Professional Documents
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MBA -13
1 - 24
ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION
SECOND YEAR
PAPER – 2.5
INTERNATIONAL BUSINESS
LESSONS: 1 - 24
Copyright Reserved
(For Private Circulation Only)
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INTERNATIONAL BUSINESS
LESSON 1 - 12
Written by
LESSON 13 - 24
Written by
Dr. V. MANICKAVASAGAM
Department of Corporate Secretary ship
Alagappa University
Karaikudi.
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M. B. A.
SECOND YEAR
INTERNATIONAL BUSINESS
CONTENTS
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LESSON – 1
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From the above example, it is evident that Portugal has an absolute superiority
in both the branches of production. However a comparison of the cost of production
80 ⎛ 90 ⎞
of wine with the ratio of the cost of production of cloth ⎜ ⎟ in both the
120 ⎝ 100 ⎠
countries reveals, that though Portugal has an absolute superiority in both the
branches of production of wine, for she has a greater comparative advantage over
⎛ 80 90 ⎞
England in wine relating to cloth ⎜ ⎟ , and import cloth from England which
⎝ 120 100 ⎠
has a comparative advantage in cloth production. England will gain by specialising
in producing cloth and selling it in Portugal in exchange of wine.
In the absence of trade between England and Portugal, one unit of wine
commands 1.2 and 0.88 units of cloth in England and Portugal respectively. In the
event of trade taking place, on the assumption that within each country labour is
perfectly mobile between various industries.
Portugal will gain if she can get anything more than 0.88 units of cloth in
exchange of I unit of wine and England Will gain if she has to part with less than
1.2 unit of cloth against 1 unit of wine. Hence, any exchange ratio between 0.88
units and 1.2 units of cloth against I unit of wine represents a gain to both the
countries. The actual rate of exchange will be determined by the reciprocal demand.
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Heckscher-Ohlin Thesis
Bertil Ohlin and Eli Heckscher have explained the basis of international trade
in terms of factor endowments. The classifiable theory demonstrated that the basis
of international trade was the comparative cost difference. However, it did not
explain the causes of such comparative cost difference. The alternative formulation
of the comparative cost doctrine developed by Heckscher and Ohlin explains why
comparative cost differences exist internationally. They attribute international (and
inter-regional) differences in comparative costs to:
a) Different prevailing endowments of the factors of production; and
b) The fact that the production of various commodities requires that the
factors of production be used with different degrees of intensity.
In short, it is the difference in factor intensities in the production functions of
goods along with the actual differences in relative factor endowments of the
countries which explains the international differences in the comparative cost of
production.
Thus, in a nutshell, the Heckscher-Ohlin theory states that a country will
specialise in the production and export of the goods whose production requires a
relatively large amount of the factor with which the country is relatively well
endowed with capital only if the ratio of capital to other factors is higher than in
other countries.
For example. assume that:
i) In Country A:
Supply of labour = 25 units
Supply of capital = 20 units
Capital/labour ratio = 0.8 units
ii) In Country B:
Supply of labour = 12 units
Supply of capital = 15 units
Capital/labour ratio = 1025 units
In the above example. even though Country A has more capital in absolute
terms. Country B is more richly endowed with capital because the ratio of capital to
labour in Country A (1.8) is lower than in Country B (1.25).
The two-country, two-commodity model of Heckscher and Ohlin is based on a
number of explicit and implicit assumptions. The important assumptions of the
model are:
i) Both the product and factor markets in both the countries are characterised
by perfect competition.
ii) The factors of production are perfectly mobile within each country but
immobile between countries.
iii) The factors of production are of identical quality In both the countries.
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LESSON – 2
years. Thus, England was ahead of other countries in the sphere of manufactured
goods in the 18th and 19th centuries; but later Germany, the United States and
Japan caught up with England which was left far behind in the production of which
it once enjoyed comparative advantage). Thus international trade helps or is based
on special1sation and ensures all the advantages of specialisation to participating
countries, the main advantage being the availability of goods at cheaper price than
if the country were to try to produce those goods within the country itself.
2) International special1sation and possibility of exporting goods to other
countries make possible large-scale production of goods and therefore, their
production at lower cost due to large scale production. International trade thus,
enables peoples of the world to get a large variety of goods at cheaper prices than If
the country were to try to produce those goods itself (even If it were possible). This
means international trade leads to more efficient use of world's resources.
3) International trade opens the" entire world markets for goods produced in a
country. Thus, international trade by expanding" the size of the markets becomes
source of employment to people in the world.
International trade thus lead" to relatively higher level of employment of
labour. For example, If we take a recent example, India has been exporting ready-
made garments to the extent of Rs. 2,000 crores annually at present.
This provides employment to hundreds of tailors, women-workers who can"
work at home, to designers, cutters, packers and so on. If India were not to export
these ready-made garments, their sale would be confined to only domestic markets
which cannot absorb all that is being produced at present with the help of domestic
consumption and exports. If exports are stopped." that will mean unemployment of
a large number of presently employed workers.
4) The act that international trade provides employment to relatively larger
number of people also means that it enables a vast number of people all over the
world to earn income. For example, export of crude oil and petroleum products by
Middle East countries had raised the level of income of people in those countries to
a relatively high level than If crud~ on were not be exported to others countries.
Also, prosperity of the Middle East countries due to rise in crude oil prices during
1970 gave a boost to India's exports to those countries and brought prosperity, for
example, to people in Kerala.
5) Equalisation of prices of Factors of Production: If there were no
international trade and If, for example, Australia with abundant availability of land
were not to export wheat and wool that could result in low value or price for land
and its use. But international trade changes this picture. Since Australia cannot
export land, it exports products where land plays a prominent part, namely wheat
and wool and therefore, land prices go on rising. Similarly, since countries cannot
export factors of production they export goes produced with the help of those
factors of production. International trade thus tends to bring about equalisation,
not only of prices of commodities but also of returns of factors of production. Thus,
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(4) Level of Income in a Country and Gains from International Trade: The level
of income of people in a country has great influence on sharing gains from
international trade.
If, for example, exports of a country are in great demand because level of
income of people in the importing country is fairly high such goods will be in a
position to command higher price and income level of people in the country
exporting those goods will rise. This will mean higher wages in export industries.
The rising income of people in export industries will also mean increasing demand
for other domestic goods whose prices will also go up and therefore level of income
of people producing those goods would also rise.
On the other hand, if in a country, demand for imported goods from the other
country is relatively small or elastic" (i.e., imported goods are not urgently wanted)
people in the importing country will be getting imported goods at relatively lower
price; income of the people producing such goods will be lower. This will also mean
lower demand for other domestically produced goods while they will be paying high
prices for imported goods (assuming that demand for such goods is inelastic in the
importing country).
2.4 SUMMARY
As like domestic trade, international trade also benefited in international
transactions. They are – specialization, large-scale production opens the entire
world market, equalization of prices of factors of production, transfers, etc., It also
made conditions for recapping maximum advantage and makes factors determining
gains such as differences in cost ratios and reciprocal demand.
2.5 ASSIGNMENT QUESTIONS
1. What are the main advantages of international trade?
2. Explain briefly the conditions necessary for recapping maximum advantages
of international trade.
3. Enumerate the factors determining gains from international trade.
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LESSON – 3
TERMS OF TRADE
OBJECTIVES
To know the different concepts of terms of trade
To understand the factors influences on terms of trade
To have an idea about the problems of measurement of terms of trade
STRUCTURE
3.1 Preamble
3.2 Different Concepts of Terms of Trade
3.3 Influences on Terms of Trade
3.4 Problems of Measurement of Terms of Trade
3.5 Summary
3.6 Assignment questions
3.1 PREAMBLE
The 'terms of trade' is one of the measurements of the gains from international
trade to a particular country,
In international economics, the phrase 'terms of trade' refers to the ratio index
of export prices to import prices. In other words, it is the rate at which a country's
exports are exchanged for imports.
If we take the example given to illustrate the Comparative Cost Theory in
lesson - 1 we find that when England and Portugal are at trade with each other. the
exchange ratio between them must be some where between the two extremes of 1
unit of wine to 1.2 units of cloth (cost ratio in England) and 1 unit of wine to 0.88
units of cloth (cost ratio in Portugal).
The terms of trade are the extract ratio at which the exchange of goods takes
place between the two countries. For instance when England and Portugal are at
trade; if one unit of wine is exchanged for 1. 1 units of cloth the terms of trade are 1
unit of wine to 1.1 unit’s cloth.
John Stuart Mill, one of the great classical economists has shown that the
terms of trade between two commodities depend upon the strength of the world
supply and demand for each of the two commodities. In other words, the terms of
trade are determined by reciprocal demand. If people have an intense desire for
wine (relative to the available supply) the exchange ratio will settle, in our example,
near 1 unit of Wine to 1.2 units of cloth. On the other hand, if cloth is very much in
demand in both the countries, the final exchange ratio will settle near 1 unit of
wine to 0.88 units of cloth.
3.2 DIFFERENT CONCEPTS OF TERMS OF TRADE
The above interpretation of the terms of trade is narrow. Of course in the early
days, the concept meant what we have stated above. But later, their terms of trade
measures have been extended to cover trends in the rate of consumption of
productive resources to effect foreign trade and net utility from trade.
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Gerald M. Meier has classified the different concepts of terms of trade into the
following three categories.
Those that relate to the ratio of exchange between commodities:
a) Gross barter terms of trade;
b) Net barter terms of trade; and
c) Income terms of trade
Those that relate to the interchange between productive resources:
a) Single factoral terms of trade; and
b) Double factoral terms of trade
Those that interpret the gains from trade in terms of utility " analysis:
a) Real cost terms of trade: and
b) Utility terms of trade.
Net Barter Terms of Trade
The net barter terms of trade, also called the commodity terms of trade,
measures the relative changes In the Import and export prices and Is expressed as:
PX
N =
pm
where PX and pm are the price Index number of exports and Imports.
For example, with 1968-69 as the above, the unit value Index of India's
exports Increased to 120 by 1972-73, but the respective Index of Imports declined
to 97. Hence, India's net barter term of trade in 1972-73 was 124. This implies that
because of .the higher rate of Increase in the export price 24 per cent more Imports
could be received, on tire basis of price relations only, In exchange for a given
volume of exports. However, by 1979-80, the unit value Index of exports Increased
to 236 and of Imports to 360. Therefore, In 1979-80, N = 66. This deterioration in
India's net barter terms of trade was caused mainly by the hike In the price oil, one
of her most important import items.
The concept of net barter terms trade suffers from certain drawbacks. It
measures only the gain or loss arising out of relative changes In export and Import
prices and completely Ignores the Impact of such factors as:
i) The changes in the level of volume of exports and Imports:
ii) The changes in the quality of exports & Imports
iii) The changes in the composition of trade
iv) The changes In the productivity of export Indusb1es: and
v) Unilateral payments.
Gross Barter Terms of Trade
Taussig introduced the concept of gross barter terms of trade to correct the
commodity of net barter terms of trade for unilateral transaction. Exports or
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Where Qm and Qx are the volume Index numbers of Imports and exports
respectively.
A rise In G is regarded as a favourable change.
The appropriateness of incorporating unilateral payments into the terms of
trade has, however, been questioned Haberler has suggested that allowance should
be made separately for unilateral transactions, instead of incorporating them in the
terms of trade index.
Though Taussing introduced the concept of gross barter terms of trade as an
Improvement on the net barter terms of trade, it too does not reflect the Impact of
changes in productivity. Further, it may not reflect the changes in the quality' and
composition of foreign trade.
Income Terms of Trade
G.S. Dorrance has modified the net barter terms and presented the income
terms of trade. The income terms of trade, which indicates a nation's capacity -to
import, is represented as:
Px • Qm
I =
Pm
It may also be expressed as:
I = N • Qx
Px
Because N =
Pm
These income terms of trade indicates a nation's capacity to Imp0r:t because
when the index of total exports earnings (Px . Qx) is divided by the Import price
index, we get the quantum of imports that can be made with, the exporting
earnings.
Therefore, a rise in 1 indicates that the nation's capacity to Import, based on
exports, has increased, i.e., it, can o6tain a larger volume' of imports from the sale
of its exports.
It should, 'however,. be clear, that I indicates only the export-based capacity to
Import and not the total capacity of the nation to Import; for the total capacity to
(import depends also on such factors as capital inflow, receipts from invisibles, and
unilateral payments.
Even when export prices decline and import prices remain constant, the
income terms of trade Improve, if the physical volume' of exports increases more
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than in proportion to the fall in export prices. This very well demonstrates that a
change in the income terms of trade terms of need not necessarily reflect a real gain
or loss. This is a serious drawback of this concept.
Single and Double Factoral Terms of Trade
Jacob Viner has introduced the concepts of single factoral and double factoral
terms of trade to modify the net barter terms of trade 80 as to reflect the changes in
productivity.
The single factoral terms of trade Is the net barter terms of trade adjusted for
changes In the efficiency or product1v1ty of a country's factors In the export
industries. It may be expressed as:
S = N.ZX
where ZX is the export productivity index.
The double factoral terms of trade Is the net barter terms of trade corrected for
changes In the product1v1ty In producing Imports as well as exports. It may be
expressed as:
D = N.ZX / Zm
where Zm is an Import product1v1ty Index. A rise In D Is a favourable movement.
because It implies that one unit of home factors embodied In exports Is now
exchanged for more units of the foreign factors embodied In Imports.
D will diverge from S when there Is a change in the factor cost of producing
imports; but, as Gerald Merier states, this has no welfare significance for the
importing country even though it indicates a change In productivity in the other
country from which commodities are Imported. What matters to the importing
country is whether it receives more goods per unit of its 'exported factor Input' (an
Improvement in S) - not whether these imports contain more or less foreign Inputs
than before.
The factoral terms of trade, both single and double, are of little practical
importance because it is very difficult to measure statistically the changes in the
productive efficiency of the factors of production. Another of their drawbacks is that
they do not reflect the real gain arising out of international trade.
Real Cost Terms of Trade
the concept of real terms of trade, Introduced by Jacob Viner, measures the
gain from international trade In uUl1ty terms.
The total amount of gain from trade may be defined in utility terms as the
excess of total utility accruing from imports over the total sacrifice of utility
Involved in the surrender of exports. (Exports result In loss of utility to the
exporting country because the resources used for export production could have
been utllised for products meant for' domestic consumption. Imports on the other
hand respect a gain in utility).
To determine the real cost terms of trade we correct the single factoral terms of
trade Index by multiplying S by the reciprocal of an Index of the amount of
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dlsutll1ty per unit of productive resources used In producing exports. The real cost
terms of Trade may be represented as:
R=N.Fx.Rx
where Fx = index of productivity efficiency in export industries and Rx = index of
the amount of disutility incurred' per unit of productive factors in the export sector.
A rise in R indicates that the quantity of imports obtained per unit of real cost
is greater. R may rise as a result of a change in the methods of producing exports,
or a change in the factor' proportions used in exports.
Utility Terms of Trade
The concept of utility terms of trade, which too was introduced by Jacob Viner,
marks an improvement on the real cost terms of trade.
Viner points out that the extent of gain from trade depends not only on the
quality of foreign goods obtained per unit of real cost involved in the production of
the export commodities, but also on the relative desirability of the import
commodities as compared to the commodities which could have been produced for
home consumption with the productive., resources now' devoted to the production
for export. To take account of changes in the relative desirability of the import
commodities and of the native commodities whose internal consumption is
precluded by the allocation of productive resources to production for export when
such changes in relative desirability are due to changes in tastes, it would be
necessary to incorporate in the 'real cost trade index' an index of relative average
utility per unit of imported commodities and of native commodities whose internal
consumption is precluded by the allocation of resources to production for export.
The utility terms of trade may be represented as:
U = N . Fx . Rx . Urn
where Urn = index of relative utility of imports as compared with the
commodities that could have been produced for internal consumption with those
productive factors which are at present devoted to the production of export goods.
3.3 INFTUENCES ON TERMS OF TRADE
The terms of trade of a country depend on a number of factors. The important
factors that influence the terms of trade are:
I) Elasticity of Demand and Supply
The elasticity of demand for exports and imports and the elasticity of supply of
exports and imports of a country significantly influence its terms of trade. When the
demand for a country's exports is less price elastic than its imports, the terms of
trade tend to be favourable because, under such a situation, 'exports can command
a relatively higher price than imports. On the other hand, if the demand for imports
is less elastic than that for exports the terms of trade tend to be unfavourable.
If the supply of a country's exports is more elastic than its imports, the terms
of trade is likely to be favourable because by constracting and expanding the supply
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LESSON – 4
BALANCE OF PAYMENTS
OBJECTIVES
To learn the concept of balance of trade and balance of payments
To understand the balance of payments on Current Account and Balance of
Payments on Capital Account
To know the Balance of Payments of Capital Account
STRUCTURE
4.1 Preamble
4.2 Balance of Payments on Current Account and Balance of Payments on
Capital Account
4.3 Balance of Payments on Capital Account
4.4 Summary
4.5 Assignment questions
4.1 PREAMBLE
Just as India (or for that matter any other country) exports commodities and
imports commodities (which are visible items of the country's exports and imports).
India also sells or exports various services like shipping, insurances, tourism,
educational and technical services, etc. which is called 'invisible' items of exports.
In the same way just as India has to make payments for commodity imports
(i.e. for visible exports), she also imports or purchases various types of services
from other countries such as services of foreign shipping companies to bring goods
home from abroad, off foreign insurance companies, educational facilities in foreign
universities, for Indian tourists who avail of foreigners hotel and tourist services for
which. India has to make payments.
Thus, compared to the concept of ‘Balance of Trade’, ‘Balance of Payments’ is a
more comprehensive concept. The concept of balance of payments includes not only
payments to be made and received for commodity imports and commodity exports.
respectively, but also includes payments which a country has to make to other
countries and which that country receives from other countries for various invisible
items of imports' and exports, respectively. Invisible items of export of a country
and imports by the country include items like: shipping, banking, insurance,
tourism, royalty payments and other fees, payment of interest of foreign debts, etc.
Thus, India has to make payments to other countries not only for commodity
imports but also for the import of above services rendered to her by other countries.
In the same way, India receives payments not only for export of commodities but
also for export of various invisible items which other countries purchase from India.
Thus, balance of payments statement includes all the payments which a
country has to receive for exporting visible and invisible items and which the
country has to, pay for importing all the visible and invisible items.
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As we have already seen, balance of trade of a country need not balance. This
is because even if there is unfavourable or adverse balance of trade, the gap can be
filled by the surplus of value of invisible exports over value of import of invisible
items.
But when it is the question of balance of payments (namely total payments
which a country has to receive for exports of visible and invisible items, and which
the country has to make for imports of visible and invisible items), it needs to be
noted that these total payments to be made and received must balance each other.
If debit items (i.e. payments to be made to other countries) in the balance of
payments go on exceeding credit items or payments like to be received by the
country (i.e. If balance of payments a country does not balance year after year), It
becomes a matter of grave concern and steps will have to be taken to see that in the
long run all the parents to be made to other countries and all the payments to be
received from other countries are made to balance.
If In a particular year, total payments to be received on account of visible and
invisible exports are less than total payments to be made on account of visible and
invisible imports, the gap can be filled by using foreign exchange reserves built
during the past years, or by raising loans from abroad and utilising them for filling
the gap. But this can not go on forever, because sooner or later the foreign
exchange reserve is bound to get exhausted and time will come when foreign debts
will have to be repaid.
4.2 BALANCE OF PAYMENTS ON CURRENT ACCOUNT AND BALANCE OF PAYMENTS
ON CAPITAL ACCOUNT
Distinction is made between ‘Balance of Payments on Current Account and
‘Balance of Paymentts on ‘Capital Account.’
‘Balance of payments on current account refers to payments to and by a
country for currently purchased or sold goods and services; it also includes interest
paid to and by the country on debts as also donations and gifts made to other
countries or received from other countries.
Balance of payments on capital account, on other hand, refers to payments to
and by a country of debts and such other long term claims on each other.
It would be seen that balance of payment on current account influences the
level of income of the people in the concerned country directly and almost
immediately. Thus, when India imports goods and services from foreign countries
and pays for them, that money could have been used to purchase Indian goods and
services. If not money flows out of the country and to that extent reduces the level
of income of people In India.
On the other hand, when India sells her commodities and services to foreign
countries, the producers of those goods and services get Income and that pushes
up the level of income of people in India. Thus, balance of payments on current
account has a direct impact of the level of Income of people in a country. (Balance
of payments on current account is also known as balance of payments on trading
account).
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On the other hand, ‘balance of payments on capital account’ does not have
such a direct and immediate impact on the current level of income of the people in
a country; but it influences the volume of assets which a country holds and that
will have effect on the level of income of people in a country in the long run.
The concepts of ‘Balance of Payments on Current Account’ and ‘Balance of
Payments on Capital Account’ can be explained and properly understood by taking
Indian figures of some past year for which detailed figures are available. It will be
seen from Table showing balance of payments on current account (and also on
capital account) that there are visible items as also invisible items. Both visible
items and invisible items make balance of payments on current account. Payments
for invisible items are similar to payments made for ‘visible items.’ Both provide
income to people who provide goods and services. It may be pointed out that the
most important item in the balance of payments on current account is export and
import of goods (visible items).
India' Balance of Payments on Current Account and
Balance of Payments on Capital Account
Rs.in crores
Items 1980-81 1985-86
1 Imports 12,543.6 21,163.6
.
2 Exports 6,576.4 11,577.6
.
3 Trade Balance (2-1) (-) 5,967.2 9,586.0
.
4 Non-Monetary Gold Movement Net 23.3
.
5 Invisibles:
.
Receipts 5,326.7 7,343.4
Payments 1,578.1 4,244.6
Service Charges on Debts (Net) 3,748.5 3,098.7
6 Balance of Payments on:
.
