
Commission receiving more autonomy to deal efficiently with the challenges facing the
commodities futures markets with the approval of Forward Contracts (Regulation) Act, and
Foreign Direct Investment (FCI)/ Foreign Institutional Investors (FII) Investments in
commodities sector.
It showed an increased interest of the government in expanding the commodity futures markets
in line with the equity markets. Securities markets are eight times larger than the commodities
market and hence the levy is premature. The functioning of securities markets is different from
that of commodities markets. Commodities markets are global asset class and trade flowed to the
most efficient markets that bore the least cost of trading. Commodity markets are still in the
nascent stage (4years old) and a fraction of the size (1/5 th) of the securities markets. It would
increase the cost of trading by at least four times. Future trading in wheat, rice, tur and urad had
already been suspended by the FMC. Efficient functioning of futures markets pre-supposes the
existence of efficient spot markets. Currently, physical spot markets have large numbers of
infirmities. It will be difficult for the futures markets to function till these are removed.
Commodity markets in India need structural changes for increasing depth and curbing of
speculative activity. Banks, FIIs and other institutions should be permitted to trade in the
commodity markets. National Commodity spot markets need significant legislative and
administrative support for taking off. Banks, FIIs and other institutions should be permitted to
trade in commodity markets. Commodity options need to be developed. The setting up of
national electronic exchanges by the national commodity exchanges is an attempt to create a
national integrated market. The vibrant agriculture markets including derivatives markets are the
frontline institutions to provide early sign of future prospect of the sector. Vibrancy in these
markets gives signal about commodities which deserves flow of investment. All the regulators
operating within the commodity markets scope work in cohesion.
35

Case Study: Export of Rice from India

INTRODUCTION
Worldwide, India stands first in rice area and second in rice production, after China.
It contributes 21.5 percent of global rice production. Within the country, rice occupies one36

quarter of the total cropped area, contributes about 40 to 43 percent of total food grain
production and continues to play a vital role in the national food and livelihood security system.
However, India did not become a major rice exporting country for a long time. Its share in world
rice trade, mainly in the form of small-volume exports of highly prized basmati rice, was
insignificant (5 percent). It was not until the mid-1980s that the quantum of export started to
grow, from 110000 tonnes in 1978-79 to 890613 tonnes in 1994-95 and to a record 5.5 million
tonnes in 1995-96, second only to Thailand (at 5.9 million tonnes).
Rice is one of the important cereal food crops of India. Rice contributes about 43% of total
food grain production and 46% of total cereal production in the country. It continues to play vital
role in the national exports. The percentage share of rice in total national export was 4.5% during
2005-06. The percentage share of agriculture export in total national export was 18.25%,
whereas the percentage share of rice export in total agriculture export was 24.62% during 200506. Thus, rice export contributes nearly 35% of total agriculture export from the country.
Among the exporting countries, Thailand, Vietnam, India and Pakistan are the major
countries exporting rice in sizeable quantity. India is one of the richest countries in the world in
terms of possessing tremendous diversity in rice varieties. There are different varieties of ricedepending on the weather, soil, structure, characteristics and purposes.
Rice is grown under a damp warm climate. A temperature range of 20C to 37.7 C (68 F to 100
F) is required for the optimum growth of rice. Rice being a semi-aquatic crop grows best under
submerged, waterlogged conditions. Rice is able to tolerate a wide range of soil reactions, but
has a preference of acidic soils. Rice cultivation is found in all the states of India, but West
Bengal, Uttar Pradesh, Madhya Pradesh, Punjab, Orissa and Bihar are the major rice
producing states. About 600 improved varieties of India rice have been released for cultivation
since 1965.
ORIGIN AND HISTORY OF RICE IN INDIA
India is an important center of rice cultivation. The rice harvesting area in India is the
world's largest. The two major rice varieties grown worldwide today are Oryza sativa indica
and Oryza sativa japonica. According to research studies, they owe their origins to two
independent events of domestication thousands of years ago.
Historians believe that while the indica variety of rice was first domesticated in the area
covering the foothills of the Eastern Himalayas (i.e. north-eastern India), stretching through
Burma, Thailand, Laos, Vietnam and Southern China, the japonica variety was domesticated
from wild rice in southern China which was introduced to India before the time of the Greeks.
The earliest remains of cultivated rice in the sub-continent have been found in the north
and west and date from around 2000 BC. Perennial wild rices still grow in Assam and Nepal. It
seems to have appeared around 1400 BC in southern India after its domestication in the northern
plains. It then spread to all the fertile alluvial plains watered by rivers. Cultivation and cooking
methods are thought to have spread to the west rapidly and by medieval times, southern Europe
37

saw the introduction of rice as a hearty grain. Some says that the word rice is derived from the
Tamil word Arisi.
Rice is first mentioned in the Yajur Veda (c. 1500-800 BC) and then is frequently referred to in
Sanskrit texts. In India there is a saying that grains of rice should be like two brothers, close but
not stuck together. Rice is often directly associated with prosperity and fertility; hence there is
the custom of throwing rice at newlyweds. In India, rice is always the first food offered to the
babies when they start eating solids or to husband by his new bride, to ensure they will have
children.
PRODUCTION OF RICE IN INDIA
From a nation dependent on food imports to feed its population, India today is selfsufficient in grain production and also has a substantial reserve. The progress made by
agriculture in the last four decades has been one of the biggest success stories of liberal India.
Agriculture and allied activities constitute the single largest contributor to the Gross Domestic
Product, almost 33% of it. Agriculture is the means of livelihood of about two-thirds of the
work force in the country.
The demand for rice in India is projected at 128 million tonnes for the year 2012 and will
require a production level of 3,000 kg/hectare significantly greater than the present average yield
of 1,930 kg/hectare. Government of India is targeting to achieve production of 129 million
tonnes of rice by 2011-12 with the growth rate of 3.7% along with other food grains. The
production of rice in India has shown an increasing trend which is evident from the Table given
below:

PRODUCTION
YEAR
2000-01

PRODUCTION
(in mn tonnes)
53.63

CONSUMPTION
YEAR
2000

RICE (in
grams)
220.0
38

2001-02

74.29

2001

204.9

2002-03

82.54

2002

215.0

2003-04

86.08

2003

201.8

2004-05

89.68

2004

205.4

2005-06

84.98

2005

206.4

2007-08

93.08

2006

208.1

Source: Federal ministry of Agriculture, Govt. of India

FACTORS INFLUENCING THE PRICE OF RICE

1. Weather: Role of weather in rice production is immense. Temperature, rainfall and soil
moisture are the important parameters that determine the crop condition. Further, natural
calamities can also affect crops. Markets keep watch of these developments.

2. Minimum Support Price: Changes in the minimum support prices (MSP) by the
government also have immense impact on the price of rice.

3. Substitute Product: Availability of substitute products at cheaper rate may lead to

weakness in demand. This situation happens especially when the main products price
tends to become higher.

4. Consumption: Rice consumption depends on two factors - population and income. For
example, rice is the staple food of Asia. Low-income groups consume more rice
according to the per capita income increase. But as the income increases, there arrives a
point when the consumption starts to dip. Income growth and reduction in population
result in a low consumption of rice.

5. Seasonal cycles: Seasonal cycles are present in rice cultivation. Price tends to be lower
as harvesting progresses and produce starts coming into the market. At the time of sowing
and before harvesting price tends to rise in view of tight supply situation.

6. Demand: Import demands as well as domestic demand influences the price of rice in
domestic as well as international market.

7. New technology: Breakthrough in the technology may increase the productivity and
would lead to more supply. This may bring some softness in the price.
39

PROBLEMS OF RICE EXPORT FROM INDIA

India is facing stiff competition in the world markets for export of rice. Besides, there are
many domestic problems for rice exporters. If these internal problems are relaxed to the extent
possible, the exporters may find easy way to boost rice export and such measures will go a long
way to sustain the exports. Some of the major problems are:

1. High tax rate: Indian rice is costlier in the international market as compared to other
competing countries in the world because of imposing of various taxes on rice exports.
These taxes include- Purchase Tax (on indirect export), Market Fees, Rural Development
Fund, Administrative Charges, etc. as per the state Government policy. In Pakistan, rice
meant for exports specially the branded ones, duties are extremely low or duty free.

2. Minimum Support Price: The Minimum Support Price (MSP) for paddy is enhanced
every year by the Government of India. Due to MSP, farmers are free to sell in the open
market or to the Government at the MSP depending on what is more advantageous to them.

3. High production cost: The production cost goes up due to increase in the cost of inputs
used for paddy cultivation. That is why when paddy is converted to rice, it becomes costlier
making it internationally uncompetitive.