Current Account (Net) (-) 2,218.6 5,297.0
7 Capital Transactions:
.
a) Private
It would also be seen from Table that when all current account receipts and
payments are taken into consideration, India had an overall deficit in the balance of
payments on current account of Rs. 2,218.6 in 1980-81 and deficit of Rs. 5,279 in
1985-86.
Some of the important invisible items in India's balance of payments on current account were
as follows:
Rs.in crores
Items 1980-81 1985-86
1. Foreign Travel:
Receipts 1165.6 1189.7
Payments 90.3 411.6
Net 1075.3 777.5
2. Transportation:
Receipts 361.6 603.9
Payments 355.1 816.1
Net 6.5 (-) 212.2
3. Insurance:
Receipts 48.4 78.6
Payments 34.3 83.3
Net 14.4 (-) 4.7
4. Investments Income:
Receipts 855.1 669.1
Payments 369.7 618.7
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LESSON – 5
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Controllable Factors
Market Market Product Channels of Price Promotion Promotion Marketing Export
segments product channels of price policy Personal selling customer and logistics marketing
planning distribution Advertising selling product transportation mix
Sales promotion service ware housing variables
inventory
Total Market Export Marketing Programme
Adopted from the Export Marketing Management concept by Winter & Others.
5.7 SUMMARY
Export marketing is developing and benefits obtained by quotas for imported
materials in exchange of proof of the export of finished goods. India has certain
weal chesses in this regard particularly on inflation, high prices and black markets.
The features are, export marketing must be orderly, must be methodical, technical
and adaptable. The basic functions are supervision of exports, adaptation of the
product for export, financing, credit and terms of payment, and after sales service.
It combats the environmental factors in this.
5.8 ASSIGNMENT QUESTIONS
1. What are the India’s weaknesses for export marketing?
2. What is export marketing?
3. State any four salient features of export marketing
4. Enumerate the important functions of export marketing
5. Describe the environmental factors in export marketing.
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LESSON - 6
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Tariff Barriers
Protective Tariff: Tariff barriers refer to barriers to trade like taxes levied on
imports. They are imposed by an importing country in the form of customs duty.
Tariffs make the imported product costlier than the product available in the local
market. Sometimes the customs duty on a product is so steep that it is not
worthwhile to import it at all. The local industry manufacturing an equivalent
product is thus given protection against foreign competition.
Revenue Tariff
The main object of the revenue tariff is to obtain revenue for the public
treasury. Revenue Tariffs are generally kept low so as not to restrict imports
appreciably. India is a very good example of an importing country where customs
duty forms a significant part of the total revenue.
Ad Valorem and Specific Duties
Tariffs or duties may also be classified into ad valorem tariffs and special or
specific tariffs. A duty may be levied either according to the value of the commodity
or according to its weight or quantity. The former type of duty is known as an
ad valorem duty and the latter as a specific duty. An ad valorem duty is charged as
a fixed percentage of the value of the imported article. A specific duty is a fixed sum
of money charged upon each unit of the commodity imported. Sometimes the
specific and ad valorem duties are simultaneously levied on a commodity. A duty in
which both these forms of duties are combined is generally known as the
compound or mixed tariff.
Tariff barriers may be classified into five general classes according to the origin
and destination of the goods crossing the national boundary.
a) Export duties
b) Import duties
c) Transit duties
d) Anti-dumping duties: and
e) Countervailing duties
a) Export Duties
Export duties are generally levied for revenue. They are more popular in the
countries exporting primary products than in those exporting manufactured
products. Export is levied on the export of raw materials with the specific objective
of making these costlier for foreign manufacturers than for domestic
manufacturers. The mother country sometimes compels its colonies to levy export
duties to protect its domestic industry from the competition of the colonies. Export
duties have sometimes been employed to conceive exhaustible natural resources for
domestic industries. Certain countries levy export duties to collect funds for the
defraying the expenses of export promotion activities. Sometimes the duties are
levied to charge higher prices from foreigners for the commodities which are in
short supply.
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b) Import Duties
One of the important purposes of import duties is to obtain revenue for the
public treasury. Tariffs are also very popular for protecting domestic industries
from foreign competition. The protection of domestic industries is very essential for
the development of a country. Domestic industries may also require protection
against the aggressive and unfair practices of foreign competitors. In recent years,
tariffs are often employed to restrict imports with a view to correct a disequilibrium
in the balance of payments.
In order to achieve uniformity amongst countries as to customs duties and
other levies, products have been grouped into various categories, depending upon
the material of which they are made. The nomenclature system has been worked
out by an international committee of exports under the aegis of the Customs
Cooperation Council. This classification of goods adopted by them came to be
known as the Brussels Tariff Nomenclature (8lN), which is today followed by a
number of countries when they impose customs duties on imported goods.
c) Transit Duties
Transit duties were very common during the period of mercantilism and in the
early nineteenth century. At that time, transportation was very slow and costly. The
use of the shortest route, therefore, was very important. Countries situated in a
favourable geographical position fully exploited their position and levied heavy
transit duties on the merchandise passing through their territories. Progress in the
field of transportation during the nineteenth century robbed transit duties of their
earlier profitability and decreased the incentive for their maintenance. Another
important factor which led to the elimination of transit duties is the desire among
nations for international economic co-operation. The burden of transit duties is
borne either by the consumers in the importing country or by the procedures in the
exporting country, depending upon the conditions of demand and supply in the two
countries. Transit duties, like other duties, have a tendency to restrict the volume
of world trade.
d) Anti-Dumping Duties
Dumping is the practice of selling goods abroad at a. price below their normal
price (or even below their marginal cost). The purpose of this may be to maintain a
stable or oligopolistic domestic market structure by disposing of temporary
surpluses abroad, or as a means of disrupting the domestic market of a foreign
competitor. Anti dumping duty is levied when the selling price of an imported
product is lower that the normally prevailing domestic price. To meet a situation of
this nature whenever it arises, most countries., under their own legislation, have
the power to impose anti-dumping duties on the ground of injury to their domestic
industries. Anti-dumping duties normally take the form of additional import duties
and charges.
e) Countervailing Duties
Countervailing duties are levied in the same way as anti-dumping duties, and
the explanation of their levy is generally the charge that imports from a specified
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practiced in a restricted way. Imports of bulk drugs into India are usually canalized
and distributed through the State Trading Corporation and the Indian Drugs and
Pharmaceutical Ltd. Both these organisation are state owned enterprises. Similarly,
the exports of such raw materials as Iron ore/except in Goa, are canalized through
another state-owned agency known as the Minerals and Metals Trading Corporation
(MMTC). These organisations regulate international trade in certain commodities.
6.3 SUMMARY
In international marketing, it is necessary to taken into consideration of
exporting country’s foreign trade regulations. And hence many barriers limit the
market potentialities in the form of tariff barriers – export and import duties, transit
duties, countervailing duties and antidumping duties and non-tariff barriers such
as prior import deposits, state trading, QRs, Health and safety regulations,
Preferential Arrangements, Trading Blocks, etc.
6.4 ASSIGNMENTS QUESTION
1. Discuss briefly the tariff and non-tariff barriers to international marketing
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LESSON – 7
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forces. The objective in pursuing this policy should be to prevent those fluctuations
of the free market rate that the purely speculative or temporary. The policy should
not interfere with changes in rates caused by real alterations in the respective
values of the currencies. But the difficulty lies in identifying the speculative and
temporary changes and isolates them from the fundamental changes.
ii) Over valuation of currency
The exchange control may aim at keeping the currency over valued. That is,
the currency is kept at a higher value in terms of foreign currency than that would
prevail if market forces were allowed to determine the rate. When the country is at
war, exports become difficult but the country has to import both raw materials and
finished goods. In such a situation, type right to purchase materials and finished
goods. Foreign exchange is confined to government agencies. The demand for
foreign currency is kept low and thus its price too. In otherworld, the exchange
value of the local currency is kept high so that the government can import its
requirements cheaply than would be possible otherwise.
Secondly, overvaluation may be used to repay the external debt cheaply in
terms of home currency. When the country is scheduled to make repayments of its
external borrowings and interest thereon on a large scale, if the currency of the
country is kept overvalued, the repayment would work out to be cheaper in terms of
local currency.
Thirdly, it may be used to contain inflation in a country depending heavily on
external trade. If the value of the currency falls, imports will become costlier and
exports will get windfall profits. The immediate effect of the situation is addition to
the inflation rate. The policy of the government, therefore, would be to prevent the
fall in value and keep it at an artificially higher level.
iii) Undervaluation of currency
The exchange control may be with a view to keep the currency under valued.
The effect and purpose of undervaluation of currency is opposite to that of
overvaluation of currency, when the currency is undervalued exports are cheaper
and imports become costlier. Thus, undervaluation of the currency leads to
increase in exports and reduction in imports and ultimately results in the
improvement of balance of payments of the country. The policy of undervaluation
may be helpful during depression when selling is difficult. Undervaluation of the
currency may help in the task by stimulating exports through lower prices.
iv) Balance of Payments Deficits
In a situation of worsening balance of payments, the government may like to
conserve the foreign exchange through payment restrictions or otherwise. Exchange
restrictions may be to prevent large-scale flight of capital from the country. The
erratic and uncontrolled movement of capital from the country. The erratic and
uncontrolled movement of capital will not only affect the balance of payments
position but also be disturbing to the domestic economy.
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1) Exchange Intervention
Exchange intervention or official intervention refers to the buying and selling
of foreign exchange in the market by the government or its agency (Central bank)
with a view to influencing the exchange rate. In a free market the rate of exchange.
is determined by the forces of demand and supply. Official intervention is an
attempt to counter the effect of demand and supply of the currency and keep the
rate of exchange at a level desired by the government.
The intention of the government is to keep the exchange rate of the currency of
the country at a fixed level. Then the currency is, said to, be ‘pegged' at that level. If
the pegged rate is higher than the rate which would prevail in the free market, the
currency is said to be 'pegged up' or simply 'pegged'. During the war of 1914-18.,
the British Government 'pegged' the pound- sterling at $4.76. How great a degree of
overvaluation this entailed was shown in March 1919. When the 'peg" was
withdrawn and the pound fell within a year to 3.40. Intervention may also be to
keep the value of the currency down as compared" to the rate that would be
determined by market forces. In that case the currency is said to be 'pegged down'.
To quote an illustration, the rate of exchange between Newzealand pound and the
pound- starling was fixed in 1933 at & N Z.125 = $100 (or & N.Z 1=16 s. Sterling).
For the first few years after the rate was established the Newzealand pound would
almost certainly have been given a higher value in a free market; the action of the
Newzealand authorities was thus a form of 'pegging down'.
It should be understood that pegging up or pegging down of a, currency does
not mean causing a permanent change in the rate either upwards 'or downwards in
the market. It only means keeping the rate (artificially) at a particular level. The
pegged rate is something different from the rate "that would obtain in the market in
the absence of pegging operations.
When the exchange value of the domestic currency is pegged up, it means that
the currency value will fall if free market is allowed. To keep the value at the pegged
up value, the government should purchase it in large quantities. In other words, it
should sell foreign currency in large quantities in the market. This would increase
the demand for the currency in the market and prevent it from falling from the
pegged up level. To effectively carry out the operation, the government requires a
large reserve of foreign currency. In addition to the accumulated reserves, the
government may borrow externally. But except in times of emergency, governments
are not likely to be willing to borrow continuously in foreign centres in order to
support their currencies. Even if they do so, continuous borrowing would lower the
country's rating in the market and ultimately the source will dry up.
Intervention may be for 'pegging down' the currency or keeping its value lower
that the free market rate. When the rate of exchange of the domestic currency is
rising in the market the government may sell the currency in large quantities and
thus bring down its rate. Large reserves of domestic currency are required for
pegging down operations. As compared to pegging up, pegging down seems easier
because it is not difficult to have reserves of domestic currency. Though it is true,
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pegging down is also not without limitations. Domestic resources can be raised by
taxation or public borrowing, both of which cannot go beyond a certain limit. The
other method is creation of more money by resorting to printing of currency. This is
an unlimited source but it has serious repercussions on the economy. Increased
money supply will lead to inflation in the country. The Inflation will cause a
permanent reduction in the value of the currency. It may be remembered that the
purpose of pegging down is to keep the rate of the currency at a lower level than the
free market level. It is not to lower the level of market rate itself.
As already defined, intervention means selling or buying of foreign exchange in
the market by the government or the Central bank. The purpose may be to 'peg up'
or 'peg down' the currency of the country. Interventioned not be for this purpose
along. Intervention may also be for the purpose of stablishing the exchange rate
and free it from short-term fluctuations. The government should be ready to
purchase and sell the currency to any extent at specified rates. The market rates
then tend to over around these official rates. The government should have large
reserves of 'both domestic currency and foreign currency to carry out the operation.
For the success of intervention two conditions are essential. The control of
foreign exchange transactions should be centralised with the government. All
proceeds of foreign exchange from exports and other transactions should be paid to
the government. Similarly, all requirements of foreign exchange for Imports and
other payments should be obtained from the government. Secondly, the government
should have sufficient reserves of foreign currency and domestic currency. In
practice there is a limit to both foreign and domestic resources and the possibility
of intervention is limited to this extent. The judicious policy that can be followed is
that of using intervention to avoid minor fluctuations in rates.
In India, exchange control is centralised with the Reserve 'Bank of India. Much
of the routine work is entrusted by it to authorised dealers. Thus the first condition
mentioned above Is fulfilled. The Reserve Bank sells and purchases from authorised
dealers without limit pound sterling and purchases US dollar, and Japanese yen.
The rates for 'pound-sterling in the market tends to be within the range of buying
and selling rates of the Reserve Bank. As far as other currencies which can be sold
to Reserve Bank, the market buying, rates are normally more favourable than the
Reserve Bank, the market buying rates are normally more favourable than the
Reserve Bank rates. The Reserve Bank seldom Intervenes In the market. The
Reserve Bank rates stabilise the market rates around them.
2) Exchange Restriction
Exchange restriction refers to the policy of the government whereby the supply
of domestic currency In the exchange market Is restricted. The exchange value of
the domestic currency is maintained by restricting its supply. Exchange
intervention tries to achieve the object of maintaining the currency high by the
government supplementing the demand for the currency in the market. This mean
the government should have sufficient foreign currency reserves to offer to the
market. This method was largely found insufficient where the magnitude of the
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problem was large or where the government did not have sufficient foreign
exchange reserves. Exchange restriction achieves the same objective in an easier
way by simply restricting the supply of the domestic currency in the market.
Any method adopted by the government which has the effect of restricting the
supply of domestic currency in the market can be termed exchange restriction. But
in its strict application exchange restriction has the following main features; First
all trading in foreign exchange is centralised with the government or central
monetary authority. Secondly, public have to obtain poor permission of the
government to exchange national currency for foreign currency. It is also an offence
for anyone to enter into an exchange transaction except by permission and through
the agency of the government. Thirdly, all foreign exchange transactions are routed
through the government or the govt. agency.
Exchange restrictions in different countries take different forms. They may
control only capital transactions or they may control both capital and current
transactions. The important methods of exercising exchange restrictions are:
(1) blocked accounts (it) transfer moratoria and (ill) multiple exchange rates.
Blocked Accounts
Exchange restriction was first imposed in the central European Countries in
1931 to bong the supply of their currencies in the market in accordance with the
demand for them without a steep fall exchange rates. These countries had borrowed
heavily on short term on which the repayment of principal and interest was due at
any time. Repayment of these foreign currency loans would have flooded the market
with the local currencies and brought down their value sharply. This would have
reinforced itself prompting further outflow of capital from the country at a
diminished value of domestic currency bringing in its wake collapse of the economy.
The only thing that could be done in such cases was to impose a ban on the outflow
of capital. In some cases the debtor was made to pay the amount due but it was
kept in an account the central bank in the name of the foreign creditor. Thus the
system of blocked accounts was born.
Under this system all payments to a foreign country will not be made directly
but paid to the central bank of the country imposing the restriction. The Central
bank will keep the amount in an account with it in the name of the foreign creditor.
This amount is not available to the foreign creditor in the currency of his country
but can be used by him to make purchases from the country blocking the account.
This system is known as 'blocking of accounts' because the bank accounts and
other assets of the foreigners are denied conversion into their currencies.
The country which blocks the accounts of foreigners may allow the use of the
balance in the accounts within the country. The foreign creditor may thus make
some imports from the country blocking the accounts and make payment to the
local exporter from the balance in the account. Transfer from one blocked account
to another blocked account may be permitted. These relaxations may encourage
Illegal dealings in foreign exchange. For example foreign exporters may under
Invoice their consignments so that a lesser amount Is blocked. The difference may
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be collected by them in local currency when they go to the country of the Importer.
When compensatory parents take place In this manner the government loses
foreign exchange to that extent should ordinarily have flow into its reserves.
The system of blocked accounts causes great hardships to the foreign creditors
who cannot use the amounts in any other currency for any purpose. Further
blocked accounts reduce International trade since other countries would not like to
export to the country and get their funds blocked. The blocking of accounts also
results in black marketing In foreign countries. The foreign creditor whose accounts
are blocked would like to sell It to others even at a lower rate.
b) Transfer moratoria
The effect of transfer moratoria is similar to that of blocked accounts. The
government puts a ban on all payments to outsiders, whether on current or capital
account. The local debtors are made to pay the amounts due to the foreign creditors
to the Central Bank of the country. The funds are released to the foreigners when
the balance of payments and reserve position of the country Improves.
c) Multiple exchange rates
When the system of blocked accounts was in vogue it was found that
foreigners whose funds were help up in such accounts were willing to sell these
balances at a discount in the unofficial markets rate than keeping their funds
blocked. The authorities then found that it would be advantageous for the country
to allow the transfer of funds at a discount. They began to charge two different
rates. Importers who wanted foreign currency had to purchase them at higher
value. Exporters who acquired the foreign currency had to sell It to the authorities
at a lower value fixed by the government. This gave way for the emergence of
multiple exchange rates.
Multiple exchange rates refer to the policy of employing different rates of
exchange for transactions involving different commodities and also for different
currencies. The aim is to encourage exports and discourage imports to the extent
possible. By quoting an unfavourable rate for imports, imports are discouraged.
When the government wants to restrict imports of a particular commodity a
different rate may be prescribed for imports of such a commodity. Thus multiple
exchange rates substitute trade control methods like import quantity control and
quota system and tries to achieve the same results by increasing the cost of
imports.
Different rates may be fixed for different currencies. For example, when £ the
dollar/sterling rate of exchange is $ 2 per £ 1, the Rupee rate may be £ fixed at
Rs.20' per 1 and Rs.7 per £ 1. The purpose may be to control direction of trade of
the country. In the present case rupee is overvalued in terms of dollar relative to
the pound -sterling. This may result in more imports from dollar countries and
more exports to sterling countries.
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with USSR. When the importer in USSR pays to his bank on realisation of the
import bill, the amount is sent to the exporter by means of an instrument drawn on
the USSR bank's account with an Indian bank, opened specially for routing these
transactions. The exporter gets payment immediately without the waiting period.
S1m1larly when an import is made into India from USSR, the payment may be
effected by issuing an instrument on the account maintained by the Indian bank
with a USSR bank for this purpose.
In contrast to exchange restrictions which tend to restrict international trade,
exchange clearing agreements (including payment agreements) encourage
international trade. The trade can take place without botheration of finding scarce
foreign exchange to finance them. Secondly, even countries which do not have
exchange reserves are enabled to import as the transactions do not pass through
exchange markets.
However, the system has many disadvantages. It may, be used by the
economically stronger country to exploit the weaker country. During war Germany
imported essential raw materials from Hungary and Rumania which had exchange
clearing agreements with it and later blocked the accounts. Hungary and Rumania
were thus forced to import certain unwanted items from Germany to utilise the
blocked funds.
Secondly, it leads to bilateral trade at the expense of multilateral trade. It
benefits the countries which are parties to the bilateral arrangements at the
expense of the countries which are not parties to such arrangements. Bilateral
trade diverts trade from natural channels into unnatural channels reducing the
benefit of international trade.
Thirdly, such arrangements result in the interference with the working of the
foreign exchange markets. A large-scale bilateral trade will reduce the transactions
in the market.
4. Indirect Methods
Among the indirect methods of exchange control import tariffs and quotas and
export subsidies fall under the category' of 'trade control'. They were outlined in the
previous chapter. The other method is the variation of interest rates. Interest rate
has an influence on the movement of capital and investments from other countries.
When larger inflow of capital is required the country may increase the interest
rates. But it will affect the domestic economy. These indirect methods are mostly
applied for purposes other than to influence the exchange rates. Their effect on
exchange rates is also not as effective as that of direct methods.
7.4 SUMMARY
Foreign exchange control refers to the control of transactions involving foreign
exchange by the government or a centralised agency. The main objectives – stability
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LESSON – 8
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Today, the IMF's loans support member countries' efforts to adopt appropriate
fiscal and monetary policies, correct distortions in price structures, achieve realistic
exchange rates, and take other measures to improve the efficiency of production.
These reforms are aimed at strengthening countries' prospects for economic growth.
As a growing number of countries seeking to strengthen their external payments
positions and domestic to strengthen economies realized the necessity of
undertaking macro-economic and structural adjustment programs in the 1980s
and 1990s. the IMF's lending activities continued to expand. For decencies, the IMF
had made financial resources available on a short-term basis to member countries.
These arrangements were not suited to low-income developing countries with
protracted balance of payments problems. However the IMF established the
structural adjustment facility in 1986 and the enhanced structural adjustment
facility in 1988, renewed the latter in 1994, and is now able to offer poorer
countries concessional loans to support medium-term macroeconomic and
adjustment programs.