4. High competition in international markets: Rice production meant for export purpose is
having subsidy in other countries like Thailand, Vietnam and Pakistan, which reduces the
cost of production and thereby reducing the cost of rice. Therefore, the export price of rice of
such countries is more competitive in the international markets compared to Indian rice.

5. Inelastic prices: Indian rice prices are inelastic due to relatively high cost of production
whereas the major rice producing nations have decreased the price to capture the
international markets.

6. Lack of proper infrastructural facilities: Rice mills have not been fully modernized to
ensure high milling recovery and reduce the percentage of broken rice. Apart from this, there
is lack of proper arrangements for production of sufficient quantity of quality seeds needed
for cultivation of rice for export purposes.

7. Quality problems of Basmati rice: Indian Basmati rice is facing aroma problem, because
intensity of aroma in traditional basmati varieties is not as high as it used to be. Post harvest
handling of produce is another important aspect. Generally, farmers are harvesting the crop at
different moisture levels and keeping the produce at higher moisture level for a longer
period will impair the intensity of aroma. In absence of genetically pure seed of basmati
varieties, a variation in plant height, grain size and maturity of the crop is found. This is one
of the major reasons for poor quality of basmati rice.
40

SUGGESTIONS FOR SUSTAINING RICE EXPORT

Rice export constitutes a considerable share in the national exports. Keeping in view the
importance of rice in the national export items, concerted efforts are required to be made to
further promote the export of rice. There is a good scope for India to take advantage of the new
trade opportunities for promoting the export of rice. This can be achieved if production is made
as per the requirements of international markets by increased investment in Research and
Development coupled with export friendly trade policies. The following are few of the measures
suggested to sustain the export of rice in future:

1. Breeding programme may be initiated to develop high yielding export quality rice
(Basmati, Non-Basmati, Long Grain Rice, etc.) to enable the exporters to sustain their
export in future.

2. Survey may be conducted to identify export quality belts/zones for production of rice to
meet the requirement of exports.

3. Extension activities may be strengthened to educate the cultivators for production of

quality rice to match the standards of international markets.

4. Low cost production technology may be developed to bring down the cost of production
to enable the exporters to compete with competing countries in the international markets.

5. Proper arrangements may be made for procurement and processing of rice export purpose
as per the requirement of international markets.

6. Proper arrangements may be made for production of pure quality seeds and making them
available to the farmers at subsidized rates.

7. In case of basmati varieties, crop should not be allowed to lodge and there should be
proper water management in the field. If these are not attended properly, such situation
may affect both aroma and linear kernel elongation.

8. Post harvest operation is also very important. After harvesting, if produce is allowed to
remain at higher moisture level for a longer period, it will impair the intensity of aroma.
PROSPECTS OF RICE EXPORT FROM INDIA
India is facing stiff competition in the International markets from Thailand, Vietnam, U.S.A.
and Pakistan. There was a considerable growth in the export of rice from India during the recent
past, particularly in the case of non-basmati rice. There are several factors responsible for this
growth. In fact exports depend not only on our ability to sell, but also on the willingness of
importers to buy. Sometimes major markets/importers used to cut down their import due to their
internal economic problems or good crop harvest and trade also cut down inventories and people
41

reduce spending. All these measures reduce imports during that particular year. The prospects of
export of basmati and non-basmati rice from India are discussed herewith:
BASMATI RICE
Awareness about basmati rice is spreading among different strata of the society in the
country and abroad. Basmati rice is possessing unique grain, cooking, eating and digestive
qualities. Hence, majority of people in the country and abroad have developed liking for basmati
rice. Because of its superfine quality, basmati rice is most preferred and also meant for high
premium value in the national and international markets. Thus, basmati rice is also stated to be
'Pearl' of rice.
Commercially, Taraori Basmati, Basmati-370 and Basmati Type-3 are very popular. All
these three varieties are similar in starch characteristics but based on grain dimensions Taraori
Basmati is preferred much over Basamati-370. Similarly Basamati-370 is preferred more over
Basmati Type-3. Pusa Basmati-1 has been well accepted by the trade and there are good
prospects for export. In fact, Pusa Basmati-1 is at present most profitable variety in rice, in spite
of being highly susceptible to major insects, pests and diseases. Under proper crop management
condition farmers can get 4-6 tonnes paddy yield per hectare. This variety is much favoured by
the farmers, traders and consumers.
With the every coming year, domestic as well as international demand for basmati rice is
increasing. If desired aroma in basmati rice along with other quality characteristics is maintained,
these measures may help to boost the export of basmati rice from India.