8.4 THE DEBT CRISIS
The oil shocks of the 1970s, which forced many oil importing developing
countries to borrow heavily from commercial banks, and the higher interest rates
that resulted from the industrial countries' attempts to control inflation converged
to bring about the debt crisis of the 1980s. In the last quarter of 1982, in debeted
countries suddenly found themselves unable to service their external debt.
The crisis posed a serious threat to the international banking and financial
system. From the outset, the lMF was a major player in seeking solutions. At first,
the IMF and the industrial and developing countries believed the debt crisis would
be temporary; they assumed that the worldwide recession that had depressed
demand for exports from heavily indebted countries would not last. Economic
growth in the industrial countries was expected to resume within one or two years,
once inflation had been brought under control. It was assumed that economic
recovery in the industrial countries, combined with the correction of certain
problems in the indebted countries-excessive budgetary deficits, easy monetary
policies, and overvalued exchange rates-would restore high growth rates in the
indebted countries. Financial officials also believed that the large amounts of flight
capital that had left indebted countries would return after these countries had
realigned their policies, and that investment would then increase;. it was assumed
that commercial banks, then unable or unwitting to engage in substantial debt
relief or forgiveness, would continue to lend voluntarily to indebted countries.
The IMF responded to the crisis by working with all interested parties-debtor
and industrial countries, and official and private creditors-to find solutions on a
country-by-country basis. It helped design and implement adjustment programs
tailored to individual debtor countries. It provided financial resources to indebted
countries and factl1tated financial flows to them from governments, commercial
banks, and other international financial institutions. It worked with creditors and
debtors on the rescheduling of debt payments.
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In the end assumptions that the debt crisis would be temporary proved to be
too optimistic-it lasted ten years. Countries began to experience "adjustment
fatigue" and the IMF came under attack for the adjustment programs it had
developed with indebted countries in return for financial support. IMF
"conditionality"-when using IMF resources to solve balance of payments problems,
countries are expected to pursue certain economic policies-was blamed when
standards of living already at subsistence levels in many countries fell even lower.
In 1989 because the success of stabilization policies was being undermined by
the size of the debt burden in many countries the debt strategy was modified to
accelerate debt reduction operations. A number of heavily indebted countries-
especially in Latin America but also in other regions-made debt-restructuring, debt-
conversion, and debt-reduction debt-arrangements with both official creditors and
commercial banks to alleviate their debt- service obligations. At the same time,
some countries began to reap the benefits of stabilization and structural
adjustment programs. In the 1990s, improvements have begun to be apparent,
especially in the Western Hemisphere, with growth rates rising for many countries;
a number of countries. However, particularly in sub-saharan Africa. still face very
difficult debt problems.
Economic In Transition
In the 1990s, the IMF is once more adapting its operations to important
changes in the international environment - namely the breakup of the former Soviet
Union and the attempts of the resulting states to make the difficult transition to
market economies. In 1991, at the Houston economic summit the heads of states of
the seven largest industrial countries- the Group of Seven-charged the IMF with
assisting the countries of the former Soviet Union with far-reaching economic
stabilization and reform measures. The IMF committed itself to channeling
significant amounts of financial assistance to these countries. In 1993, the JMF
established the temporary systemic transformation facility which was extended in
1994 to make financing available to the countries of the former Soviet Union as
they transform their centrally planned economies to market based systems.
In addition to supporting reforms with loans, the IMF is helping the countries
of the former Soviet Union achieve better macroeconomic management by training
government officials enhancing the quality of statistical data assisting with reforms,
of the tax system and government expenditure management designing social safety
nets and improving the operations of the central banking and financial closer to
home the IMF in conjunction with other international organizations established a
new institute in vienna.
Policy Analysis
In recognition of the complexity and Intractability of the problems faced by the
developing and transition economies the IMF has broadened its focus when
considering the economic policies of the countries it assists.
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increasingly global economy and financial system, the question of a central reserve
asset issued by an international monetary authority is a pressing one.
An important recent development for the global economy was the conclusion of
the Uruguay Round of trade negotiations. In the open, more competitive
environment created by the Uruguay Round agreement, there will be a need for IMF
surveillance over exchange rate and macroeconomic policies, and the IMF w1llwork
withGA1Ts successor, the World Trade Organization, toward further trade
liberalization.
Present circumstances offer opportunities for greater cooperation among
nations. The IMF is now what it was first intended to be-truly universal
organization, with 179 members, almost all of the countries in the world. Once
again, as at Woods 50 years ago, with sufficient political will, nations could work
together to build a stable and open monetary system for the benefit of the entire
international community.
8.6 IMF CHRONOLOGY 1944-95
¾ 1944 Bretton Woods Conference, at the conclusion of which the Final Act
embodying the Articles of Agreement of the World Bank and the IMF is
signed.
¾ 1946 Camille Gutt is appointed IMF's Managing Director (June 1946-may,
195l).
Fund's Initial quotas are $7.4 billion.
¾ 1951 Ivar Roath is appointed Managing Director (August 1951 August 1956).
(SDR).
¾ 1970 Fifth General Review of Quotas is completed, increasing total to about
SDR 28.9 billion, which was equivalent to $28.9 billion.
¾ 1971 Dollar convertibility into gold is suspended.
¾ 1972 Committee on Reform of the International Monetary System and Related
Issues (the Committee of Twenty) is establ1shed.
¾ 1973 H. Johannes Witteveen is appointed Managing Director (September 1973–
June 1978).
¾ 1974 Guidelines for the management of floating rates are established.
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LESSON – 9
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Secondly, the Bank should lend only for specific projects which are
economically and technically sound and of high priority nature. As a matter of
general policy, the Bank concentrates on lending for projects' 4estgned to
contribute directly to the productive Capacity and normally does not finance
projects of pr1mar1ly social character, such as education, housing etc. Most Bank
loans have been made for basic utilities such as a power and transports, which are
pre-requisites for economic development, besides, the Bank puts much emphasis
upon the proper management of the projects.
Thirdly, the Bank lends only to meet the foreign exchange content of any
project cost. It normally excepts the borrowing to mobilise its domestic resources.
Fourthly, the Bank does not expect the borrowing country to spend the loan in
a particular country; in fact it encourages the borrowers to procure machinery and
goods for Bank financed projects in the cheapest possible market consistent with
satisfactory performance.
Fifthly, it is the Bank's policy to maintain continuing relations with borrowers
so as to check the progress of the projects and to keep in touch with financial and
economic development in borrowing countries. 1bts also helps in solving any
problem which may arise in technical and adm1nistraUve field.
Fina1ly, the Bank indirectly places special importance on the promotion of
local private enterprise.
9.4 LENDING OPERATIONS
Only those countries that satisfy the 'eligibility norm' can get assistance from
the Bank. The eligibility norm for IRDB loan is a per capital GNP of $ 2,650 at '1980
prices. Over the years, a number of countries which were among the original
beneficiaries of IBRD loans ceased to be eligible for such assistance on the ground
that they had progressed far enough to make IBRD assistance unnecessary. Of
these, the latest to graduate out of IBRD's lending facilities were Greece, Israel,
Spain and Venezuela. "Graduation" from IBRD lending facility, according to a
recent decision of the Bank's board of directors, "Will normally occur within five
years after a country reaches the per capita GNP benchmark of $2,650 at 1980
prices; this period might be longer if the economic situation deteriorates during the
phase-out period".
Two Important factors which determine the pace of 'graduation' are (1) access
to capital markets on a reasonable terms, and (2) the extend of progress achieved in
establishing the key institution for economic and social development.
One of the principles governing this policy is that graduation should be seen
as a stage in the evolving of a relationship between the borrowing country and
IBRD. IBRD will continue to provide to those countries even after "graduation" and
such support might include assistance in project work and institution building,
review of economic policies, arrangements for private financing and continued
eligibility for lending by IFC.
During 1970s, the World Bank adjusted its lending operations and its role in
providing technical assistance to meet the evolving needs of its developing member
countries. Bank funds and technical assistance were increasingly channelled to the
poor countries. At the end of 1960s, nearly 60 per cent of Bank lending went to the
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development of infrastructure, by the end of 1970s, with nearly half of the Bank
lending directed to sectors such as agriculture and rural development, education,
population, and nutrition, urbanisation, and small scale enterprises. 'Even
Infrastructure lending has changed, with, for example, emphasis on highway
maintenance and construction of rural roads and with the beginning of lending for
gas exploration and production.
Sometime ago, the Bank evolved a new type of lending, namely, structural
adjustment lending, to assist member in introducing important structural changes
in their economies and in carrying out different economic reforms. The structural
adjustment lending by the Bank is seen as a constructive response to the different
situations created for many developing countries by what looks like a lasting
deterioration in their terms of trade and the growing problems associated with the
recycling of OPEC surpluses.
Further, the Board of Directors of the Bank ascertained the strategies for
strengthening the Bank's progranunes.
Firstly, increased attention will be given to the impact of a country's sectoral
policy on productivity and living standards of the poor. This will be made an
important part of the Bank's policy dialogue with borrowers. The Bank will also
consider how burdens of structural adjustments are shared among various income
groups and how adverse effects on the poor, like' increased unemployment, h1gner
prices of basic goods or higher taxes ~ be mitigated.
Secondly, the Bank, will broaden its project work to consider poverty and
employment aspects in the traditional' sectors.
In addition to continued support for education, population and health
programmes, the Bank will intensify efforts to increase productivity, and
employment of the rural landless, urban jobless, adult illiterates and female headed
households.
9.5 SUMMARY
The IBRD known as World Bank, has the main purpose to assist in the
reconstruction, promote private foreign investment and balanced growth. The
guiding principles of IBRD – to assess the proper repayment prospect, lend only for
specific projects, lends only to meet the foreign exchange content. The lending
operations are made as per norms.
9.6 ASSIGNMENT QUESTIONS
1. What are prime purposes of IBRD?
2. Explain the guiding principles of IBRD?
3. State the IBRD’s procedural norms for lending loan?
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LESSON – 10
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Out of the total voting power, 20% has been a) located among member
countries equally, whereas the remaining 80% has been allocated on the basis of
subscribed share capital by each member of ADB.
The management of the ADB is entrusted to the Board of Governors
constituted by representatives of the member-countries of the ADB. The Board of
Governors meets once a year, whereas for routine decision-making and carrying on
the ADB's lending and other operations, a ten-member Board of Directors has been
constituted.
In April 1974 there came to be established a fund known as the Asian
Development Fund. It is a multi-purpose fund, the proceeds of which are to be
utilised for providing concessional loans to the relatively poorer member countries
of the ADB. Ten member’s countries had subscribed 24.5 million US dollars to the
Asian Development Fund by December 1974.
10.5 LENDING OPERATIONS OF THE ADB
The ADB provides loans to its member-countries keeping in view the following consideration:
1. Larger portions of ADB loans should be given to relatively poorer among
developing countries in Asia:
2. The Government of the borrowing country has approved the loan by ADB
being given to the private or public sector enterprise:
3. The Chairman of ADB has received a detailed report of the project for which
the ADB is to provide loan:
4. The ADB while giving loan also takes into consideration prospectus of loans
which the applicant may receive from other than ADB source.
5. Generally the ADB loans are to be used within the markets of member-
countries for purchase of essential goods, etc: but the Board of Directors with
a two-third majority of allow the ADB loan to be used in markets of non-
member countries: and
6. The ADB will function strictly keeping in view the sound principles of
banking.
During 1968-73 the ADB approved loans totaling (in terms of US dollars) 1376
mi1l1on US dollars to 21 countries for 189 projects. Of these, industrial
development projects were given a quarter of the total loans: 24% of loans were
given for development of transport and communication projects: 26.5% for electrical
power projects: 12.5% for agricultural development projects: 11.2% for water
supply projects and 1 % for educational projects.
During 1974 the ADB sanctioned loans Worth (in terms of US dollars) 547.7
million of which 186.9 million were for industrial development projects: 134 million
for agricultural development projects: 76.55 mi1l1on for power projects: and 81.5
mi1l1on for transport and communication projects. There appeared evident shift in
the sartorial allocation of ADB's lending policy in 1974.
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If the period of 1968-74 is considered, of the total loans approved, 17.5% were
given to South Korea: 12.5% to the Philippines: 10.63% to Malaysia; 9.4% to the
Republic of China: and 8.5% to Singapore. This means that more that 50% of the
total loans sanctioned were given during this period to East Asian Countries. India
did not ask for any loan during this period: but Bangladesh received 9.5% of the
total loans during this" period.
The ADB charges 8¼% interest on its loans. though at the time of its
establishment the rate of interest charged was 6.78% which was raised to 7½% in
May 1970 and to 8¼% in September 1974.
10.6 CRITICISM OF THE ROLE AND FUNCTIONING OF THE ADB
Following are the main points of criticism that are generally made in regard to the role and
functioning of the ADB:
1. Though the ADB is a financial institution concerned solely with development
problems of Asian countries, it is alleged that the role and working of the ADB is
greatly influenced by strategies and interest of the United States. This becomes
clear from the fact that majority of Asian countries that received financial
assistance from the ADB are allies of the United States (e.g. South Korea. the
Philippines, Singapore which have fairly developed economies). The borrowers of the
ADB have generally been supporters of the United States in international affairs. It
is for this reason that the Soviet Union has not become a member of the ADB.
2. It is alleged that the rate of interest charged by the ADB is high and the
proportion of concessional loans from the ADB has been generally low. And,
therefore, ADB has not been in a position to provide to substantial financial
assistance to poorer Asian developing countries which should have been the main
objective of the ADB and therefore, the LDCs from Asian region are forced to borrow
from some other international agencies than the ADB.
3. Generally. ADB provides 'tied loans' and compels borrowing countries to use
those loans only for specified projects. Naturally, this reduces scope or area for the
development of LDCs for which ADB was established in the first instance.
4. Generally, ADB loans were given to, private sector projects. The ADB has
shown very little interest in the development of public sector which has been
playing a major role in the development of LDCs for Asian countries.
There is thus need to re-examine the role and functioning of the ADB in the
light of the above criticism.
The Asian Development Bank and India: Recent Developments
It may be noted that India has started Developments. from the Asian
Development Bank (ADB) since 1986; India's borrowings from the ADB amounted
to 250 million US dollars in 1986; 377.6 million US dollars in 1987; and 493
million US dollars in 1988.
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10.7 SUMMARY
ADB is a regional finance institution with certain objects – to promote
investment, to utilise the available resources, etc. The functions of ADB are
financial assistance and conduct of surveys and research. 27 Asian members and
14 non-regional members thus are making a total of 41 members. The ADB
provides loans to its member – countries by keeping certain considerations. The
main pitfalls concerning with development problems of Asian countries and
provides tied loans and given to private sector projects.
10.8 ASSIGNMENT QUESTIONS
1. What are the objects of ADB?
2. Explain briefly the prime functions of ADBI?
3. Briefly analyse the membership, capital resources and organization of ADBI?
4. Describe the lending operations of the ADBI?
5. Discuss the criticism of the role and functioning of the ADBI.
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LESSON –11
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European banks, especially British and French, rather than with banks in the
United States.
iv) Balance of Payments Deficits of the USA
The large and persistent deficit in the balance of payments of the USA meant
an increasing flow of the US dollar to those countries which had a surplus with the
USA. The USA has had a deficit in international payments in every year since 1950,
except in 1957. Since 1958, the deficits have assumed alarming proportions. This
was one of the most important factors responsible for the rapid growth of the
Eurodollar market.
v) Banking Regulation
Some of the regulation of the Federal Reserve system especially Regulation "Q",
which fixed the minimum rate of interest payable by the banks in the USA and the
prohibition of payment of Interest on deposits for less than 30 days, very
significantly contributed to the rapid growth of the Eurodollar market. Although
Eurodollar rates had their ups and downs, they were all the time-except for brief
periods In 1958 for three months deposits-appreciably higher than the deposits for
less than 30 days. Further, "Selective Controls in the United States, such as
Interest equalisation and the voluntary restrictions on lending and investing abroad
by United States corporations and banks, have made the market a longer than it
otherwise would have been. Without these controls, much of the market's activity
would instead be carried on In the New York money market."
vi) Innovative Banking
The advent of innovating banking, spearheaded by the American banks In
Europe and the willingness of the banks in the market to operate on a narrow
spread also encouraged the growth of the Euromarket.
vii) Supply of Petro-Dollars
The flow of petro-dollars, facilitated by the tremendous Increase in OPEC's oil
revenue following the frequent hikes in oil prices since 1973, has been a significant
factor in the growth of the Eurodollar market In the last one decade.
'There is a wide array of reasons pointing to a continued high demand for Euro
credit. In order to cover these extensive credit needs, Euro-banks will however,
require an increasing flow of deposits. One source that may well quash forth in the
coming years would be the 'surplus oil Income of OPEC oil members."
11.5 THE PARTICIPANTS
The participants in Eurocurrency business include governments (including
those of Communist countries). International Organisatlons, Central Banks,
Commercial Banks, Corporations, especial1y Multinational Corporations, Traders,
Individuals etc.
Supply and Demand
The supply of and demand for funds In the Eurocurrency market comes from
the above participants. The central banks of various countries are very important
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suppliers. The bulk of central government funds are channelled through the BIS in
Basle. The enormously revenue of OPEC countries has become an Important source
of the flow of funds to the Eurodollars market. Multinational corporations and
traders, too, place their surplus funds in the market to obtain short-term gains.
Governments have emerged as significant borrowers in the Eurocurrency
market. The frequent hike in oil prices and consequent increases in the current
account deficits of many countries compel them to increase in their borrowings.
The oil price rises have also affected Eastern Europe's state-controlled economies,
aggravating the already high imbalance in their commercial relations with the rest
of the world. In the context of this increasing problem, "when the sums which many
countries have borrowed on the Euromarkets fall due, in most instances it is likely
to be the cause that new loans, or extensions of the existing ones, have to be
negotiated to cover them".
Commercial banks in need of additional funds for lending purposes may
borrow from the Euromarkets and relent it. At the end of the financial year, they
sometimes resort to borrowing for "window dressing purposes." Business
corporations, especially multinationals, and traders borrow from the market for
their short-term requirements.
11.6 TONIC OR POISON?
The advantages of, and the dangers associated with, the Eurocurrency market
have given rise to the doubt whether it is a welcome tonic or a slow poison
ctrcu1ating in the international system.
The growth of the Euromarket has considerably helped to alleviate the
international liquidity problem, provided credit to finance the balance of payments
deficits, enabled exporters and importers to obtain easy credit, helped to meet the
short-term credit requirements of Business Corporation and provided better
opportunities for the investments of short-term funds. It has provided a market for
profitable investment of funds by central banks. The supply of funds by the
Euromarket has enabled commercial banks in some countries to expand domestic
credit creation and helped "window dressing." Eurocurrency has helped to
accelerate the economic development of certain countries, including South Korea,
Brazil, Taiwan and Mexico.
However, the growth of this market bas given rise to some serious problem,
especially in the sphere of monetary stability, "Central banks and governments
have been uneasy about the Eurodollar, market ever since It became visible in
1958. Its explosive growth baffles them: they know that something is going on, but
they are seldom sure what It is. They do know that one of its attractions for the
participants is that tile Eurodollar market provides opportunities for avoiding many
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LESSON -12
INTERNATIONAL LIQUIDITY
OBJECTIVES
To Study the Sources of International Liquidity and Role of IMF
To Know the Criticism of Liquidity
To Identify the Concept and Uses of SDR, and Valuation and Allocation of
SDRs.
STRUCTURE
12.1 Preamble
12.2 Sources of Liquidity
12.3 Adequacy of Liquidity
12.4 IMF and International Liquidity
12.5 Criticism
12.6 Other Sources of Liquidity
12.7 Use of SDRs
12.8 Prescribed Holders of Sdrs
12.9 Valuation of SDR
12.10 Allocations of SDRs
12.11 SDR as a unit of Account
12.12 SDR as a Currency PEG
12.13 Summary
12.14 Assignment Questions
12.1 PREAMBLE
International liquidity refers to the resources that are available to monetary
authorities of countries for the purpose of meeting balance of payments deficits.
Countries, like companies and individuals, need a sufficient supply of liquidity if
they are to conduct their affairs in an orderly and planned way. The topic of
international liquidity assumed greater significance because of the fact that during
the past three decades the growth in the international reserves did not keep pace
with the increase in the volume of international trade. Too little liquidity will impede
the global growth of trade and a. surfeit of it will fuel inflation. Hence the need for a
long term strategy for estimating the liquidity needs of the world economy and
arranging for its provisions at Just adequate levels.
Here it would be pertinent to differentiate between international reserves and
international liquidity. International reserves have been defined as those assets of
monetary authorities that can be used, directly or through assured convertibility
into other assets, when a country's external payments are in deficit. Convertionally,
official holdings of gold, convertible foreign exchange, reserves position in the IMF
and special drawings rights are included under reserves.
International liquidity is a wider concept than International reserves. It
includes not only reserves of a country but also Items such as its ability to borrow
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the foreign exchange holdings of its commercial banks, the willingness of foreigners
to hold its currency in the event of payments deficit, and the extent to which
increases in interest rates or changes in the term structure of interest rates would
encourage a capital inflow without having undesired domestic repercussions. This
comprehensive definition of international liquidity though theoretically sound is
difficult to assess in practice.
12.2 SOURCES OF UQUIDIIY
International liquidity has been defined as the resources available to individual
countries to meet their balance of payments deficits. Such resources cover a wide
spectrum differing in their nature and case of access to the countries monetary
authorities. Broadly, they can be classified into two categories; (i) owned resources
and (ii) borrowing facilities.
(i) Owned resources include officia1 holdings of gold, holdings of reserve
currencies and reserve position in IMF. The reserve position in IMF represents the
country’s reserve trench with IMF. The owned resources of the country are surely
and easily available to it and hence are highly dependable. They are under the
country's own control and provide a firm basis for domestic policy management
than do credit facl1ttles.
(ii) Borrowing facilities include access to IMF credit, Inter· governmental swaps
and bilateral credit arrangements. A new source of liquidity has been the
international capital worthiness of the country the credit facilities that could be
availed of from international banks can also be counted as a source of liquidity.
The problem with the borrowing facilities is the difficulty is assessing their
availability. Low conditionality credit facilities of IMF and borrowing facilities with
other countries on a mutual basis can' easily be included as sources of liquidity.
But it is not the case with conditional credit facilities from IMF and commercial
credit. In the case of 'commercial credits the further difficulty is the estimation of
the quantum of its availability which cannot be easily done. However, at least
conceptually as we have already defined liquidity should include all these sources.
12.3 ADEQUACY OF LIQUIDITY
One measure of judging the adequacy of international liquidity is the
proportion of official reserves to imports. In absolute terms official holdings of
reserve awaits. viz., gold, SDRs, reserves position in IMF and foreign exchange,
have shown increase over the years. From about SDR 55 billion in 1955, such
assets went up to SDR 667 billion as at the end of 1981. Though this seems
impressive the growth in reserves has in fact lagged far behind the increase in
imports. This is borne out by the fact that the ratio of official reserves to imports
registered a decline from 37% in 1966 to about 24% in 1981.
A more serious problem, that is affecting especially the developing countries, is
the mal-distribution of official reserves. The "fall in the level of reserves in relation
to imports is steeper in the case of developing countries. Whenever there were
efforts at increasing the liquidity, because the basis for allocation was such, the
increase had benefited some specific group other than the developing countries.
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The fifties and sixties saw concentration of reserves with the developed and
industrialised countries. Thus throughout, the developing countries had been at a
disadvantage. These countries have been facing balance of payments problems on a
continuous basis.
Thus the efforts should not only be to increase the stock of liquid assets, but
also to see that they are equitably distributed so that they are available to those
countries which need them.
The primary sources of liquidity are IMF, international capital markets and
international banks.
12.4 IMF AND INTERNATIONAL LIQUIDITY
The IMF is alive to the problem of shortage of international liquidity. Within
the framework provided by its Articles, it is making all efforts to increasing the
supply of international liquidity. The measures-taken in this direction are; (a)
increase in quotas. (b) allocation of SDRs. and (c) introduction of new lending
facilities and expansion of existing facilities.
12.5 CRITICISM
a) IMF Quotas
The IMF quota increase has lagged behind with the increase in world trade. As
a consequence, over the years, the IMF quotas have declined relative to world trade.
From about 16% of world Imports in 1945, the IMF quotas fen about 10% in 1970
and further to 4% in 1983. This is partly due to inhibitions nurtured in increasing
the quotas at a faster rate. The Eighth Review of Quotas yielded an increase of
47.5% as against an increase of 100 to 125% considered necessary by Technical
Studies conducted on the eve of the Review.
The other disturbing factor is that the distribution of quotas between
developed and developing countries are not satisfactory. The basis of allocation of
quotas largely reflects the situation immediately after the Second World War. Even
after the lapse of a period of more than four decades, the basis of allocation has not
changed to any substantial extent. Adding to its already learning towards developed
countries, the adjustments made during the Eighth Review of Quotas have hit hard
the developing countries.
A suggestion made to make the quotas system more effective is that its review
should be more frequent, say, every three years instead of five years. Its increase
should be made automatic at some pre-agreed rate related to the growth of world
trade. The system of distribution among members also needs a thorough review.
b) Special Drawing Rights
Contrary to expectations, the share of the SDRs In the official reserves has
been showing a declining trend. The decline is from little over 4.1% at the end of
1973 to less than 3% by 1983.
Pleadings by developing countries for a large-scale increase in SDR allocation
have been turned down largely due to opposition by developed countries. The
contention of the developed countries opposing the increase is that it would lead to
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inflation. The developing countries point out that the argument is ill-founded.
Report by a Commonwealth Study Group opines that "at present there is
insignificant prospect of further SDR allocations creating danger of accelerating
world inflation. For example, an allocation of SDR 10 billion could add no more
than 1/100 of one per cent of global aggregate demand, an amount also most
unlikely, even if it were substantially larger to stipulate inflationary expectations
significantly." Another report, by a Group of Experts set up by the Chairperson of
the Non-Aligned Movement, puts forward the same argument more vehemently.
"It is paradoxical that major developed countries express apprehensions about
the inflationary Impact of relatively small amounts of SDRs while the principal
reserve currency country seems little concerned about the inflationary impact of its
own large budget deficit or about the skewed and haphazard creation of liquidity its
large current account deficits bring about.”
The Group of Experts is also critical about the allocation of SDRs on the basis
of IMF quota. Such allocation leads to the major share of SDR allocation going to
surplus countries which have no need for extra liquidity. 'The result of this is that a
preponderant part of the SDRs created and frozen and the effective SDR allocation
"is reduced to a fraction of what had been calculated as necessary from
consideration of global liquidity. This could be resolved either scaling up the total
allocation so that the portion which is likely to be used corresponds to the need for
global liquidity which would result in an unnecessarily high allocation of SDRs - or
in distributing them in such a way that the bulk of SDRs go to deficit countries in
need of liquidity. In this distribution, the needs of the least developed countries
need would special attention.
(c) General Arrangements to Borrow
The condition that IMF can make use of the funds under GAB to finance a non
participant only in case the situation threatens the stability of the international
monetary system puts a serve restraint on the use of funds making it
discriminatory in the sense that it is available to a few members and not to others.
GAB is at the most a poor substitute for quota increase. If they have to serve a
useful purpose, like other resources borrowed by IMF from its members, they
should be available to all members on equal terms as normal supplement to IMF
resources.
(d) Lending facilities
As compared with the conditional lendings, the unconditional lendings are
limited. While there is a general agreement on the need for certain conditionalities
to go with the facilities, the dispute is over the nature of the conditions attached to
IMF loans. Since there is no single solution to problems faced by deficit countries,
the conditions cannot be rigid and same for every case. Therefore, the IMF's
guidelines on conditionality are sufficiently general to leave room for substantial
discretion in individual lending circumstances.
The criticism levelled against the conditionalities attached to IMF loans is that
they are based on short-term consideration and are too rigid on monetary and fiscal
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Inception, the Quota Contributions and the Purchase and Sale of these Currencies
are under the Arrangements in Force. Second, there is the Special Drawing Account
through which all operations and transactions in SDRs are conducted. The SDR is
essentially only an entry in this account at the Fund. Moreover, it is an entry
which. may be held only by (a) national monetary authorities (who must be
members of the Fund) and (b) by the General Account of the Fund to which
participant countries are permitted to transfer SDRs for certain spec1ftedpurposes,
for example, to pay charges levied by the Fund or to repay drawings from the
General Account. It is apparent, then, that the SDR is really created in the sense
that it is defined equivalent in foreign exchange from other members, and that it
discharges specified obligations of members towards the Fund's General Account.
Every member of the IMF has the right to become a participant of the SDR
facility, but every member is not obliged to join the facility. Obviously, only
members of the IMF can participate in SDR facility.
The Special Drawing Right, as mentioned above, is only a book entry in the
"Special Drawing Account" of the IMF. The allocation of SDR takes the form of a
credit entry in the name of the participating countries in the Special Drawing
Account. The total SDR created by, the IMF are allocated to the participating
countries in proportion to their quotas in the IMF.
The allocation of SDR to a participant does not involve any payment by it to
the IMF. The recipient of SDRs also does not have to give any collateral security to
the IMF. SDRs allocated and credited to a participant's account are owned by it and
they can be freely used by the said country for meeting payments deficits. One
distinct characteristic of SDR is its unconditional use. A participant using SDRs is
not called upon to adopt any particular economic policy or seek the prior approval
of the IMF.
The possession of SDRs in its account entitled a participating country to an
equivalent amount in the currency of other participating countries. The foreign
exchange so obtained can be freely used for meeting payments deficits.
12.7 USE OF SDRs
Participating countries may use the SDRs unconditionally, transferring them
in the books of the Fund to another participant (chosen by the Fund), who will be
required to supply its own or another currency in exchange. To provide against
mal-distribution of the SDRs such as would occur if SDRs are drained away from
the deficit to the surplus, countries, members are required to hold, on the average
of a five year period, Drawing Rights to the amount of at least 30% of the average of
their net cumulative allocations over that period.
Members with a balance of payments need may use SDRs to acquire foreign
exchange in a transaction with designation - that is, where another member,
designated by the Fund, provides currency 'in exchange for SDRs. The Fund
designates members to provide currency in exchange for SDRs on the basis of the
strength of their balance of payments and reserve positions.
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LESSON – 13
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non-ferrous metals, pearls, precious stones, capital goods, chemicals and chemical
materials.
Foreign trade includes exports and imports. If the exports are higher than the
imports, the balance is called favourable trade balance. On the other hand, if the
values of imports are more than the value of exports, the balance is called
unfavourable trade balance. In these situations Government approaches the
international agencies for loans to meet the trade deficit. The following table shows
the recent trends in foreign trade
Table
India's Foreign Trade
Value in crores (rupees)
Year Imports Balance of Trade
1979-80 6418 9143 - 2725
1980-81 6711 12549 - 5838
1981-82 7806 13608 - 5802
1982-83 8908 14356 - 5448
1983-84 9872 15763 - 5891
1984-85 11297 16485 - 5188
1985-86 10895 – –
1986-87 12452 20096 - 7644
1987-88 15674 22244 - 6570
1988-89 20231 28235 - 8004
1989-90 27681 35416 - 7735
1990-91 32553 43193 -10640
1991-92 – – –
1992-93 53351 – –
1993-94 69688 – –
Source: Ministry of Commerce, Department of Commerce, Government of India Annual reports
1991-92: Centre for Monitoring, Indian Economy, 1994.
The above table shows that there is an increase every year in Imports and
exports. But the rate of increase in Imports is higher than exports. As a result of
this, there is a trade deficit. This yawning trade deficit has forced the government to
approach the Aid India consortium members including the World Bank. These
agencies provided loans to India to the tune of Rs.2472 crores in 1982-83 and
Rs.1356 crores in 1983-84.
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Table
India’s export to Countries during 1993-94
Value in lakhs
Country Rs.
Africa 2,34,361
Egypt 34,834
Nigeria 32,934
Mauritius 24,589
America 12,60,437
USA 11,27,771
Canada 64,201
Brazil 16,652
Asia 10,94,599
Japan 4,18,425
Hongkong 56,693
Singapore 1,68,373
East Europe 1,46,844
Russia 72,806
Ukraine 26,131
Czech Republic 8,385
West Europe 22,32,975
Germany 4,99,220
UK 4,33,675
Belgium 5,55,987
Middle East 14,91,173
UAE 2,85,851
Saudi Arabia 4,47,196
Iran 1,06,128
Oceania 2,07,265
Australia 1,84,009
Newzealand 20,918
Papua N GNA 1,160
Source: Centre for Monitoring Indian Economy May 1994. Top three countries from each
continent only
India's goods have been exported to different countries in various continents
like Africa, America, Asia, Europe (East and West), etc. During 1993-94, the highest
values of goods have been exported to the countries like USA, Canada and Brazil.
India exports to more than 100 countries in the world.
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Domestic trade terms and reference to methods and practices peculiar to India
should be carefully and rigidly avoided, and words and phrases with doubtful or
double meanings should be eliminated. The writer of an export catalogue must
know the product fully and vtsual1se its use in foreign markets and the
arrangements used in its sales abroad. If any new words or phrases are used, their
meaning must be made clear.
Accuracy in an expert catalogue is much appreciated and is very, important.
The following points must be borne in mind while preparing an export catalogue:
i) The export catalogue should be so constructed that through its use alone
the buyer in foreign market may adjust his buying to his capacity to sell or
his capacity to pay.
ii) Every point of importance should be emphasized, e.g., a product saves
time, temper and money, and will sell on sight for these reasons.
iii) Each item should be analysed to determine its best export selling points.
iv) It should state facts-neither exaggerates nor understands them.
v) It should make it easy for the foreign dealer to place an order.
A loose-leaf type of export catalogue is recommended. It should not be too
large or bulky. An attractive set-up of the catalogue should be an important
consideration.
House Magazine
While a few manufacturers publish highly creditable house magazines for the
special use of the export trade, there' is, in general, more commonly neglected sales
aid in the entire field of export marketing.
The following suggestions, if kept in mind while publishing a house magazine,
would really help as an effective export sales aid:
i) Incorporate illustrations in the house magazines so that they are
interesting and need not be translated:
ii) The typography should be excellent and easily readable.
iii) Do not criticize one area or distribution in a direct way.
iv) Tie in new products at every reasonable point but not in a strictly selling
style.
v) Write about those things which normally a salesman cannot say: and
vi) Last, but not the least, always keep in mind that customer house organ
should be edited for the reader. Whether the customer is actual or
prospective, he is the person at whom all export salesmanship is directed.
13.5 EXPORT ADVERTISING
The function of advertising in export trade is precisely the same as its function
in domestic trade. Advertising may be used as a means of creating dealer demand,
dealer preference, or consumer demand or acceptance. It may be used to prepare
the way for the salesman to enable him to make a greater volume of sales than
would otherwise be possible. Advertising may be used like-wise to help move the
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products from the dealer's shelves. Naturally many problems confront the
manufacturer-exporter who undertakes to advertise his products in foreign markets
- the formulation of an advertising policy, the estimates of appropriations, the
selection of media and the preparation of advertisements.
The formulation of Policy depends largely upon the opinion of the export
manager as to the, efficacy of advertising a particular product in a given market.
The appropriations to be made for foreign advertising depend of course, upon the
general financial budget and the amount which can be allocated to the development
of foreign sales. Foreign advertising campaigns may be planned for as wide a range
of objectives as in domestic selling. The variation from modest initial
advertisements to world-wide campaigns offers the possibility of meeting any set of
conditions imposed by the character of the products, the size of concern or other
factors. Keeping in mind the differences in purchasing power, purchasing habits,
and methods of thought, the same principles apply to the preparation of foreign
advertising as to those of domestic advertising. However, that does not mean that
an advertisement which ranked high in selling power in India would so rank in the
USA. In illustration and wording, the appeal must be consistent with the customs
and habits of the country in which the advertising is used. Selling, resorts to
advertising to stimulate demand. Advertising methods help the exporter to present
facts to the foreign buyer. Advertising in foreign countries fails because, at times, it
does not recognize merchandising and marketing functions in a foreign .country; it
fails to maintain more than a tenuous relationship with the economics of the
product and it falls short of perfection in its technique. The problem of advertising
in foreign markets is the problem of adapting Indian advertising to conditions that
are different. Conditions are highly variable in different markets. and each market
must be considered, to a large degree. as a separate and a distinct unit. Indian
advertising practices may be 25 years behind American standards.
The use of available media, the size of the column, and the use of colour are
the technical details of foreign advertising. In every essential respect-method,
appeal continuity, coverage, relation to merchandising and marketing, employment
of research, principles of getting attention, use of a sound layout and good art -
advertising is the same the world over because people in every land respond to the
same general kind of' stimuli and react to the same visual appeals and to the same
economic motives.
The problem of advertising in foreign markets, therefore, is not the problem of
the creation of new and different advertising but the problem of adoption of
domestic advertising to conditions found in overseas markets. Export advertising
expenditures are growing rapidly as products compete for world market share. A
large number of international marketing segments cross many national boundaries.
The growth in expenditure is also occurring due to the availability, increasing
capacity, and diversity of media vehicles.
The problem to be solved by export marketers is whether to follow an
international advertising strategy of standardization or to adapt advertising to
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satisfy the needs of local foreign markets. The principal reasons for employing
standardized advertising are cost savings and a reduction of message confusion in
areas where their is media overlap or country-to-country consumer mobility.
According to an estimate. German 1V broadcasts are received by forty percent of
Dutch homes with 1V sets. Also, Paris Match has a circulation of 85.000 in
Belgium, 26,000 in Switzerland, and substantial readership in Luxembourg and
other countries of West Europe. The risk of confusion that may result from reaching
such audiences with different brand names and advertising appeals has led to the
standardization approach which does not sacrifice local adaptability. Examples are
the Esso 'Tiger in your Tank' campaign and the Playtex brassieres ads which
feature the same stop-action photographic demonstrations of the product strength.
Exports w1l1 plan more and more, global brands. 1V and communications
generally will reach further across the world, and standardization is bound to grow.
The choice being exercised today by many exporters is between prototypes
versus, pattern advertising. To a major extent, the choice is product dependent.
This involves consideration of the needs satisfied by the product. In deciding on
export advertising strategy, two further main factors have to be thought through.
These factors are interactive. One is the position of the product in its life cycle in
different foreign markets. The second is the role and responsibility of export
advertising in the marketing mix abroad. Some large exporters have developed a
benchmark strategy which involves similar advertising themes and basic copy
across multiple markets. In most cases, these multiple markets span the advanced
industrialized countries, including Japan.
Exporters can either adopt the same promotion strategy they used In the home
market or change it for each local market.
Consider the message. The exporters can change the message, at three
different levels.
(a) The exporters can use one message around the world by varying only the
language, name, and colours.
(b) The next possibility is to use the same theme globally.
(c) Finally, some exporters encourage their advertising agencies to make a full
adaptation of theme and execution to local market.
The use of media also requires international adaptation because media
availability varies from country to country. Commercial radio or TV is not even
available in some Scandinavian countries and Middle Eastern countries. In
Germany, advertisers have access to commercial TV only during a few
preannounced short time blocks, none of which interrupt the program. As a result,
viewer ship of these commercial time blocks is low. Yet companies complain that
they must buy time months in advance and have little control over when their ads
will broadcast. Certain countries add restrictions as to what can be advertised,
often not allowing cigarette or alcoholic beverage advertising on TV. The rapid
growth of VCR usage in Europe has cut further into the size of TV audiences.
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Another medium, magazines, varies in its effectiveness: magazines play a major role
in Italy and a minor one in Austria. Newspapers have a national reach in the United
Kingdom. but the advertiser can buy local newspaper coverage in Spain.
Management of the export advertising function encompasses the setting of
objectives: the process for the formulation of strategy: implementation of the
strategy: choice of advertising agency.
13.6 IMPORT SUBSTITUTION
Besides the export drive, the Government has reiterated its efforts towards
import substitution and import saving measures. Increase in the qual1ty and
quantity of production, upgradation of technology and modernization of production
techniques, if all these would be implemented in the right spirit, in the right
manner and at the right time, import substitution is bound to follow sooner than
expected.
Import substitution may be defined as the substitution of domestic source of
supply for foreign source of supply.
It is clear from this definition that import substitution implies:
1. development or creation of new source of supply or productive capacity if
there is no domestic supply:
2. expansion of the domestic production / supply if the domestic supply is
insufficient: and
3. protection of domestic industries from foreign competition if competitive
disadvantage of the domestic industries, especially the intent ones, is
encouraging the foreign source of supply.
Import substitution is one of the important planks of the commercial-economic
policy of the developing countries. The foreign exchange scarcity created by the
import-export gap prompt these countries to emphasize on the import substitution
in a bid to reduce the import, requirements and thereby to narrow down or remove
the trade deficit.
Import substitution assumed importance in the Indian economic development
policy since the Second Five Year Plan. The large- scale imports necessitated by the
development requirements of the nation gave rise to what may be called
development disequilibrium in the balance of payments. Export promotion and
import substitution are the two important measures to narrow down and ultimately
to wipe' 'out the balance of payments deficit.
Industries and other sectors with potential for import substitution have been
given high importance in our development programmes. At the beginning of the
planning era, India was relying very heavily on the foreign sources of supply for her
requirements of capital goods and a number of basic and other important inputs. In
the last three decades, considerable import substitution has taken place in many
important areas like capital goods, cement, organic chemicals, pharmaceuticals,
dye stuffs etc. Today imports account for only less than 10 percent of the total
supply in many vital sectors.
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India's foreign trade gap is very wide. In every year of the Sixth Plan (1980-85),
the trade deficit was well over Rs.5.000 crores. This situation calls for further
efforts aimed at export promotion and import substitution. There are a number of
vital sectors with good scope for more import substitution. Though primarily an
agricultural country, India is not yet self- sufficient in case of essential consumer
items like food grains and edible oils. Items like cement, aluminum, steel and
certain other products which are well within the productive apparatus of the
country account for a significant part of our import bill. At the beginning of the
Second Plan, in 1955-56, imports accounted for about 40 per cent of the total
supply of nitrogenous fertilisers. 10.00 per cent of phosphatic fertilisers and 100
per cent of potassic fertilisers. In 1979-80, imports accounted for 37 per cent.
24 per cent and l00 per cent of the total supplies of the nitrogenous, phosphatic
and potassic fertilisers respectively.
Our import bill for crude oil and petroleum products has been quite
substantial. Hence import substitution in this sector is of paramount importance to
reduce the balance of payments deficit. No wonder' the Government is making
concentrated efforts to step up the domestic oil production.
In short, a rapid increase in the domestic production of petroleum. Fertilizers,
cement, steel, food grains, vegetable oil, etc. is essential to contain growth of
imports within reasonable limits.
A number of measures like those mentioned below have been suggested to
accelerate the pace of import substitution in areas where the country has
comparative reasonable span of time:
1. Issue of licences/letters of intent for products not manufactured in the
country should be given on a first-come-first-served basis. Foreign
collaboration should be freely allowed:
2. A scheme of Import substitution allowance be introduced on the lines of cash
incentives for exports:
3. A concessional rate of interest is another way by which Import substitution
can be given priority. The same result can also be achieved by adopting
differential tax rates:
4. Reduction in the Import duty on the capital equipment to be installed:
5. Reduction in the customs duty and excise duties on raw materials to be used
by such units for a specific period:
6. Liberal Issue of Import licences for capital goods, raw materials, etc:
7. Concessional tariff for power, fuel, etc.
8. Concessions in income tax, sales tax, etc., for a specific period: and
9. Additional depreciation.
Certain suggestions like allowing foreign collaboration freely w1ll not be quite
acceptable without judging the merit of the case including the need for foreign
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(4) Foreign exchange crisis: Developing countries face the problems of foreign
exchange. Their imports are much higher than the exports resulting in an adverse
balance of trade. They can not afford unrestricted imports because of exchange
crisis. Such countries plan their international trade in line with the availability of
foreign exchange. State trading is one of the solutions of foreign exchange crisis
because the government can arrange the deficit through loans from foreign
countries or by deferring the payments. In post second war period, the exchange
crisis was the main reason for the development of state trading.