NON-BASMATI RICE
Non-basmati rice exports have also suffered much due to the competition from exporting
countries like Thailand, Vietnam and Pakistan because of their low cost of production. In the
recent past export of non-basmati rice was fluctuating year after year due to various reasons. If
rice exporters made their sincere efforts with Govt. supporting export policy, non-basmati rice
export is expected to increase in future.
INCENTIVES TO RICE EXPORTERS OF INDIA
Various incentives are given to the exporters of rice, since Rice is most important cereal
crop of India. Also to make Indian Rice competitive in the international markets, Government of
India keeps on coming with new export friendly policies as well as incentives for the rice
exporters.

42

The decision of the Union Government to allow non-basmati rice exports to 21 African countries
to the extent of one million tonnes is a welcome move, as it will help the millers and the farmers,
but clear guidelines have to be formulated and tenders should be called for to ensure
transparency, according to Vinod Agarwal, President of AP Rice Exporters Association.
He said in an interview here on Tuesday that the Directorate-General of Foreign Trade had issued
a notification earlier this month allowing rice exports to 21 African countries. Three Government
agencies - MMTC, STC and PEC - had been appointed to facilitate exports to these.
But our past experience shows that there is no transparency in such transactions. Three

or four major exporters manage to corner the contract and the others are denied the benefit. It is
of no benefit to the millers or farmers and only the three or four big players stand to gain.
Therefore, we want transparency in the transactions. Tenders should be floated and all should be
given a fair chance," said Agarwal.
He said that after imposition of ban on rice exports in 2007 some five lakh tonnes of rice
was allowed to be exported to Bangladesh in government-to-government deals but "only three or
four major exporters grabbed the contracts."
He said the current situation in Andhra Pradesh market was causing concern, as the FCI
was not buying rice from the millers and the latter were therefore not willing to buy paddy from
the farmers. "The FCI is not in the market and exports are not allowed. There is severe scarcity
of storage space, as wheat from the North is dumped in the godowns here. Therefore, there is a
lull and crisis in the market.
EXPORT SUBSIDIES
Export subsidy reduction commitments have been made under the Uruguay Round
Agreement on Agriculture (URAA) by Colombia, Indonesia, Uruguay, the EC and the
United States. The actual use of export subsidies has fallen short of the aggregate ceiling,
although information is difficult to get even from the WTO. Proposals for further reduction
commitments are likely to meet opposition from the EC. Other issues have arisen in relation to
export competition in rice, in particular the granting of export credits by the United States of
America. It should be noted, however, that export credits are also commonly used in
government-to-government deals, although there is little information available in connection
with such practices.
Export subsidies have been used by India since mid-2001 to promote exports of rice
held by the government Food Corporation of India. According to the WTO, India is not eligible
to use export subsidies on rice, but the country claims that under the URAA (Article 9-4) the
country is exempt from commitments on export subsidies for marketing, processing and
transportation. While this position is questionable, the country has to date not been challenged on
that account by other countries in the WTO.

RESTRICTIONS ON EXPORTS
43

The Commerce Ministrys decision permitting export of up to 10 lakh tonnes (lt) of rice
to African countries through parastatals is subject to the shipments containing a minimum 25 per
cent brokens content.
The rice to be exported shall be with a minimum of 25 per cent of brokens, the
Directorate General of Foreign Trades (DGFT) notification, dated May 6, has said. On the
other hand, you have a condition of a minimum export price (MEP) of $1,100 a tonne below
which no basmati rice can be shipped out. And now, the same Commerce Ministry is saying that
you can export non-basmati rice only if it has a minimum 25 per cent brokens, which
corresponds to the most commonly consumed grades here, said Mr. Vijay Sethia, former
President of the All-India Rice Exporters Association (AIREA).
According to him, if the Government was keen to gradually ease restrictions on rice
exports, the best way would have been to lower the MEP and make it applicable to both basmati
as well as non-basmati grain. By this, you will ensure that only high-end rice, which includes
premium non-basmati varieties such as Ponni, Swarna Masuri and Red Matta, is exported, while
the rice consumed by ordinary segments remains within the country, he added.
The 10 lt of rice permitted to be exported has been allocated among 21 countries.
This includes 1,44,900 tonnes to Cote DIvorie, 1,41,300 tonnes to Senegal, 1,17,100 tonnes to
Nigeria, 96,000 tonnes to Liberia, 72,400 tonnes to Togo, 68,800 tonnes to Ghana, 48,300 tonnes
to Egypt, 38,500 tonnes to Sierra Leone, 36,250 tonnes to Gambia, 24,200 tonnes each to
Burkina Faso, Mali, Somalia, Benin, Guinea Bissau, Mozambique and Zambia, 21,700 tonnes to
Cameroon, 15,000 tonnes to Mauritius, 12,100 tonnes each to Djibouti and Zanzibar, and 5,550
to Tunisia.
STATISTICS AND CALCULATION OF RICE EXPORTS FROM INDIA
AVERAGE EXPORT PRICE AND ITS CALCULATION
Total quantity of rice exported and its value realized in rupees have been taken separately
for basmati and non-basmati rice and then the value of export divided by the quantity of rice
exported to arrive at the average export price of rice per quintal year wise for basmati & nonbasmati.
We give below a year wise representation of average export price of basmati rice and
non-basmati rice in India:
Year