Thus, the state trading is necessary to achieve the following objectives:-
i) to achieve Its political objectives;
ii) to boost Its export trade;
iii) to enlarge the base for domestic planning programmes, by purchasing
products to fill a gap in the plans and by controlling outside economic
forces that may affect these plans;
iv) to improve the country's balance of payment situation:
v) to control foreign exchange;
vi) to maintain national security and defence by furthering military
preparedness and by preventing potential enemies from receiving strategic
materials;
vii) to acquire specific products, either because they can be obtained at lower
cost or because they are in short supply in home market.
viii) to advance domestic interests by improving bargaining power in trade or
by protecting trade against foreign competition.
13.20 STATE TRADING CORPORATION OF INDIA (STC):
On the recommendations of the Deshmukh Committee chaired by Dr. P.S.
Deshmukh and the review committee, headed by Shri S.V. Krishnamurti Rao, the
Government accepted the proposal for establishing the State Trading Corporation, a
registered body under Indian Companies Act.
Establishment
The State Trading Corporation (STC) was set up by the Government in May
1956, incorporated under the Indian Companies Act. 1956. It was designed as the
sole import export agency as may be decided by the Government of India from time
to time. Initially it was established to deal with bilateral trading partners, largely in
the socialist block. It has now become a wholly owned holding company of the
Projects and Equipment Corporation of India Ltd., The Cashew Corporation of India
Ltd., The Handicrafts and Handlooms Export Corporation of India Ltd., Before
October 1963, the foreign trade of minerals and metals was also with STC but with
the establishment of the Minerals and Metals Trading Corporation of India (MMTC)
Ltd. w.e.f. October 1. 1963, this part of trading activities was handed over to the
newly set up Corporation.
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Management
The State Trading Corporation is a registered company under Indian
Companies Act and managed by a Board of Directors including both executives and
non-executive directors. It is headed by a chairman.
Objects of the STC
The main objects of the STC for which it was established, as given in its
Memorandum of Association are as follows:
i) To organise and undertake trade in socialist countries as well as other
countries in commodities entrusted to the company from time to time by the
Government of India and to undertake the purchase, sale and transport of
such commodities in India or elsewhere in the world.
ii) To undertake at the instance of the Union. Government of India import and/or
internal distribution of any commodity in short supply with a view to
stabilising prices and rationalising distribution.
iii) To generally implement such special arrangement for imports/exports,
internal trade and/or distribution of particular commodities as the Union
Government may specify in the public interest.
iv) To arrest the decl1n1ng trend in exports or to boost export by introducing new
products in new markets.
v) To assist small exporters in their export trade.
vi) To assist small exporters in their export trade.
vii) To assist export-oriented organisations in their export and financial and
organisational activities.
1. Turnover
The total turnover of STC amounted to Rs. 1756 crores in 1990-91 as
compared to Rs. 1855 crores in 1989-90. STC's exports during 1990-91 amounted
Rs. 369 crores as compared to Rs. 752 crores during 1989-90. The following table
illustrates STC's performance during 1989-90 and 1990"91.
Rs. in crores
Exports 1989-90 1990-91
Canalised 135 113
Non-Canalised 262 273
Counter trade 341 83
Off-shore 14 –
Imports
Canalised 1045 1309
Non-canalised 25 23
Domestic 33 55
Total 1855 1756
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LESSON -14
exporter allows credit or not. The exporter must be careful in allowing credit. But
sometimes providing credit facilities is necessary to get the business, otherwise
there is a fear of losing the valuable foreign exchange for the country and good
buyers abroad. The way out may be to borrow money from a bank or any other
financial institution to finance such credit.
The areas where finance would be essentially needed and arranged, after one
obtains an order are - (a) Procuring raw materials and component to manufacture
the product. (b) Refinancing facilities so as to get the proceeds of bills after the
shipment.(c) Availability of funds until the export benefit are realized, and
(d) Refinance facilities for long term credits offered for the export of products.
]n India, the schemes of export financing available to an exporter are
reasonably liberal. There are many financial institutions including recently set up. .
Export Import Bank, that under take the risks, attached to the export financing.
An exporter needs finances for his pre-shipment and post-shipment
requirements. Mainly pre-shipment requirements are short term requirements
where period of credit normally does not exceed 180 days. The post-shipment credit
needs may be short term, medium term and long term. A credit extended beyond
180 days and upto 5 years is referred as medium term.
14.2 SHORT TERM SOURCES OF FINANCE
The following are the short-term sources of finance in export trade:
1) By importer
In certain cases the importer finances the exporter by. ~ sending the amount
required to meet the preshipment credit in advance which can be adjusted against
the import price of the goods. The importer may insist upon the letter of credit
instead of cash. In either case, the effect is the same, the importer has financed the
transaction.
2) By exporter
When the exporter puts up his own capital or diverts his business funds
towards export business, and execute, the export order without the help of
borrowed funds, it is said that the exporter has financed, the exports. The exporter
may either have an open account with the importer, if they are known and their
relations are well maintained or send the documents against payment or against
acceptance after shipping the goods. If documents are against payment, the
exporter gets the payment within a reasonable time and if the documents are
against acceptance, he can discount the acceptance from his banker as soon as he
gets it from the buyer after acceptance. In this way, the exporter finances his short
term needs himself.
This method is most unusual because comparatively few manufacturers and
professional exporters either have their own capital or wish to employ it in this
manner. The reason behind it is that the rate of interest charged by the bank on
export credit or fee for negotiating drafts is quite low and no wiseman will invest his
own capital in this "manner.
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Thus post shipment credit is required by the exporter during the intervening
period between the shipment of goods and the receipt of payment therefore. Thus in
nut shell, an exporter needs credit or financial support at two stages-(i) At
preshipment stage, and (it) At post shipment stage.
14.5 PRE-SHIPMENT FINANCE OR PACKING CREDIT
Pre-shipment finance (packing credit) is needed by the exporter for his working
capital requirements between the time of the receipt of order from an overseas
buyer and the time of shipment to arrange for production procurement of goods.
The preshipment finance is required for short term period ranging between 90 days
to 180 days. Pre-shipment finance is of particular importance to small scale
manufacturers and exporters who are short of finance to meet the necessary
expenditure involved in the production of goods for export.
Pre-shipment credit is normally provided by the commercial banks. the bank
while advancing credit for this purpose, normally take the following factors into
consideration--
(a) honesty, integrity and capital of the exporter, (b) exporter's experience in
the trade, (c) security or guarantee offered, (d) the margin and the rate of interest,
(e) bank's experiences about the exporter. (f) standing of the foreign buyer,
The bank generally asks for the security in the-following forms:
i) Letter of credit received against the contract,
ii) Confirmed order as evidence of having received an exporter order,
iii) Relevant policy issued by the Export Credit and Guarantee Corporation,
iv) Personal bond in case the party is known to the banker.
If the exporter has to supply the goods to an export house, the manufacturer
exporter should have to furnish a letter from the export house containing (I) the
obligation of supplier, and (ii) a certificate of export house that it is not itself
claiming the pre-shipment credit.
Amount of credit and rate of interest The amount of loan depends upon the
f.o.b. value of goods and incentives thereof such as cash compensatory and Duty
drawback etc. and generally conforms to the norm set up by the ECGC under the
Export production Finance Guarantee; Scheme i.e., 50 per cent over and above the
f.o.b. value of goods subject to a maximum of 100% of the domestic cost of the
export product.
Pre-shipment Credit may be in the form of loan, Cash Credit and Overdraft
and the amount provided normally covers to following costs:- .
a) cost of purchase or production,
b) cost of packing including special packing for export.
c) Internal transport cost
d) port, customs and shipping agent's charges,
e) cost of special inspection or tests required by the importer,
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on the other hand, is unique in any given stratum as it involves human elements
namely, the behavioural pattern of the consumers and the characteristics of the
society such as customs, attitudes, values etc. Thus, international marketing is
identical to the domestic marketing as far as technical aspect is concerned but
international marketing, to the extent it is visualised as a social process, differs
from domestic marketing.
14.14 SUMMARY
Export finance starts when exports of goods are cleared and the amount is
received. It may be short, medium and long term sources of finance. The export
pattern is pre shipment finance and post shipment finance. The international
marketing has its main role and differentiates from domestic marketing.
14.15 ASSIGNMENT QUESTIONS
1. What is export financing?
2. What are short term sources of finance?
3. Describe the medium and log term sources of finance?
4. What do meant by international marketing?
5. Explain the scope of international marketing?
6. Differentiate; international marketing and domestic marketing.
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LESSON - 15
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The only option to avoid the situation is to establish the export oriented
industries and to increase the existing installed capacity of units producing goods
for export markets, Industries should also be given stimulus to util1se their
.unutil1sed capacity and export the surplus production. Thus export is a must for
meeting the import requirements of a country because by exporting the surplus or
additional production, a country can also earn valuable foreign exchange that is
necessary to meet the import bill.
Moreover, if a country fails in meeting the import bill by exporting the goods
and services from the other country, the difference is trade deficit which cannot be
said to be a pleasant situation. Thus, positive measures, and encouragement for
the steady and substantial increase in the export trade is necessary to balance the
imports.
In this way, export should be increased steadily and substantially especially by
an underdeveloped country where trade deficit has become a regular feature.
ii) Debt Servicing
Almost all underdeveloped countries, including India, have been receiving
external aid over the years for their industrial development. The natural
consequence of aid has been the need for debt servicing i.e. arrangement of foreign
exchange every year equal to the installment and interest assumed thereon as per
terms of the aid or loan.
Hence, it is necessary to aim at sufficient export earnings to cover both
imports and debt servicing, This will lead to the availability of higher amount of
foreign aid for development and consequently higher amount for debt servicing.
iii) Rapid economic growth
An, expanding export trade can be a dynamic factor in a country's
development process. However, one has to plan imaginatively in increasing the
production of exportable surpluses. The country should have to util1se domestic
resources and to' provide technological Improvement and Improved production at
lower costs. For this purpose Industrial development is Inevitable which is not
possible without making exports. Export and economic development of a country
are inter-related without exports economic development of higher order cannot be
imagined. In a study on 'The relation of exports and economic growth” conducted
for a group of 50 countries by R.F. Emery, it was found that a higher rate of
economic growth. The study also revealed that a significant correlation exists
between exports and GNP and that real GNP percapita recorded an increase of 1 %
for every 2% rise in exports to grow economically should take serious view for
creating exportable surpluses '(surpluses after meeting domestic demands). In the
best interest of the economy and exports, emphasis should be on increasing the
overall production and expanding the export of non-traditional products. This will
lead to -
i) Earning of more valuable foreign exchange which can be judiciously
allocated for the import of necessary plants, machinery and equipment for
the development of industries in the country In order of preference as spelt
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out in the development plans of the country. The foreign exchange can be
used for the import of agricultural implements and fertil1sers to raise the
production of agricultural produce and that can provide a base for many
agriculture based industries. New agricultural produce can be grown to
establish new Industries that may provide import substitution and may
save necessary foreign exchange.
ii) 'Spin off benefits for the domestic consumer by exposing the Industry to
international markets and making, it more competitive as well as
conscious of costs and equality.
iii) Mitigate unemployment in labour-intensive Industries.
iv) Established new and new Industrial units for contributing towards export
after making their domestic demand, sometimes. 100% export-oriented
units are established.
v) Full utilisation of idle resources.
Thus, export marketing is really a dynamic force in the development of a
country.
iv) Profitable use of natural resources
Natural resources are valuable assets of a country which should be exploited
ideally, keeping the Interest of the country in mind. This can be well done by export
marketing. Earning from exports can be utilised in establishing Industrial unit
based on different natural resources available in the country by making the
necessary of plant and machinery for the purpose, Moreover, necessary equipments
can be imported for the exploitation of natural resources such as digging machines
to be used in oil .exploration etc. In this way, an increase in the conservation of
natural resources and their profitable use in the industry will reduce imports of a
country.
v) Facing Competition successfully
In a thrust to export more, the Government of the country, announces several
concessions and incentive plants. Domestic producer in order to avail these
concessions, concentrates his mind towards the improvement of quality of goods
produced and reducing the cost of production so as to face the acute competitive
situation in the foreign markets by making intensive use of latest technology, As
because he is already marketing the goods in the domestic market, the advantage of
other quality at reduced price is also made available to the domestic customers and
face competition successfully in the local market. Moreover, better quality and
lower prices improve the image of the producer as well as the country in minds of
foreign customers.
vi) Increase in Employment Opportunities
In an effort to increase the export, many export oriented industrial units are
established, on the one hand, and the existing units produce more to get exportable
surplus, on the other hand. This generates new opportunities for employment and
increases the existing level of employment. In underdeveloped countries,
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various issues concerning their international trade and take decision jointly. OPEC
and EEC are such groups. In this way, international trade leads to international
collaboration.
(2) CLOSE CULTURAL RELATIONS: International trade brings various
countries closer. Better trade relations are established among the countries.
Government and non-Government trade commission or trade representations visit
other countries from time to time. The local representatives and other related
persons came into contract with foreign representatives and come to know their
habits and customs. Apart from this, exporting firms open their selling deposits,
agencies or manufacturing units abroad. Their employees also come into contract
with the persons of the countries of their posting. In this way closer cultural
relations among various countries develop.
(3) HELP IN POLITICAL PEACE: The economic relations between two countries
help to improve their political relations. Various countries having different political
ideologies import or export their products. The USSR imports food grains from
America, though they have a different rather opposite, political ideology. Thus, to
some extent, international trade helps maintaining political peace in the world.
To sum up, it is now undisputable that export trade contributes to the
national economy, national exchequer, and individual exporting firms and
maintains international economic, cultural and political relations among various
countries. Countries have come closer on account of international marketing. In
modern world export marketing is 'an inevitable part of business activity of a
country.
15.5 INTERNATIONAL MARKETING Vs EXPORT MARKETING
Generally the two terms 'international marketing' and 'export marketing' are
taken synonymously, and are used interchangeably. Though differentiation between
these two terms is not so easy, however, the following points of difference may be
noted--
(1) SCOPE: The scope of international marketing includes inter alias, the
following activities (a) setting' up of a branch abroad for processing, packaging,
assembly or even undertaking direct manufacturing through direct investment; (b)
entering into licensing arrangement; (c) setting up of Joint ventures and
'collaborations in the foreign markets; (d) offering turnkey projects and consultancy
services. Furthermore, international marketing involves research into the needs of
the foreign markets and evolving suitable marketing strategies to meet them.
On the contrary, the scope of foreign marketing is very limited and it includes
only the activity of exporting goods and services to the foreign country and related
matters thereto. A manufacturer tries to sell his surplus production in foreign
markets' as and when the demand for it arises either directly or through some
agency. He does not make any attempt to have an insight into the potential of
foreign markets by conducting research nor does he attempt to differentiate his
marketing mix to match such needs.
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(2) APPROACH: The other point of difference between export marketing and
international marketing is that of approach towards the firm's orientation. In the
case of export marketing, the firm is ethno centric or home oriented and produces
and sells goods to foreign buyers visiting home country or to an importer in the
host country or to an export house for being sold in the foreign market. The
philosophy here in exporting the goods by, the firm is either (a) to counter domestic
competition' and export the surplus product or (b) to avail of the incentives
provided by the home Government. Most of present day multinationals like Philips,
IBM, Unilever etc., started their international operation mainly because of
compulsion of their domestic market conditions, i.e., intensive competition and
their small size. On the other hand most of the Indian firms which attracted
towards international operations started exporting mainly to avail Government
incentives. However, as the foreign marketing deepens and involves and or all of the
above listed alternatives, the firm majors into international marketing.
In case of international marketing, the firm's approach in exporting the goods
and services is not to avail the Government incentives or to counter the domestic
market conditions i.e., intensive competition or the small size. Here the approach in
entering the international markets is to explore the marketing opportunities in the
host country or countries and therefore the exporting firm's actions are governed
mainly by the host country's environment. It now aims at countering Government
and competitive pressures in the host country. Also at this stage the firm
undertakes, as mentioned above, international market research identifies consumer
preferences in the host country and develops an appropriate marketing mix.
However, here too, the centre of reference remains the parent firm and its
headquarters.
Thus, to conclude, international marketing approach presupposes serious
marketing involvement of a firm in its foreign markets, whereas export marketing
approach, prima-facie, is an opportunistic approach. The involvement of a firm in
its overseas operations in this case is at best casual as explained above.
15.6 ROLE OF EXPORT CREDIT GUARANTEE CORPORATION (ECGC)
The risk element in the export business is greater than the risk involved in
domestic trade because the two parties of the export contract belong to different
countries. The export contract involves a number of complications– economic, legal,
political and social. For minimising the risk element in export business and to
facilitate the flow of finance from banks and other institutions to exporters there is
an Export Credit Guarantee Corporation (ECGC)
The ECGC was established in 1954 and the Export Risk Insurance
Corporation (ERIC) was merged in it. The corporation is under the administrative
control of the Ministry of Commerce. Its Head Office is in Bombay and regional
offices are at Calcutta, Madras, Delhi and Bombay. 'It is wholly owned by the
Government of India and works on 'no profit no loss' basis.
Functions of the corporation: The main functions of the corporation are--
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1. By issuing suitable polices. 'It insures orders against the attendant risks of
export operations.
2. It provides financial guarantees to ~ and exporters for export against deferred
credit payment terms.
3. Any other activity assigned to It by Ute Government of India from time to
time.
Insurance policies issued by ECGC: The ECGC has issued the following two types of
policies–
(1) Standard policies, and (2) Special policies
(1) Standard Policies
Standard policies are issued by the ECGC to exporters to protect them against
the risks of international trading especially those relating to losses in exports on
deferred terms of payment.
There are three types of standard policies–
a. Specific shipment policy (Political risk): This policy covers the risks caused
by the political reasons such as importers government action to block or
delay payment, war revolution or civil disturbance, cancellation of import
licence, demurrage or addition handling charges due to delay, and any
other causes of loss occurring outside India.
b. Specific shipment policy (Comprehensive risks): Such policy covers both the
political and commercial risks involved in export transactions. The policy
covers the commercial risks caused to the exporter by the insolvency of the
buyer, delay in payments for more than 4 months, non-acceptance of goods
not due to exporter's default.
c. Contract Policy: Contract Policy covers the additional risks due Jo
cancellation of export licence or imposition of new export restrictions in
India. The above two specific policies cover risks from the time the goods
are shipped but the contract policy covers the risks from the date of
contract.
The extent of coverage of financial losses (on account of political or commercial
risks) under the ECGC standard policy is 90% of the losses.
(2) Special Policies
Special policies, besides the risks covered under standard policies, are issued
by the ECGC to cover the risks as desired by the exporters to meet their needs in
export transactions.
To suit the various needs of the exporters, the ECGC has devised the following policies–
a. Construction works policy covers the risks of non-payment of contract price
to the contractor by the foreign contractee.
b. Policy for consignment export covers the loss on consignment transaction.
c. Services policy covers the risks of non-payment for services rendered
abroad. Policy covers only technical and professional services.
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d. Manufacturer's credit insurance policy covers 80% of the risk due to default
on insolvency on the part of the exporter.
e. Exporter's credit insurance policy. This policy covers 50% of losses arising
out of default or insolvency of manufacturers.
f. Market development policies cover losses on market development on 50:50
basis if market surveys are done by an independent agency.
Financial Guarantees
ECGC provides financial guarantee to the banks advancing credits to exporters. Some
of the guarantees offered by the ECGC are –
i) Packing Credit Guarantee or Pre:-shipment Guarantee
ii) Post-shipment Export Credit Guarantee.
iii) Export Finance Guarantee
iv) Export Production Finance Guarantee
v) Export Performance Guarantee
vi) Transfer Guarantee.
Apart from the above, the ECGC in the last few years has brought forward
many progressive schemes and policies to encourage exports and cover the risks of
exporters and the financial institutions. The new schemes introduced in 1980 are
to cover risks against exchange fluctuations at the bid/ contract stage and in
respect of deferred receivables including constructions, contracts, turnkey projects
and buyer's credits.
In this way, the ECGC covers a wide range of risk including political and
financial risk and is serving to the cause of national economy.
15.7 EXPORT PROMOTION MEASURES
The Government has, over the years, been undertaking several export
promotion measures aimed at encouraging a rapid growth in exports in order to
earn the much needed foreign exchange for financing the import of essential inputs
required for the economic development of the country. These measures encompass
a wide spectrum of policies and programmes including financial. Fiscal, industrial,
trade and exchange rate management on one hand and development of institutional
frame work for export promotion, removal of bottlenecks and streamlining of
policies and procedures etc. on the other.
The following are the institutional infrastructure for export promotion.
Institutional Infrastructure
An exporter needs guidance and assistance at different stages of his export
effort. For this purpose, the Government of India has set up several institutions
whose main functions are to help an exporter in his work. It would be advisable for
an exporter to acquaint himself with these institutions and the nature of help that
they can render to him so that they can initially contact them and have a clear
picture of what help he can expect from organised sources in his export effort.
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Institutions engaged in export efforts fall into six distinct tiers. At the top is the
department of commerce of the Ministry of commerce. This is the main organisation
to formulate and guide India's trade policy. At the second tier, there are deliberative
and consultative organisations to ensure that export problems are comprehensively
dealt with after mutual discussions between the Government and the industry. At
the third tier are the commodity specific organisations which deal with problems
relating to individual commodities and/or groups of commodities. The fourth tier
consists of service institutions which facilitate and assist the exporters ~ expand
their operations and reach out more effectively to' the world markets. The fifth tier
consists of Government trading organizations specifically set up to handle
export/import, of specified commodities and to supplement the efforts of the private
enterprise in the field of export promotion and import management. Agencies for
export promotion at the state level constitute the sixth tier.
The Department of Commerce is the primary Government agency responsible
for evolving and directing foreign trade policy and programmes. including
commercial relations with other countries. State trading, various trade promotional
measures and development and regulation of certain export oriented industries.
Apart from the Finance and Administrative Divisions, the principal functional
divisions of the Department of Commerce are Economic Division. Trade Policy
Division, Foreign Trade Territorial Division, Export Products Division. Export
Services D1v1sion and Export Industries Division.
The main task of the Trade Policy Division is to keep abreast of the
developments in the international organisations like UNCTAD, GATT, the Economic
Commission for Europe, Africa, Latin America and Asia and Far East (ESCAP). It is
also responsible for India's relations with the European Economic Community.
European Free Trade Association, Latin American Free Trade Area, other regional
groupings and commonwealth. It also looks after the general1sed system of
preferences and non tariff barriers.
The Foreign Trade Territorial Division is entrusted with the work relating to
the development of Trade with different countries and regions of the world. This
Division also handles matters pertaining to State trading and barter deals.
organisation of trade fairs and exhibitions, commercial publicity abroad, etc. It also
maintains contacts with Indian Trade Missions abroad and attends to the
connected administrative work including the protocol functions.
The Export Products Division pays attention to the problems connected with
production, generation of surplus and development of markets for the various
products under its Jurisdiction. These products include, inter alia, plantations,
marine products, chemicals, plastics, leather and leather goods, sports goods,
films, steel metals, engineering products, minerals and ores, coal, petroleum
products, mica, salt, etc. Although in administrative terms the responsibility for
these products remains with the Ministries concerned, this Division keeps itself in
close touch with them to ensure that production is sufficient to realise the full
export potential besides meeting the home consumption. This Division is also
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responsible for the working of export organisations and corporations dealing with
the above commodities and products.
The Export Industries Division is responsible for development and regulation
of rubber, tobacco and cardamom. The Division is also responsible for handling
export promotion activities relating to textiles, woolens, handlooms, readymade
garments, silk and cellulosic fibres, Jute and Jute products, handicrafts, coir and
coir products.
The Export Services Division deals with the problems of export assistance
including import repleshment licensing, cash assistance, export credit, export
houses Marketing Development Assistance and grants there from transport, free
trade zones, dry ports, quality control and pre-shipment Inspection. Joint ventures
abroad and capacity creation in export oriented industries including assistance to
Import capital goods and essential raw materials.
The Economic Division, headed by the Economic Adviser, is responsible for the
formation of export strategies, export planning, periodic appraisal and review of
policies as also for maintaining coordination and constant contacts with the other
Divisions as well as with various organisations which have been set up under the
Commerce Department to assist the export drive. This Division also monitors work
relating to technical assistance, management services for export and overseas
Investments by Indian entrepreneurs.
For the execution of export and import policies formulated by the Ministry,
there is an Import Export Trade Control Organisation headed by the chief controller
of Imports and exports. Its supporting offices are located at Import port towns and
commercial centres of the country, namely, Agartala, Ahmedabad, Amristar,
Bangalore, Bombay, Calcutta, Cuttack, Chandigarh, Ernakulam, Gauhati.
Hyderabad, Jalpur, Kanada, Kanpur, Madras, New Delhi, Panjlm, Patna,
Pondicherry, Rajkot, Shillong, Srinagar and Vishakapatnam.
Consultative and Deliberative Bodies
The various consultative and deliberative bodies have been set up to ensure
that the collective advice of the commercial Interests Is available to the Government
of India for framing and formulating export promotion and import policies and for
successful implementation thereof.
Central Advisory Council on Trade: The council was constituted with effect from
Feb. 15, 1978 by merging the Board of Trade and the Advisory Council on Trade. It
was reconstituted in July 1983. The council consists of 28 members including
representatives from different trade organisations. Reserve Bank of India, Export
Import Bank, Federation of Indian Export Organisations, member of parliament and
Individuals with business standing and expertise in the field of commerce. The
council has powers to co-opt additional members. The members of the council hold
office for 2 years. The council which ordinarily meets twice a year, advices the
Government on matters relating to (i) export and import policy and programmes, (ii)
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the operation of export and import controls (iii) organisation and development of
commercial services and (iv) organisation and expansion of export production.
The Council is presided over by the Commerce Minister and in his ,. absence
by the Minister of State for Commerce.
Zonal Export and Import Advisory Committee
There are four such committees, one each for the Western, Eastern, Southern
and Northern Zones. These were set up in July 1968 (i) to consider difficulties faced
in the operation of prevailing import and export policies and procedures and to
suggest measures for improvement in disbursement of cash assistance, (ii) to
consider difficulties in the matter of customs clearance, shipping, credit, insurance
and export inspection and to suggest measures for improvement therein and (iii) to
suggest improvements in the methods of working and public relations of the Import
and Export Trade Control Organisation and other Government Departments
concerned with trade and industry.
Commodity Organisations
A number of organisations have been established in the country with the
objective of promoting and strengthening commodity specialisation. More important
among item are the Export Promotion Councils and the Commodity Boards.
15.8 EXPORT PROMOTION COUNCILS
There are 19 Export Promotion Councils covering the following products:
apparel, basic chemicals, pharmaceuticals and cosmetics, chemicals and allied
products, carpet, cashew, cotton textiles, engineering, gem and jewellery,
handicrafts, handlooms, leather, overseas construction, plastics and linoleums,
shellac, silk, silk and rayon textiles, spices. Sports goods and woolens. These
councils are non profit-making limited companies registered under the Companies
Act. The Ministry of Commerce provides necessary assistance in relation to their
programmes.
These councils advise the government regarding current developments in the
export sector and measures necessary to facilitate future growth in exports, assist
manufacturers and exporters to overcome the various constraints and extend to
them the full range of services for the development of markets overseas. The
councils also perform certain "regulatory functions as they have the power to de-
register errant or defaulting exporters.
An idea of the functions of the Export Promotion Councils can be had from
some of the important activities of the Engineering Export Promotion Council as
mentioned below:
1. to appraise the Government of the exporter's problems;
2. to keep its members posted with regard to trade enquiries and opportunities;
3. to help in exploration of overseas markets" and identification of items with
export potential;
4. to render assistance on specific problems confronting individual exporters;
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There are 8 statutory Boards for the following commodities; handicrafts, silk:
powerloom, coffee, coir, rubber, tea, tobacco and cardamom. The Commodity
Boards deal with the entire range of problems of production, development,
marketing, etc. In respect of the commodities concerned, they act themselves as if
they were the Export Promotion Councils. Some of these Boards have opened their
branch offices in foreign countries in order to promote the consumption of the
commodities under their jurisdiction. For example, the Tea Board has set up
various promotional units in foreign countries with a view to organislng generic
promotion programmes. Similarly, some other boards have taken promotional
measures by opening foreign offices abroad, participating in trade fairs and
exhibitions, conducting market surveys, sponsoring trade delegations, etc.
Marine Products Export Development Authority
The Marine Product Export Development Authority replaced the Marine
Product Export Promotion Council and started functioning in September 1972. The
Authority serves the seafood industry right from fishing to processing, packagmg,
storing, transporting and marketing to the different markets all over the world. The
Authority Is entrusted with the task of ensuring a healthy growth of the Industry
through judicious regulation, conservation and control. Importers and exporters
can obtain any Information relating to the markets and the products from the
Marine Products Export Development Authority.
The Specific functions of the authority are:
(a) Development of off-shore and deep-sea fishing in all its aspects and
conservation and management of off-shore and deep-sea fisheries;
(b) Registration of fishing vessels, processing plants, storage premises and
conveyances relating to the products Industry and exports with a view to promote a
healthy development;
(c) Laying down standards and specifications for marine products for purposes
of export and to Introduce comprehensive in-plant Inspection system to maintain a
high quality of the products;
(d) Rendering financial or other assistance and to act as an agency for
extension of relief and subsidy as may be entrusted by the Government;
(e) Rendering other types of assistance and service to the industry in relation
to market intelligence, export, promotion, trade enquiries and import of certain
essential items required In small quantities for the industry;
(f) Regulation of export of marine products;
(g) Improve the marketing of marine products overseas by providing market
intelligence, market promotion activities, information on the types of products in
demand in different countries, nature of processing for specific types of
requirements, etc.
(h) Arrange for training in different aspects connected with export with special
reference to fishing, processing and marketing: and
(i) Such other measures that will be of importance to the export industry.
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MPEDA's service extended to foreign buyers range from spotting the right
packers and exporters and in ensuring that the products are delivered in the
overseas markets on time and in prime condition.
To ensure better coordination and to offer prompt and effective service to the
industry, MPEDA has opened regional offices in major seafood processing and
export centres and a trade promotion office at New Delhi. It has got a foreign office
at Tokyo and plans to set up similar offices in other major markets.
15.9 AGRICULTURAL AND PROCESSED FOOD PRODUCT EXPORTS DEVELOPMENT
AUTHORITY
With a view to increase the exports from agricultural sector, the Processed
Food Export Promotion Council has been upgraded as Agricultural & Processed
Food Products Export Development Authority (APEDA). It will coordinate its
activities with national bodies like Horticulture Board and State Governments for
generating production for exports and with research institutes for development of
value added products. It would also undertake quality certification and unify the
existing inspection and quality control for products such as meat and meat
products.
The products covered by the Authority are:
1. Fruits, vegetables and their products
2. Meat and meat products
3. Poultry and poultry products
4. Dairy products
5. Confectionery, biscuits and bakery products
6. Honey, Jaggery and sugar products
7. Cocoa and its products, Chocolates of all kinds
8. AIhoholic and non-alchoholic beverages
9. Cereal products
10. Cashewnuts, groundnuts, peanuts and Walnuts
11. Pickles, chutneys and papads
12. Guava gum
13. Horticulture and floriculture products
14. Herbal and medicinal plants
The functions of APEDA are:
a) the development of industries relating to the above products, for export by
way of providing financial assistance or otherwise for undertaking surveys
and feasibility studies, participation in the equity capital through joint
ventures and other relief’s and subsidy schemes;
b) the registration of persons as exporters of the products concerned on
payment of such fees as may be prescribed;
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c) the fixing of standards and specifications for these products for the
purposes of export;
d) the carrying out of inspection of meat and meat products in any slaughter
house, processing land, storage premises, conveyances or other places
where such products are kept or handled for the purpose of ensuring the
quality of such products;
e) the improving of packaging of these products;
f) the improving of the marketing of these products outside India;
g) the promotion of export-oriented production and development of these
products;
h) the collection of statistics from the owners of factories or establishments
engaged in the production, processing, packaging, marketing or export of
these products or from such other persons as may be prescribed on any
matter relating to these products, and the publication of the statistics so
collected, or of any portions thereof or extracts there from; and
i) the training in various aspects of the industries connected with these
products.
Supplementing the commodity organisations are the offices of the Textile
Commissioner and the Jute Commissioner. The Textile Commissioner is concerned
with the development and regulation of all textile industries other than jute and
coir. It is also responsible for the development of the textile machinery industry.
The Jute commissioner is concerned with the development of jute industry and the
jute mill machinery industry.
15.10 SERVICE INSTITUTIONS
A number of institutions and organisations have been established to meet the
requirements of industry and trade. The fields in which these institutions have
been active include development of export management personnel, market
research, export credit insurance, export publicity, organisation of trade fairs and
exhibitions. collection and dissemination of market information, preshipment
inspection and quality control, development in packaging, etc. A brief review of the
activities and functions of some of these institutions is given below:
15.11 INDIAN INSTITUTE OF FOREIGN TRADE
Some of the principal activities of the Institute are the following:
1. It provides training of a high standard, short-term and long term, for
executives and personnel employed in trade and industry, export houses, export.
organisations, government departments, government trading corporations and
Indian embassies and consulates abroad, for developing specialisation in the
techniques, methods and procedures of international trade.
2. It sponsors candidates selected from industry and trade, export houses,
government departments, trading corporations, etc., for higher training abroad in
export management' and export techniques and for acquiring firsthand knowledge
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credits, marketing and merchandising and other aids, TDA's micro-level approach
distinguishes it from other export promotion organisation.
A special function of the TDA is to attract International subcontracting of
engineering and other components from India and promotion of export-oriented
Joint ventures in the country In conjunction with the Indian Investment Centre.
Initially, the TDA confined its activities to a limited number of products. But it
has now taken up a number of new items. At present the products taken up by the
TDA are:
Engineering
¾ Electronic equipment and components
¾ Sewing machines and components
¾ Bicycles and components
¾ Automobile ancillaries
¾ Industrial fasteners
¾ Ferrous castings and forgings for industrial application
¾ Small tools and hand tools
¾ Garden tools
¾ Instruments for industrial
¾ Laboratory
¾ hospital and educational use
¾ Diesel engines and parts
¾ Storage and dry cell batteries
¾ Builder's hardware
¾ Fencing components
¾ Scooters and mopeds
¾ Mechanical. handling equipment
¾ Telecommunication equipment
¾ Pumps and centrifuges
¾ Tubes, pipes of iron and steel
¾ Heating and cooling equipment
¾ Domestic electrical appliances and accessories
Non-Engineering
¾ Readymade garments and knitwear
¾ Home furnishing and made-ups. including carpets and carpeting
¾ Leather goods. including garments
¾ Sports goods. sporting accessories and camping equipment
¾ Wooden furniture
¾ Garden furniture
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15.13 SUMMARY
It is necessary to make a significant by contributing to the economy and the
country’s development for developed countries. In this context, the importance of
international marketing is essential. They are – to meet imports of industrial needs,
debt servicing, rapid economic growth, facing competition, increase in the standard
of living and employment opportunities. The importance of export marketing in view
of individual – utilise installed capacity, relative profitability, less business risk,
increased productivity, etc. The international marketing varies in regards with
export marketing in scope and approach. The export contract involves a number of
complications, for this to smooth the flow of finance, the ECGC emerged. Finally,
the role of Trade Development Authority has taken up products from Engineering
and Non-Engineering areas. It has many divisions such as information division,
Research and Analysis Division, and merchandising Division. It also set up
overseas offices at Frankfurt, New York and Tokyo.
15.14 ASSIGNMENT QUESTIONS
1. Discuss briefly the importance of international marketing?
2. Explain the role of ECGC and various insurance policies issued by ECGC.
3. Enumerate the different export promotion measures.
4. State the functions of export promotion councils.
5. What are the principal activities of Indian Institute of Foreign Trade?
6. Discuss briefly the role and major functions of TDA?
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LESSON – 16
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Under its policies intended to protect the exporters against overseas credit,
I1sks, ECGC bears the main brunt of the I1sk and pays the exporter 90 percent of
his loss on account of 'commercial' risks and 'political' risks. The functions and
policies of the corporation are discussed in greater detail later in the book.
16.2 EXPORT-IMPORT BANK
Export-Import Bank was established on January I, 1982 for the purpose of
financing, facilitating and promoting foreign trade of India. It extends finance to
exporters of capital and manufactured goods, exporters of software’s and
consultancy services and to overseas joint ventures and turnkey/construction
projects abroad. The Bank is the pI1nc1pal financial institution in India for
coordinating the work of institutions engaged in financing export and import trade.
16.3 EXPORT INSPECTION COUNCIL
In consonance with the need for constant improvement in the quality of Indian
manufactures and products, and for lending confidence to the importers abroad In
respect of the quality of Indian exports, the Government has enacted the Quality
Control and Pre-shipment Inspection Act. Eighty-eight per cent of export
commodities coveI1ng 915 items have already been brought within the purview of
this Act and are subject to compulsory pre-shipment inspection. It is envisaged that
barring a few items, all the commodities with in the near future be covered by
quality control and compulsory pre-shipment inspection. The Export Inspection
Council established under the Act administers the various schemes of quality
control and pre-shipment inspection. The council is also charges with the
responsibility of establishing laboratories and test houses through the country for
the provision of inspection facilities in regard to the commodities thus notified. It
has established inspection agencies under which the network of quality inspection
officials operate in various parts of the country.
Textiles committee, Bombay, is responsible for quality control of textiles, yam
and textile machinery. .
The Act is being revised to provide for more stringent punishment to defaulting
exporters.
16.4 INDIAN INSTITUTE 01 PACKAGING
It is absolutely necessary that the packaging standards of Indian products
should match the standards required by the sophisticated markets and effectively
compete with the packaged products emanating from the developed countries.
Likewise, it is very important that the materials and devices used in packaging of
the products should be such that they ensure safe transit of the export goods.
Considering the existing deficiencies in the standard of packing for the safe transit,
Government of India, in collaboration with the industry, has set up the Indian
Institute of Packaging (lIP).
The main aims of the Institute are:
i) to undertake research on raw materials for the packaging industry,
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iv) Projecting Indian goods and services abroad through various media
including films, exhibitions, advertisements and publications.
v) Sponsoring outgoing multi-interest trade and economic missions, and
special teams of government recognised export houses, consultancy firms.
small scale industries and individual study-cum sales teams.
vi) Maintaining overseas liaison with International and U.N. Agencies-like ITC,
GAIT, UNCTAD, ESCAP, UNIDO, IMF, World Bank, ADB, ILO, etc.
vii) Establishing rapport with overseas chambers of commerce, trade
associations and government departments concerned.
viii) Sponsoring 'special, projects' related to the export promotion of India's
consultancy services.
ix) Executing projects and responsibilities entrusted to it, from time to time, by
the Government of India and servicing as a forum for two-way transmission
of views and information between government departments and the
exporting community.
x) Promoting trade, economic and technical co-operation between India and
other Countries by way of international seminars and creating special
infrastructure for follow-up.
The FIEO is the primary servicing agency to provide integrated assistance to
Government recognised export houses as also the central coordinating agency for
export promotion of consultancy services.
FIEO is now placing great emphasis on intra and inter-regional co-operation in
trade and economic matters with a View to promoting harmony and understanding
through economic, trade and technical ties.
16.7 TRADE FAIR AUTHORITY OF INDIA
The Trade Fair Authority of India came into existence on March11, 1977, after
unifying three organisations, namely, the Directorate of Exhibitions and commercial
publicity, the Indian Council of Trade Fairs and Exhibitions and Trade Fair
Organisation.
The objectives of the Trade Fair Authority are:
i) to promote, organise and participate in industrial trade and other fairs and
exhibitions.
ii) to set up showrooms and shops in India and abroad,
iii) to undertake trading activities in commodities connected with or relating to
such fairs and exhibitions, and
iv) to develop exports of new items for diversification and expansion of India's
exports.
The Trade Fair Authority of India brings out regularly three journals, namely,
Udyog Vyapar Patrika (Hindi-Monthly), Indian Export Bulletin (English-weekly), and
Economic and Commercial News (English-weekly). These periodicals provide
authentic information on the country's economy, business possibilities offered by
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foreign markets, Government trade policies, facilities available for exports and
important tenders floated by other countries. They also provide material to Indian
Missions for their publicity efforts.
The Authority has been organising wholly Indian exhibitions and India's
participation in severa1international fairs on a countrywide basis.
With effect from July 1981, all fairs and exhibitions, both within the country
and outside, are coordinated by the Trade Fair Authority. It is also the agency for
organising fairs and exhibitions assisted be Marketing Development Assistance.
16.8 DEPARTMENT OF COMMERCIAL INTELLIGENCE AND STATISTICS
The Department of Commercial Intelligence and Statistics is located at
Calcutta. Its functions comprise (i) commercial intelligence and (ii) collection,
compilation and publication of the statistics of trade, tariff and shipping.
The work of the Department is broadly divided into the following principal categories:
i) Collection and supply of commercial information required by the
Government and the trade;
ii) Maintenance of registers of Indian and foreign firms:
iii) Publication of the 'Directory of Exporters of Indian Products and
Manufacturer's':
iv) Publication of the weekly 'Indian Trade Journal' and 'Monthly Statistics of
Foreign Trade of India':
v) Publication of the periodical reports received from Indian Government Trade
Representatives stationed in foreign countries in regard to economic
conditions in these countries:
vi) Mediation in commercial disputes between Indian and foreign firms with a
view to bringing about amicable settlement:
vii) Trade introduction: and
viii) Maintenance of Commercial Library in Calcutta for the use of the public.
16.9 DIRECTORATE GENERAL OF SHIPPING
Till 1949, the Ministry of Commerce was responsible for all matters relating to
policy and administration of merchant shipping. Subsequently, it was felt that there
should be a separate organisation to deal with all executive matters relating to
merchant shipping. Accordingly, the Directorate General of Shipping was set up in
September 1949, with headquarters at Bombay. Its functions include, inter alia.
i) Matters affecting merchant shipping, navigation, administration of
merchant shipping:
ii) Development of Indian Shipping: and
iii) Regulation of ocean freight rates in overseas trade.
16.10 FREIGHT INVESTIGATION BUREAU
Freight Investigation Bureau (FIB) was set up in the Directorate General of
Shipping in 1959. This has branch offices at Calcutta, Cochin, Kandla, Madras and
Vishakapatnam.
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8. Natural Rubber Subsidy (NRS) Scheme, under which a portion of the difference
between the cost of indigenous natural rubber used in export production of rubber
manufactured products, and the international price of equivalent grade of rubber is
compensated, has been in operation. The Scheme has been extended upto 31.3.1996. The
maximum amount of subsidy payable under this scheme, at present, is Rs.6000/- MT.