Basmati Rice
Rs. Per Quintal

Non-basmati Rice
Rs. Per Quintal

2000-01

1,957.00

759.00
44

2001-02

2,279.00

819.00

2002-03

2,385.00

968.00

2003-04

2,841.00

939.00

2004-05

3,140.00

1,009.00

2005-06

2,789.00

1,070.00

2006-07

2,543.00

1,139.00

2007-08

2,762.00

864.00

It is seen from the above table that export price of basmati and non- basmati rice has
fluctuated significantly year after year. The reason for fluctuation in average export price of rice
is attributed to different quantity and quality of rice exported to different countries during
different years. A particular country may import a particular quality/grade of rice in one year
and the same country may import another quality/grade of rice during next or subsequent years.
Thus, different quality and quantity of rice exported to different countries at different export
price rate may probably be the reason for fluctuation of average export price of rice in India.
EXPORT EARNINGS FROM RICE
The export earnings from the export of total rice (Basmati and other than Basmati) during
1998-99 accounted for 4.38% of total national export earnings. The total earnings from
Basmati Rice during 2005-06 were 1.33% of total national export earnings. Similarly, export
earnings from agricultural exports during 2005-06 were 17.81% of total national export earnings.
The percentage share of rice exports to the total agricultural exports during was 24.58% in which
the share of Basmati Rice was 7.5%. This is more clearly shown in the following table which
shows the export earnings of the country:
Item

Year 2005-06

Total National Exports

1,41,603.53 Rs. crores

Total Agricultural Exports

25,224.63 Rs. crores

Total Exports of Rice

6,200.80 Rs. crores

Total Exports of Basmati Rice

1,886.25 Rs. crores

Percentage share of Basmati to the Total Rice Exports

32.42%
45

Percentage share of Rice Exports to Total Agricultural Exports 24.58 %

EXPORT OF BASMATI RICE FROM INDIA

Basmati Rice, the leading aromatic fine quality rice in world trade, fetches good export
price in international market for its three distinct quality feature: pleasant aroma, super fine
grains and extreme grain elongation. Nearly two third of Basmati Rice produced in India is
exported. India accounts for about 70 percent of the world's basmati production. Each year,
India produces nearly 2.25 lakh tonnes of rice. Almost 1.25 lakh tonne is consumed by Indias
residents. The rest is left for exports. The countries were Basmati rice is exported include Saudi
Arabia, UAE, European Union countries, USA, UK, Germany, Australia, Austria, Russia,
Singapore, Iran, Kuwait, Behrain, Spain, Italy, France, Denmark and Norway.
According to a latest report by APEDA, till February 2006, basmati export had
already crossed one million tonne mark and stood at 11.4 lakh tonne, which has been
valued at Rs 2,775 crore.
Year wise Export of Basmati Rice
Export of Basmati rice
Year

Quantity ('000 tonnes)

Value (Rs. in Crores)

2002-03

593.32

1,685.62

2003-04

600.60

1,866.25

2004-05

**

2142.00

2005-06

710.29

**

2006-07

1140.00

2775.00

EXPORT OF NON-BASMATI RICE FROM INDIA

India is also exporting a substantial quantity of non-basmati rice to various countries in
the world. However, the export of non-basmati rice has been fluctuating year to year due to
weather conditions affecting the production of non-basmati rice. The export of non-basmati rice
from India was on its peak during 2004-05 and a total quantity of 45.41 lakh metric tons was
exported to different countries in the world. Again the export crossed to 43.66 lakh metric tons
46

during 2006-07, but during subsequent years, the export of non-basmati rice again came down
significantly due to various reasons. The countries where Non-Basmati Rice is exported include
Saudi Arabia, Bangladesh, Australia, Bahrain, Ethiopia, Hong Kong, Korea, Sri-Lanka,
Maldives, Mauritius, U.A.E., Malaysia, Qatar, Nepal, Indonesia, Somalia, Singapore, etc.