9. Tea bags have been exempted from Excise duty. Full rebate of excise duty on
loose tea and of additional excise duty on packet tea has been granted. Customs Duty
on filter paper used in manufacture of tea bags has been abolished. To counter
misbranding of other areas as Darjeeling tea a new logo for Darjeeling tea has been
launched. Only packet teas (Indian & Foreign) containing a minimum of 60% pure
Darjeeling tea will be allowed to use that Logo.
10. Diamond exporters have been given permission to open dollar accounts
abroad to finance their trade. A number of items of machinery tools and equipment
used in the Gem and Jewellery industry have been placed under OGL with a reduced
level of import duty.
II. Institutional Measures
1. The Cabinet Committee on Trade and investment (CCTI), which was
reconstituted in Oct., 1991, with the Prime Minister as its Chairman and the Ministers
of Finance, Agriculture and Commerce as its members continued to provide the fora for
Co-ordinated consideration of various proposals in regard to export promotion, export
production and performance.
2. The Ministry of Commerce had constituted on May 5, 1989 a Board of Trade to
provide a forum for ensuring continuous dialogue with Trade and Industry in respect
of major developments in the field of international trade. The Board of Trade was
reconstituted on 13.8.91. The Chairman of the Board of Trade is the Commerce
Minister and the membership of the Board includes the Governor, Reserve Bank of
India, Secretaries of the Ministries of Commerce. Industry, Finance and Textiles,
Special Secretary, Prime Minister's Office, President of FICCI, ASSOCHAM, CEI, FIEO,
representatives of Trade and Industry and a few specialists;
3. A State Cell has been operating in Ministry of Commerce under the overall
charge of an Additional Secretary. The functions of the State Cell are to act as a nodal
agency for interacting with the State Governments/Union Territories on matters
concerning imports and exports from the States.
4. Commodity Boards, Export Development Authorities and eleven Export
promotion councils functioning under the Development of Commerce have been
helping to boost up exports.
5. The Export Processing Zones at Madras Falta, NOIDA and Cochin have become
operational and export performance of these zones is steadily in progress. The Export
processing Zones at Vishakapattinam is under implementation.
6. The Design-Cum-Development Centre set up at Jalandhar has commenced
stocking essential raw materials for supply to the sports goods industry. Also a Project-
cum-product Development Centre has been set up at Meerut to help the Indian Sports
Goods industry to upgrade the production 'techniques and develop improved materials.
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5. Export of Iron-ore of Redi origin has been decanalised and iron ore of Goan
origin can now be exported directly by Goan exporters to China in addition to their
traditional markets of Japan, South Korea, Taiwan and West Europe.
6. Export of low grade bauxite with alumina content less than 54% of West Coast
origin, and export of Coal/Coke has also been decanalised.
7. Single window clearance has been granted for all proposals relating to deep-sea
fishing including joint ventures, test fishing and leasing of foreign vessels.
8. Input and Output norms for 128 electronic items for advance licence have been
announced and the powers of Issuing advance licences for such cases have been
delegated to the Regional Offices, with an upper limit of Rs.5 crores. For obtaining
advance licences, the number of documents required to be submitted have been
reduced substantially.
9. The 'Open Sky Policy' under which scheduled and non-scheduled freighter
operators/airlines all over the world have been permitted to provide cargo services to
meet the requirements of the shippers, has been permitted to be continued on a
permanent basis.
10. The Ministry of Commerce has identified 15 broad sectors for a special export
thrust abroad. These sectors area Tea, especially in package and value-added forms;
cereals, in particular wheat, processed foods, including fruit and juices, meat and meat
products and fresh fruits & vegetables. Marine Products, especially in value added
forms, Iron Ore. Leather and leather manufactures, with an emphasis on the latter.
Handicrafts and Jewellery, Capital goods and consumer durables, Electronic goods
and computer software, Basic chemicals, Fabrics, Piece goods and made-ups,
Readymade garments, Woolen fabrics and Knitwear, projects and services and Granite.
16.15 SUMMARY
To minimize the risk element in export business and to facilitate the flow of
finance from the banks to exporters, there is an ECGC. The prime measure of export
promotion as per 1991-92 budget is to provide tax concessions and deductions under
80(C). The industrial policy 1991 also seeks to abolish the industrial licensing except
for a short list of 18 industries the 100% Eou/Ep2s have been exempted from the
purview of compulsory export inspection and permitted to subcontract in the DTA,
provided DTA units are registered with the central excise.
16.16 ASSIGNMENT QUESTIONS
1. Analyse the recent trends in India's export.
2. Explain the role of STC in India's foreign Trade.
3. Discuss the meaning and importance of international marketing.
4. Evaluate the export promotion measures taken by Government.
5. How are export credit needs financed? Evaluate the export credit and
finance system in India.
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LESSON – 17
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ii) when the sale of the product is showing a downward trend and the reason
for the fall could not be established.
iii) when facts and figures about Demand potential are not available.
iv) in designing an advertising programme when consumers habits and
preferences and of the markets are not known.
v) when product development is needed to adapt the product according to the
needs of the consumers.
vi) when the income, fashion, habits and preferences are changing fast.
vii) Having an idea of competitors’ policies and strategies regarding their
products, advertising and sales promotion to make the necessary changes
in its policies and strategies.
viii) when companies own pricing policy is not conductive to competitors pricing
policies and needs change.
The market research is, therefore, needed in taking decisions regarding new
product launching, product, adaptation, entry to new market, and alternative
pricing strategies etc.
17.5 MAIN PARTS OF EXPORT MARKET RESEARCH
Export market research may be divided into the following four main parts:
(A) Elements market research may be divided Into the following four main part-ll:
i) Resources and production;
ii) Transportation;
iii) Location;
iv) Climate;
v) Population;
vi) Standard of living;
vii) Government;
viii) Foreign trade: and
ix) Per capita income
(B) General Market Elements Related to Export Product
i) Foreign trade policy; and
ii) Foreign exchange policy.
(C) Specific Market Factors Concerned with Export Product
i) Domestic production:
ii) Imports: and
iii) Alternate sources.
(D) Particular Factors Affecting Exports
i) The policy of the company:
ii) Adaptability of the product to the export market:
iii) The price of the product:
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(a) Geography
i) Area, topography, climate and seasons.
ii) Natural divisions or sales regions of the country.
(b) Resources
i) Character of resources and extent of development.
ii) Minerals, agriculture, chief crops, forests, water power and potential
and developed electrification areas.
(c) Industries
i) Kinds, location, amount arid quality of output, labour conditions and
unemployment record.
ii) Degree of competition with my export products.
iii) Growth of industries during the last decade or so.
(d) Population
i) Amount, density, rural and urban, location and size of important cities.
ii) Historical background, religious, nationality distribution, social classes,
progressiveness, customs, bias in favour of or against, India or other
nations.
iii) Literacy, educational development, language groups.
iv) Purchasing power, wages, per capita figures in savings, bank deposits,
cars, telephones, radios, T.V. etc.
(e) Transportation and Shipping
i) What transportation facilities to the country are available steamship, air
services, railways, frequency and rates, harbour facilities, free ports?
ii) What are the transportation conditions within the country railways,
highways, air, river ports, and carriage?
(f)Business Customs
i) Business methods as compared with those in India's ethical standards.
ii) Business hours, buying and selling seasons.
iii) Importance of formality in correspondence and selling tactics.
iv) Association, Chamber of commerce.
v) Organisation of trade, channels of distribution of particular products.
vi) Advertising development, media available, character and circulation of
newspapers and magazines, radio advertising, outdoor advertising,
availability of local advertising agencies.
(4) Analysis of competition
(a) Local competition
i) How efficient are these local industries?
ii) To what extent are they protected by tariffs?'
(b) Indian Competition
i) Can I meet the competition of other Indian exporters to market?
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4. Asking its domestic research supplier to conduct the research and then
the domestic research supplier may contract the work to a foreign
research, supplier.
5. Asking a multinational marketing research firm to conduct the study.
17.8 SUMMARY
Indian companies could entrust the job to multinational research firms to
minimize the problems and risks inherent in overseas marketing research projects,
to standardize and centralize the research process, and to provide c1oser-to-home
co-ordination. But finding the right group 'to carry out work overseas research is
just the first part of the process.
17.9 ASSIGNMENT QUESTIONS
1. What do you mean by export market research?
2. Explain the importance of export market research.
3. Discuss the need for joint ventures in abroad.
4. Examine the banking procedure for negotiation of documents.
5. What are the main parts of export market research?
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LESSON -18
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questions may be Incomplete and incorrect hence the very purpose of the field
survey is defeated.
The technique is suitable where numbers of respondents are limited.
Thus, desk research and field research are complementary to each other. The
results arrived at the desk research analysis, the gaps can be covered through field
survey. The information collected in field research by the surveyor can again be
analysed through desk research by applying various mathematical formulate and
models.
18.5 TYPES OF INTERVIEWS
The above field research techniques are based on interviews. Interviews may
be of three types for this purpose (a) structured (b) unstructured, and (c) semi-
structured.
(o) Structured Interview: An interview is structured when the interviewer
follows the questionnaire prepared strictly for the purpose. Me asks only those
questions set in the questionnaire.
(b) An unstructured interview is one where interviewer has no questionnaire
and the entire discussion is free-flowing.
(c) A semi-structured interview is one where both questionnaire based
discussion as well as free flow discussion takes place.
Which type of interview should be conducted depends on a number of factors.
A structured interview will be adopted in the following cases (i) If a large number of
the same classes of respondents are to be interviewed and their responses are to be
collected and compared; (ii) If information sought includes a high proportion of hard
facts; (iii) Where the interviewer is immature and inexperienced; (iv) It reduces
interviewer's bias. Semi or unstructured interview is more suitable when (i)
judgement responses are sought when the aim of interview is not to collect the
statistical data but only to probe the interviewee's mind on a specific issue. The
probing methodology cannot be standardised but can be devised instantaneously
depending upon the response of the respondent; (ii) In-depth interviews are to be
conducted and the interviewer is experienced in interview technique. Generally,
structured interview is suitable in consumer and retail surveys, whereas
unstructured or semi-structured interviews are preferably conducted in industrial
marketing.
18.6 QUESTIONNALRES-DESIGN AND TESTING
Questionnaire is the basic tool of the interview technique when an interview is
structured and semi-structured. Questionnaire is nothing but a formalised,
sequential array of questions designed in a way which is ideally suited to elicit
information from someone who is administered the questionnaire. The following
basic principles should be followed to make it effective. .
i) The questions must be short and in plain language.
ii) Questions must logically flow from the preceding to the succeeding
question.
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which Indian Entrepreneurs have set up companies abroad and have acquired a
certain degree of capability to compete in the International Technology Market are
Light Engineering, Textiles and allied products, Chemical & Pharmaceuticals, Food
products (including soft drinks), Leather, and Rubber products, Iron & Steel,
Commercial Vehicles, oil seeds crushing and Palm oil refining, Glass and Glass,
products. Pulp and Paper and Cement products, etc. Non-manufacturing sector
generally includes Hotels and Restaurants, Trading and Marketing, Consultancy,
Engineering and Construction.
Regional Dispersal
Indian joint ventures are dispersed over 43 countries. More than 72% of the
approved JVs are concentrated in 12 countries, i.e. Russia (14), Malaysia (23), UK
(19), Sri Lanka (16), Nigeria (15), Nepal (14), Indonesia (12), USA (12), Kenya (9) and
UAE (11). As regards regional dispersal, the maximum numbers of operating joint
ventures i.e., 58 (36%) are in the East Asia region, followed by 18.0% (29 JVs each)
in the Europe-America region and in the Africa region. South Asia accounts for
14.2% (23). West Asia for 11.18% (18) and Oceania for 2.4% (4) JVs.
18.12 PROBLERNS FACED BY INDIAN VENTURE
Joint ventures, approved by the government so far are 400. Out of them 40 per
cent (160) were abandoned, many of them half way, after considerable money and
time were spent on them. Some of the reasons for their failure were.
(a) inability to gauge the market prospects.
(b) failure to select the right partners.
(c) subsequent backing out of the local partners, and non-approval of the
technology sought to be supplied, by Indian partners.
(d) relentless price competition.
However, the basic cause of the failure of Indian joint venture was the problem
of adjustment in the new marketing environment. They could not adjust themselves
because they were habituated to a sheltered market in India. Marty units found it
difficult to survive in the face of relentless price competition.
Most of the problems could have been avoided if the entrepreneurs had
thought seriously before entering into joint venture agreements. Of course, there
was information gap and the Indian entrepreneurs did not have enough information
about many countries. Fortunately, the rate of mostly has come down in recent
years. Between i976 and 1979, of the 149 proposals only 31 had failed to come off.
This could be due to greater care exercised in the scrutiny of the proposals by the
government.
The picture is not much satisfactory in case of those ventures which i.-, are
already in operation. A study of 28 ventures conducted by M.K. Raju reveled that
more than 80 per cent of the joint ventures that have commenced production are
unprofitable. Poor performance of Indian joint ventures is due to
i) poor project management
ii) poor operations control; and
iii) a lack of commitment.
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Poor project management has led to cost escalation in the range of 40 to 100
per cent. Poor production control has led to poor quality, lack of cost
consciousness, and irregular deliveries. Some other problems identified by
Mr. Raju's study are - (i) insistence on using 'scaled down' duplication of Indian
plants back home in order to use Indian equipment and little regard to scale factor;
(11) the prohibition of cash remittance from India to Joint ventures thus artificially
restricting the growth of some Indian ventures, and (iii) Inability of Indian joint
ventures to control any of the critical variables such as-price, product, leadership,
distributor channel or manufacturing cost.
18.13 SOME SUGGESTION
There are some suggestions, which if implemented, would go a long way in
making India's joint ventures more successful
1. An export agency should be set up to disseminate information about
business opportunities in other countries.
2. The entrepreneur who is going to collaborate should make accurate
feasibility studies, undertake market surveys and prepare their own project reports
and not mainly depend upon the information supplied by other agencies.
3. More flexibility should be afforded to Indian entrepreneurs to specify
appropriate equipment and scale of operations rather insisting on India equipment.
In fact, insistence on Indian equipment adversely affects India's image as the host
countries feel that the main motive behind setting up joint venture is only to find
sales avenues for Indian capital goods and equipment.
4. A consortium of Indian banks should be formed to ease the cash starvation
problem of Indian joint ventures.
18.14 GUIDELINES FOR JOINT VENTURES
The Government of India has framed certain guidelines in order to link joint
ventures with the promotion of exports and to avoid substantial transfer of capital
from India.
The main features are:
1. Indian participation abroad should be through a corporate entity in India
that should have necessary manufacturing experienced and technical competence
at its command.
2. Participation by Indian companies should be in accordance with the ru1~
and regulations of the country where the project is to be located. Association of
local Parties, local development banks and financial institutions should be
encouraged to the maximum extent feasible.
3. Mode of Participation in the equity share capital should no1"lllaliy be
through export of new indigenous capital normally and .plant and machinery
required for joint venture. However participation in one or more of the following
ways, on merit of each case, may also be considered:
(a) export of know-how.
(b) capitalisation of services fees, royalty and other payments.
(c) raising of foreign exchange loans abroad.
(d) grant of loans by Indian participating companies to the joint venture units.
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LESSON – 19
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evidences. Sometimes receipts of sales tax paid are called for as evidence. In
addition, a newcomer applicant may be required to prove to the licensing authority
his ability to enter into the export trade by producing the sales contracts already
concluded by him with overseas buyers.
Applications for export by newcomers should be made in the prescribed form,
which should be accompanied by shipping bills and/or such other documents as
are required to be furnished in terms of the relevant trade notice or as are
considered necessary by the applicant.
Canalised Exports
Certain items of exports are exported through a canalised agency i.e. the STC
or other recognised agency/organisation. The list of the items and are agencies so
nominated are given in Annexure I to Section II of Import-Export Policy (Vol.II).
For these items, exports will be allowed only through canalising agencies. The
quantum up to which export may be permitted in respect of these items and other
details pertaining thereto are decided by the government from time to time. The
operations of the canalising agencies in this regard are therefore, subject to such
directions as may be given to them by the government.
Open General Licence
Items covered by an Open General Licence may as long as it is valid, be
exported freely without any licensing formalities to all destinations permitted
therein.
At present, the following four Open General Licences are operated, and their
texts are contained in Import-Export Policy (Vol.ll):
(a) Open General Licence No. 1 applies to exports by land to any country
adjacent to India and having no seaport of its own of any goods included in
Schedule I to the Exports (Control) Order. 1977, which are consigned under a
procedure prescribed for regulating transit traffic.
(b) Open General Licence No.2 applies to exports of bonafide samples.
(c) Open General Licence No. 3 gives a list of item which may be exported on
fulfilment of the conditions specified against each of the items; and
(d) Open General Licence No. 4 includes a list of items which may be exported
directly by the canalising agency mentioned against each item.
Limited Free Licensing
Where the export of a commodity is regulated within a set celing or when there
is no established pattern of trade, exports will be allowed on "first-come, first-
served" basis. The following principles and procedures will be applicable in such
cases:
(i) A public notice/trade notice shall be issued, announcing the policy and
indicating the licensing offices to which the available celling has been allocated for
the purposes.
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terms of clause 5(q) of the Export (Control) Order, 1977, as amended from time to
time, for the licensing period.
(x) Any quantity allocated against the earlier licence which lapses for the above
reasons shall be available again to the licensing office concerned for reallocation in
the same manner as laid down above.
Free Licensing
Where as item is allowed free for exported but is not covered by an Open
General Licence, the Intending exporters are required to secure licensing
endorsements on the connected shipping bills from the licensing authority.
Application should be made in the prescribed form.
Ad Hoc Licensing
(i) In order to develop new markets and encourage home based industries in
producing new export products, requisites for exports in small quantities are
sometimes considered on an ad hoc basis, even if the indigenous production of
such items is somewhat limited. Ad hoc licensing is, at time made use of to enable
an industry or unit to clear accumulated stocks and maintain continuous
production.
(ii) Application for the export of such items should be made in the prescribed
form and accompanied by shipping bills and/or such other documents as are
required to be furnished in terms of the relevant trade notice or are considered
necessarily by the applicant.
Pre-Ban Commitment
Unless otherwise provided, the following types of preban (including pre-control)
commitments may ordinarily be honoured for export control purposes:
(a) Where, against a specific export order an irrevocable letter of credit In
favour of the exporter/ exporting firm has been opened by the foreign buyer,
covering 100 per cent of the f.o.b. value of the prior to the date of ban/control.
(b) Where advance payment has been received provided that:
(i) The advance payment has been received against a specific export order
and covers 100 per cent-of the f.o.b. value of .the consignment; and
(ii) Such advance payment has been received through an authorised
dealer in foreign exchange on or prior to the date of the ban.
Notwithstanding the above the government may for sufficient reasons treat any
other claims not covered by the above provisions as a pre-bank commitment.
Copies of pre-bank commitment/export contracts (or pre-control commitments
/contracts) should be sent by the person concerned to the regional licensing
authority along with documentary evidence relied upon in support of such
commitments/contracts having been made. These documents should be sent to the
licensing authority by Registered Post (Acknowledgement Due) within a period of 15
days from the date of the public/trade notice or notification announcing the
imposition of the ban on the export of a commodity or the date on which such
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commodity is placed under export control as the case may be Cognisance will be
taken only of cases where these documents have been filed in time. The submission
of such evidence shall not however confer any right on a person to the grant of any
export licence or permission to export.
NOTE
A contract is deemed to have been concluded after an offer has been made and
accepted by the second party. It should be specific as to the mutually accepted
terms and contents. i.e., it is binding on both with reference to its enforceability.
Where such evidence is in the nature of a telegraphic/telex message detailing
the offer or the acceptance of the contract in its materials particulars the evidence
relied upon the substantiating the pre-ban commitment/export contract (or pre-
control commitment/contract) should include the (confirmatory) post copy of the
said message sent immediately after its despatch together with the connected
envelope bearing the stamp of the post office.
Application Forms
Applications for export licences or licencing endorsements on shipping bills
should be made on prescribed forms along with relevant documents. These forms
aware given in the Hand book of Import-Export Procedures. The applicants may use
their own typed/cyclostyled or printed forms.
Persons Authorises to Sign Application
Every application for an export licence or for a licensing endorsement on the
shipping bill should be signed by applicant himself or by a person duly /legally
authorised by the applicant to do so. The position or nature of such legal authority
held by the person signing the application/document form should be clearly given
therein along with the official stamp of his status. Otherwise, such application
/document or form will receive no consideration by the licensing authority. This
requirement applies equally to the applications made to canalising agencies.
Deficient applications
Applications will be summarily rejected if they are not:
(i) In the prescribed form.
(ii) Accompanied by necessary export documents.
(iii) Accompanied by the necessary particulars setting out the authority of the
person signing it; or
(iv) Received before the last date prescribed.
Applications are expected to complete all the columns in the application form
truly and properly. They may take the help of the Counter Assistance System to
make sure that all these requirements are met.
Amendments an Alteration to Licence
No change shall be made or effected by the license or any other person in the
description of the goods or the name of the consignor or the consignee and in the
terms and conditions of the licence. Any unauthorised change would render the
licence null and void besides exposing the offender to the risk of being penalised.
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export licences on the basis of such quota, if otherwise admissible. In such cases,
no application for TGR need be made; but an intimation about the change should
be sent in the prescribed form, to the licensing authority within 90 days of the date
of change. The constitution of the new concern should also be mentioned in the
usual manner in the next application for an export licence, indicating therein the
nature of the change and the date from which it has taken place. Where the
intimation about the change is sent after the expiry of 90 days, the quota
entitlement of the applicant will be liable to as cut of 25 per cent in the first
licensing period after the change. The licensing authority may, however, condone
the delay if it is satisfied that the delay was due to circumstances beyond the
control of the applicant.