Year wise Export of Non-Basmati Rice from India

Export of Non-Basmati Rice
Years

Quantity ('000 tonnes)

Value (Rs. in Crores)

2003-04

565.19

225.46

2004-05

448.50

340.47

2005-06

4,540.70

3,717.41

2006-07

1,989.04

1,924.72

2007-08

1,795.74

1,685.37

CASE STUDY
In late 1997, an American company RiceTec Inc. was granted a patent by the US patent
office to call the aromatic rice grown outside India 'Basmati'. RiceTec Inc. had been trying to
enter the international Basmati market with brands like 'Kasmati' and 'Texmati' described as
Basmati-type rice with minimal success. However, with the Basmati patent rights, RiceTec
would be able to not only call its aromatic rice Basmati within the US, but also label it Basmati
for its exports. This has grave repercussions for India and Pakistan because not only will India
lose out on the 45,000 tonne US import market, which forms 10 percent of the total Basmati
exports, but also its position in crucial markets like the European Union, the United Kingdom,
Middle East and West Asia. In addition, the patent on Basmati is believed to be a violation of the
fundamental fact that the long grain aromatic rice grown only in Punjab, Haryana, and Uttar
Pradesh is called Basmati.
According to the Agricultural and Processed Food Products Export Development
Authority (APEDA), India is the second largest producer of rice after China, and grows over a
47

tenth of the world's wheat. RiceTec Inc was issued the Patent number 5663484 on Basmati rice
lines and grains on September 2, 1997.
According to Dr. Vandana Shiva, director of a Delhi-based research foundation
which monitors issues involving patents and biopiracy, the main aim for obtaining the patent by
RiceTec Inc. is to fool the consumers in believing there is no difference between spurious
Basmati and real Basmati. Moreover, she claims the "theft involved in the Basmati patent is,
therefore, threefold: a theft of collective intellectual and biodiversity heritage on Indian
farmers, a theft from Indian traders and exporters whose markets are being stolen by
RiceTec Inc, and finally a deception of consumers since RiceTec is using a stolen name
Basmati for rice which are derived from Indian rice but not grown in India, and hence are
not the same quality."
In an official release, the government of India reacted immediately after learning of the
Basmati patent issued to RiceTec Inc., stating that it would approach the US patent office and
urge them to re-examine the patent to a United States firm to grow and sell rice under the
Basmati brand name in order to protect India's interests, particularly those of growers and
exporters. Furthermore, a high level inter-ministerial group comprising of representatives of the
ministries and departments of commerce, industry, external affairs, Council for scientific
and industrial research (CSIR), Agriculture, Bio-technology, All India Rice Exporters
Association (AIREA), APEDA, and Indian Council of Agricultural Research (ICAR) were
mobilized to begin an in-depth examination of the case. The government of India was
particularly concerned about the patenting of Basmati.
In the presence of widespread uprising among farmers and exporters, the nation of India
as a whole felt confident of being able to successfully challenge the Basmati patent by RiceTec
Inc. The law firm representing India in the dispute, Sagar and Suri, criticised the procedures for
granting patents in the US claiming it is diametrically opposite to the one followed in India and
Europe. According to them, India first examines a patent application, then widely publishes it for
third parties to challenge, and only then grants the patent. However, the US keeps the patent
application a closely guarded secret and grants it without allowing other parties to challenge it.
Indians feel that the US government's decision to grant a patent for the prized Basmati
rice violates the International Treaty on Trade Related Intellectual Property Rights (TRIPS).
The president of the Associated Chambers of Commerce (ASSOCHAM) said Basmati rice is
traditionally grown in India and Pakistan and granting patent to it violated the Geographical
Indications act under the TRIPS. As a result, it is safe to say Basmati rice is as exclusively
associated with India and Pakistan as Champagne is to France and Scotch Whiskey is to
Scotland.
In the wake of the problems with patents that India has experienced in recent years, they
have now realized the importance of enacting laws for conserving biodiversity and controlling
48

piracy as well as intellectual protection legislation that conform to international laws. There was
a widespread belief that RiceTec Inc took out a patent on Basmati only because of weak, nonexistent Indian laws and the government's philosophical attitude that natural products should not
be patented. According to some Indian Experts in the field of genetic wealth, India needs to
formulate a long-term strategy to protect its bio-resources from future bio-piracy and or theft.
The type of measure being utilized was accusing the RiceTec Inc and the US of violating
the Geographical indication act of the TRIPS agreement in the WTO. But first, India and
Pakistan filed a petition to the US patent office to re-examine the patent on Basmati claiming
Basmati has been grown in their regions for thousands of years and is common knowledge in
India and thus cannot be patented.

CONCLUSION
India is one of the richest countries in the world India in terms of possessing tremendous
diversity in rice varieties. There are different varieties of rice-depending on the weather, soil,
structure, characteristics and purposes.
The multifunctionality of agriculture in terms of environmental, social and cultural
concerns is being used to defend the permanence of blue and green box payments. In Japan, most
of the emphasis on multifunctionality and food security is in relation to rice. In developed
countries where rice is a non-marginal crop, the elimination of blue or green box support would
considerably impair the sector. Rice production sites are often the natural habitat of a wide
variety of birds and plants. Water management in ricelands ensures that the soil desalination
process essential to the maintenance of land fertility takes place. Environmental concerns are
consequently a frequently used weapon in defence of the sector.
Food safety is not particularly relevant to rice, although there is increasing concern
regarding GMOs (genetically modified organisms). While some rice varieties are being
developed with new genes (e.g. carotene-enriched rice), they are not yet traded internationally.
According to Dr. Richaria, one of the most eminent rice scientists of the world, 400000
varieties of rice existed in India during the Vedic period. He estimated that, even today 200000
varieties of rice exist in India which is indeed an exceptionally high number. This means that
even if a person eats a new rice variety every day of the year he has to live for over hundred
years without reusing a variety. Every variety has a specific purpose and utility. The harvesting
area of rice in India is the world's largest.
Rice is an important aspect of life in the Southeast and other parts of Asia. For centuries,
it has been the cornerstone of their food and culture. During this period, farming communities
throughout the region developed, nurtured, and conserved over a hundred thousand distinct
varieties of rice to suit different tastes and needs.
Rice is a major food staple and a mainstay for the rural population and their food security.
It is mainly cultivated by small farmers in holdings of less than 1 ha. Rice is also a wage
commodity for workers in the cash crop or non-agricultural sectors. This duality has given rise to
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conflicting policy objectives, with policy-makers intervening to save farmers when prices drop,
or to defend consumer purchasing power when there are sudden price increases.
Rice is vital for the nutrition of much of the population in Asia, as well as in Latin
America and the Caribbean and in Africa; it is central to the food security of over half the world
population, not to mention to the culture of many communities. Rice is therefore considered a
strategic commodity in many countries and is, consequently, subject to a wide range of
government controls and interventions.
AGENCIES EXPORTING RICE

1. SHRIL: An ISO 9001-2000 Certified Company dealing in Indian long grain white
basmati rice, brown basmati rice.

2. SRI GAJANAN AGRO MILLS (INDIA) PVT. LTD, NIZAMABAD, ANDHRA

PRADESH: Since last 50 years in the processing of high quality premium grade non
basmati rice and broken rice.

3. TRISTAR OVERSEAS, New Delhi, Delhi: Exporter of variety of basmati rice like
traditional basmati rice, pure basmati rice, sharbati rice, shabnam basmati rice, parmal
basmati rice

4. USA RICE: USA Rice Federation is a national association representing producers, millers
and allied businesses advancing the use and consumption of U.S.

5. BASMATI ASSOCIATES, Navi Mumbai, Maharashtra: Basmati rice traders and

exporters and provides the premium brand of basmati from the company Jagat Agro in
Mumbai.
PRIMARY DATA
INFORMATION ON THE COMPANY

The organization we visited is a rice export mill named Karari Rice Mill Enterprises.

It is situated in Nallasopara in Thane district of Maharashtra, India.

Mr. Karari is the owner of the firm.

They are rice, grain merchant and commission agent.

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Karari Rice Mill Enterprises deals in long grain white basmati rice, brown Basmati rice
and broken rice.

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