(iii) Where there is a change in the name of the established exporter's
business, without any change in the ownership or constitution of the business, no
application for TGR need be made. The established exporter should produce his
quota certificate before the licensing authority for the necessary change therein,
together with an affidavit about the change of name and affirming that he will not
claim any licence further in the old name. Where a private limited company
becomes a public limited company or vice versa, it should report the fact to the
licensing authority.
(iv) Where there is a change in the name of the established exporter's business
as well as a change in the ownership or constitution of the business, the new
concern cannot claim export licences on the basis of the quota of the original
concern without obtaining a TQR in its favour. The application of a TQR should be
made to the licensing authority.
(v) Where there is any change in the ownership or constitution of an
established exporter’s business and, as a result of such change, a part of the quota
of the original concern is required to be separated or the quota of the original
concern is required to be divided, the application for such separation of the quota
or for its division, as the case may be, should be made to the concerned licensing
authority. If the quota to be separated in sought to be transferred in favour of any
person, the transferee, too, should make an application for the TQR to the licensing
authority. In such make cases, the new owner or the reconstituted concern(s)
cannot claim export licences on the basis of the quota standing in the name of the
original concern without obtaining a TQR
(vi) Where an established exporter is a limited company and the company is
amalgamated with another company, the application for a TQR in favour of the new
company should be made to the licensing authority, supported by an order of the
competent court or other evidence of amalgamation.
19.4 APPLICATION FOR TQR
An application for TQR should be made in the prescribed from (Form α-X)
along with the prescribed documentary evidence. The application for the TQR
should be made by the head office of the applicant concern, covering all its
branches, and such application should be made to the licensing authority in whose
jurisdiction the head office is situated.
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value of the two quota certificates even if the quota certificates are in
different basic years. This w1ll also apply in the case of amalgamation of
two limited companies.
ii) In cases fa1l1ng under para (2) above, the transferor and the transferee
w1ll be required to select the common basic year for the same or similar
items.
iii) The provisions of this paragraph will also apply to cases where the parties
have been exempted from making an application for a TQR.
Where an application for a TQR is required to be made in terms of these
provisions such application should be made so as to reach the licensing authority
concerned, complete in all respects, within a period of 90 days from the date of
change in the ownership, constitution or name of business, etc., as the case may
be. The licensing authority may however, in deserving cases, condone the delay in
making the application if such authority is satisfied that the delay was caused by
circumstances beyond the control of the applicant. If the applicant is not in a
position to make an application complete in all respects within the prescribed
period of 90 days due to formalities to be observed in getting the deed of transfer of
business registered with the Registrar of Documents he may apply by producing an
attested copy of the transfer deed with evidence to show that the original deed has
been deposited for registration and should furnish an undertaking to the effect that
the original deed, duly registered, will be provided by him within a period of 15 days
from the date of registration.
Where an application for as TQR, complete in all respects. i.e., accompanied by
documents specified above, is received by the licensing authority concerned within
a period of 90 days from the date of the ownership, constitution or name of the
business, as the case may be, or where the delay in the receipt of the application is
condensed by the licensing authority, as indicated above, the transferee will be
eligible for the transfer of the quota from the licensing period during which the
change occurred. In other cases, the TQR will be effective from the licensing period
during which the application for it is made, complete in all respects. In the case of a
deficient application, the TQR will be valid from the licensing period during which
the documents are produced.
Where an applicant is unable to produce the original document specified
above, he may submit Photostat/certified/attested copies thereof in support of his
application for a TQR. The applicant may submit Photostat/certified/attested
copies thereof and the original documents subsequently to show that the
Photostat/certified/attested copies are correct. The benefit of the TQR may, in such
a case, be given from the date on which the Photostat/certified/attested copies of
the documents in question were received. If the, TQR is otherwise admissible from
such date.
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Where the new established exporters have been exempted from making
applications for TQRs, the export licences will be issued to them in the normal
course, if otherwise admissible. They will, however, be required to state in their
applications for licences the changes occurring in the business and the dates from
which such have taken place. If in such cases, any objection or granted received
from any person at any time against the licences claimed or granted, the licensing
authority will examine such objection and call for such evidence from both the
parties as may be deemed necessary. If as a result of the examination, the licensing
authority finds that the established exporter is not entitled to the whole or a part of
the quota on the basis of which he has been claiming licences without obtaining a
sanction for the TQR, the quota of the established exporter will be reduced
accordingly and the parties found guilty of misrepresentation or contravention of
these rules will be liable to panel action under the Imports and Exports (Control)
Act and the orders issued thereunder. In such cases, the value/quantity of the
excess licences already obtained by the party will also be adjusted against the
future quotas of the party in respect of any item(s).
If the objection is made to the licensing authority within three months from
the date of the change in the constitution or ownership or name of the established
exporter's business, and the objector is found to be entitled either to the whole or a
part of the quota, such quota will be transferred in his favour, if he is otherwise
eligible. The licensing authority may also condone the delay in making the
objections, if such authority is satisfied with the delay was caused by
circumstances beyond the control of the objection.
It will be open to the licensing authority to reject the application for a TQR:
i) If the application or the documents accompanying the application are
defective.
ii) If the licensing authority decides that the recognition and grant of quota is
not in public interest or for the continuity of any business.
iii) If the licensing authority decides that the transfer/division of quota is
sought with an intention to defeat the transferor's creditors; and
iv) For any other reasons to be recorded.
The licensing authority may, after giving a reasons opportunity to be heard to
the persons who have been granted through inadvertence or mistake or due to any
fraud or misrepresentation.
19.5 PERMISSION FOR UTILISATION OF QUOTA LICENCES
Where an export licence has been granted to an established exporter, and after
the grant of the licence but before its utilisation, there is a change in the ownership
or constitution or name of the established exporter's business, the new owner of the
business or the reconstituted concern, etc., as the case may be, cannot utilise the
reconstituted concern, etc., as the case may be, cannot utilise the licence in
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question Without obtaining the written permission of the licensing authority which
granted the licence, or of any other person empowered in this behalf by such
authority in terms of sub clause 4(2) of the Exports (Control) Order, 1977. In such
cases, an application for the necessary permission of the authority should be
supported by an affidavit by the applicant, sworn before a First Class Magistrate or
Notary Public, to the effect that he is the rightful successor of the business for
which the licence in question was descondend that, in the event of any mis-
statement subsequently detected he will be liable to all actions and consequences
arising therefrom.
19.6 ISSUE OF FRESH QUOTA CERTIFICATES
i) In the event of a change in the ownership or constitution a business
without any change in the name of the business, where the new owner or
the reconstituted concern, as the case may be, is not required to apply for
a TQR, the quota certificates standing in the name of the original concern
will be endorsed by the licensing authority, indivating therein the nature
of the change and the date from which the change has taken place.
ii) If the name of the business changes, the quota certificate will be amended
by the licensing authority by changing the name of the established
exporter's business appearing thereon. An endorsement will also be made
on the quota certificate, indicating the data from which the change has
taken place.
iii) Where a quota has been divided, the quota certificates and their
counterfoils standing in the name of the dissolved concern will be
cancelled and fresh quota certificates will be issued in the name of the
succeeding parties according to the share of the quota transferred to the
name. A suitable endorsement, giving the number and date of the order
under which the division/transfer has been allowed by the Export Trade
Control Authority, will also be made on the old and fresh quota certificates
and their counterfoils.
iv) The persons concerned should produce the quota certificates before the
licensing authority which issued the same for necessary endorsement/
amendment as indicated above immediately after the change has
occurred. In cases where the new owner or the reconstituted concern is
required to apply for a TQR, the quota certification should immediately be
produced before the licensing authority for necessary endorsement/
amendment but, in any case, not later than 30 days, after the new owner
of the reconstituted concern, as the case may be, has been recognised as
an established exporter.
19.7 SUMMARY
To sum up, the export licensing procedure announced by Government, with
certain purposes – Established exporters and new comers. For this different kinds
of licensing were introduced such as, quota, newcomer, open general, limited free,
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free, ad hoc licensing. Besides, the recognition of new exporters and Transfer of
Quotas (TQR) have been established for exporter in individual, a Partnership
concern, A karta of Hindu undivided family, a Limited company or any association
or body of individuals. With regard to the, permission, an export Licence has been
granted to an established exporter, and after the grant of the licence but before its
utilisation.
19.8 ASSIGNEMNT QUESTIONS
1. What are the categories of exporters?
2. What is Quota Licensing?
3. What is open General Licence?
4. What are canalized exports?
5. What is a limited free licensing?
6. Briefly analyse the recognition of new exporters and TQRs.
7. Write a note on: Permission for utilization of Quota licences.
8. What do you understand about issue of fresh quota certificates?
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LESSON - 20
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taken as the date of the shipment of goods and should therefore be within the
validity date given in the documentary letter of credit.
A clean bill of lading is one in which no adverse entry about the apparent
condition of goods has been made. When an adverse comment does appear on it,
the bill of lading is termed as a claused bill of lading. The remarks on the mate
receipt issued by the Master of the vessel about the apparent condition of goods at
the time they were received on board the vessel, usually find a place on the bill of
lading as well, thus making it a claused bill of lading.
A claused bill of lading is normally not accepted by the foreign buyer. Unless
the letter of credit specifically permits the acceptance of such a bill, the exporter
should endeavour to negotiate documents with a clean bill of lading, for otherwise
the buyer has the right to refuse acceptance of goods because they do not conform
to the conditions of the letter of credit. A bill of lading is transferable when a
suitable endorsement for this purpose is made on it. It is therefore essential that
the exporter should take due care while preparing it.
The three most widely used endorsements are:
i) ‘To order and endorsed in blank’, since it is endorsed in blank, any
individual who gains possessing of it can get delivery'.
ii) 'Endorsed to the order of . . . ‘When it is endorsed to the order of a person,
bank or a company, only the party indicated in the endorsement can get
delivery of goods. The endorse can further re-endorse the bill of lading in
favour of another party, who can then take delivery of goods. If the bill of
lading is made out in the name of the buyer or the foreign bank opening
the credit as a consignee, either the buyer or the foreign bank, as the case
may be, can take delivery of the goods.
A bill of lading issued after the goods are loaded on the vessels is called an ‘on
board bill of lading’, Negotiating banks usually accept only an ‘on board’ bill of
lading for the purpose of negotiation. A buyer usually asks for a full set of ‘clean
shipped’ or ‘on board’ bill of lading as part of the negotiable documents required by
him. The letter of credit would specify what constitutes the full set of bill of lading.
20.3 COMMERCIAL INVOICE
A commercial invoice is a document prepared by the exporter giving details of
the goods shipped, their brief description, the shipping marks, the unit and total
f.o.b., c. & f. or c.i.f. value as the case may be depending on the (L.C.) contract, the
number and date of the bill of lading as well as the name of the ship carrying the
cargo. The description of the cargo mentioned in the invoice should be on the same
lines as found in the letter of credit. It is essential that the invoice is made out in
the name of buyer or the consignee mentioned in the letter of credit.
20.4 CERTIFICATE OF ORIGIN
Sometimes import regulations of a foreign country may require that all import
consignments should be accompanied by a certificate of origin which states the
country in which products under export were originally produced/manufactured.
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This is advisable, for it is quite likely that the goods produced in a particular
country attract preferential tariff rates in the foreign market at the time of
importation. Or it may be that goods produced in a particular country are banned
for import in the foreign market. The certificate of origin helps the buyer in
adhering to the import regulations of the country.
Some of the foreign markets may accept the certificate or origin issued by a
Chamber of Commerce of an exporting country. Others, especially countries in the
Middle East and the Gulf, require these certificates to be legalised by their own
respective consulates. An exporter submits a copy of the commercial invoice to the
Chamber of Commerce, together with the nominal fee prescribed by the Chamber.
On the basis of this, the Chamber issues a certificate of origin. Where legalisation is
required by the Consulate, the certificate of origin issued by the Chamber of
Commerce is submitted to the Consulate of the concerned foreign country, which
makes its endorsement on the certificate.
Special certificates of origin are applicable for availing of concessions under
Generalised System of Preferences as well as under Common-wealth Preferences.
Under General1sed System of Preferences, the certificate of origin in the specified
form usually in triplicate, is obtained from anyone of the following agencies.
(1) Export Inspection Council and Its agencies;
(2) Chief Controller of Imports and Exports.
The Central Silk Board, The Coir Board, The All India Handicrafts Board and
the Textile Committee are also authorised to issue certificates of origin for the
products under their purview.
For concessions under Commonwealth preferences, the certificates of origin
have to be submitted in special forms obtainable from the High Commission of the
county concerned. The form is also known as ‘combined certificate of origin and
value.’
20.5 MARINE INSURANCE POLICY
Where the contract will the foreign buyer is on c.i. (cost and insurance) or c.i.f.
(cost insurance and freight) basis, the responsibility for taking insurance cover
against all risks of damage to or loss of goods during the sea voyage is that of the
exporter. On an application received from him describing the goods and mentioning
the name of the ship on which the goods are loaded as well as the value of the
goods for which the insurance is required, the insurance company issues a policy
in the name of the exporter and endorsed in blank. The premium charged by the
insurance company would depend on the total value for which the goods are
insured, the type of ship as also its age, and the port of discharge of the cargo as
evidenced in the bill of lading. The premium rate when goods are loaded on deck of
the ship is higher than when they are loaded in the hold of the ship. This is
understandable, for the risks involved and the chances of damage to the cargo are
more when these are loaded on deck of the ship. The insurance policy issued by the
insurance company should carry the name of the vessel, and the description of
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goods, corresponding to those found in the bill of lading. It comes into effect only
after the date of the bill of lading.
Marine Insurance is aspecialised subject as it covers many types of risks. The
insurance cover, too, differs from material to material and also depends upon the
risks involved. Suffice it is to say that the exporter should consult the insurer
before taking out a suitable policy.
20.6 NEGOTIATION
A complete set of negotiable documents is presented to the negotiating bank
through whom the documentary letter of credit has been advised. Where the
exporter has complied with all the terms and conditions of the letter of credit while
submitting his documents to the negotiating bank, the documents are deemed to be
clean. The letter of credit opened by the buyer through his bank (the opening. bank)
authorises drawing a bill of exchange against which payment will be made by the
opening bank on behalf of the buyer, provided the terms and conditions specified in
the letter of credit are complied with. A bill of exchange is a draft drawn by the
negotiating bank on the opening bank or the buyer as the case may be, and is an
instrument of payment which is negotiable. The drafts drawn are of two types,
(1) Sight Draft, (2) Usance Draft.
If the letter of credit stipulates payment at sight, the exporter draws a ‘sight
draft’ on the buyer or his bank. When sight drafts are drawn by the exporter, he
expects the buyer to arrange for payment immediately on presentation of the draft.
Until payment for the draft is made, shipping documents will not be handed over to
the buyer to enable him to clear the goods.
When the exporter has offered credit terms for payment, a ‘usance draft’ is
usually drawn by the negotiating bank of the exporter. It is drawn for payment after
a specified period. The buyer on whom the draft is drawn retires the draft after 30
days, 60 days or 90 days as agreed between him and the exporter at the time of
concluding the contract. The letter of credit opened by the buyer will Clearly specify
the credit period which has been agreed upon and would mention that the draft
should be drawn for 30, 60 or 90 days, as the case may be.
For a credit period beyond 180 days, the exporter has to obtain the prior
permission of the exchange control authorities in India.
The bill of exchange drawn should correspond to the conditions stipulated in
the letter of credit.
The letter of credit would further specify the details of the despatch of
documents. The negotiating bank of the exporter would accordingly mail the
complete set of documents. Usually, a set of documents is transmitted to the
banker of the buyer specified in the letter of credit by the first available air mail,
followed by a second set by the next available air mail, so as to ensure that even if
the first set is lost, the buyer or his bank may take possession of the goods on the
basis of the second copy. The process of negotiation is completed with the despatch
of documents by the exporter's banker.
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LESSON – 21
IMPORT PROCEDURE
LESSON OBJECTIVES
(1) To understand import procedures and controls.
(2) To explain import policy of the Government.
(3) To examine canalisation of imports and exports.
STRUCTURE
21.1 Preamble
21.2 Stages in an Import Transaction
21.3 Import Procedure Simplified
21.4 Import Controls
21.5 Import Policy of India
21.6 Summary
21.7 Assignment Questions
21.1 PREAMBLE
The unit deals with import procedure and import controls. It also analyses
import policy of the Government. Canalisation of imports and exports are also dealt
with in this unit.
The first step toward the import of goods from abroad into India will be to set
up an establishment for importing things and secure recognition from the
government as an importer. A person of a firm can import goods only on the
strength of an import licence issued by the Controller of Exports and Imports. If the
firm imported goods of the class in which it is interested during the basic period
prescribed for such class, it will be treated as an established importer. In such
cases, application can be made to secure a quota certificate. For this the intending
importer furnishes details of the goods imported in anyone year in the basic period
prescribed for the goods together with documentary evidence including the Bill to
Entry / Postal Declaration forms and Customs Duty receipts with relevant invoices
and Bank Drafts / Chartered Accountant's Certificates in the prescribed form
certifying the C.I.F. value of the goods reported in the selected year. The quota
certificate entitles the established importer to import up to the value indicated
therein which is calculated on the basis of past imports. In case the importer is an
actual user, that is, one who requires raw materials, accessories, machinery, and
spare parts for his own use in an industrial manufacturing process, he has to
secure licence through the prescribed sponsoring authority which certificates his
requirements and recommends' the grant of licence. The sponsoring authority for
Scheduled Industries borne on the Register of the Director-General of Technical
Development (Technical Cell), New Delhi, and others have to move through the
authority prescribed for them. Small industries (with a capital of less than Rs. 5
laksh) have to apply for licence through the sponsorship of the Director of
Industries of the State where the factory is located unless some other authority is
expressly prescribed by the Government. For other categories of importers (a) those
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importing against exports made under a scheme of export promotion, and (h) others
- licences have to be secured from the office of the Chief Controller of Exports and
Imports. The import licences are usually issued for a period of one year at a time.
21.2 STAGES IN AN IMPORT TRANSACTION
The following stages mark the various steps involved in importing goods into
India under an import licence and quota:
1. Placing the Indent
The importer places order for the goods he requires, and for which he holds an
import licence. The order is called ‘indent’ and may be placed either directly or
through special1sed intermediaries called ‘indent houses.’ The word ‘indent’ is used
for import of goods, according to which two or three copies of the order are
prepared and indented. An 'indent' may be ‘open’ or ‘closed.’ An open indent is one
which does not specify the price and other details of the goods ordered but leaves
them to the discretion of the buyer in the exporting country. A closed indent, on the
other hand, specifies the brand of the goods ordered, the price at which they are to
be purchased, and the details of packing, shipping and insurance, etc. If an indent
specifies the price at which goods are sought to be imported, it may give rise to
negotiations between the parties. In such a: case, the indent incorporating the price
finally settled is called a ‘confirmatory indent.’
Though one can order goods directly, generally importers prefer to make use of
the services of indent houses for this purpose. The indent firms serve as middlemen
between the exporters and importers and charge a certain percentage of
commission from the importer. In India, many of the big indent houses have their
offices in port towns like Bombay, Calcutta, Madras, etc.
The indent houses maintain close touch with the well-known foreign firms who
send the samples of their products to them. Their salesmen take these samples to
the intending importers and book orders from them. The details of the order taken
down by the salesmen in their note-books are entered in the indent form. Two
copies of the indent form are sent to the importer for his acceptance. The importer
returns one of the copies duly accepted and signed to the sindent house which then
sends a copy of the indent to its agent in the foreign country concerned.
If an importer does not act through an indent house, he may place an order
directly with the exporter.
2. Obtaining Foreign Exchange
The foreign exchange reserves of any country are controlled by the Government
and are released through the central bank. In India, the exchange Control
Department of the Reserve bank of India deals with applications for the release of
foreign currency. However, an importer is able to get the foreign exchange only from
an exchange bank approved and recognised by the Reserve Bank of India for dealing
in foreign exchange. The importer has to produce the import licence along with the
prescribed form for securing foreign exchange required to pay for the goods ordered
from another country. The exchange bank through which the payment is proposed to
be routed puts its endorsement on the application form. On the strength of the
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application and the licence and the exchange policy of the Government of India in
force at the time of application, the Reserve Bank of India sanctions the release of a
certain amount of the desired foreign currency. This paves the way for the importer
to go ahead with the other formalities in connection with an import transaction. It
must be noted that while licence is issued by the Government for all imports during
the period of its validity, exchange is released and made available only for a specific
transaction for which an order has been placed.
3. Arrangement for Payment
After the importer has succeeded in securing the requisite amount of foreign
exchange from the Reserve. Bank of India, he has to make arrangements for paying
for the goods ordered. This may be done through an LIC where it is intended to
enable the shipper to obtain payment for the goods immediately on surrendering a
documentary bill to a bank in his own country.
Another method will be to request the exporter to forward the documentary bill
through his banker to the importer for being delivered to him either against
acceptance of the bill of exchange or against its payment. In such cases, when the
shipper (exporter) has shipped the goods, he sends an advice note to the importer
stating the date of shipment of goods and the probable date when the ship is
expected to reach its destination. At the same time he draws a bill of exchange on
the importer (also called indentor) for the full invoice value of the goods. Various
documents like master document, insurance policy, bill of 1~d1ng and certificate of
origin are attached to this bill. That is why it is called the ‘Documentary Bill.’ A
Documentary Bill may either be D/A or D/P, i.e., the banker through which it is
sent may be instructed to deliver the documents against the acceptance of the bill
by the importer or against the payment by him. (D/A=Documents against
Acceptance: DIP = Documents against Payment).
The bank's branch in the importing country, or its agent there, arranges for
the bill to be presented to the drawee (importer). The attached documents are
handed over to him, immediately thereafter if it is a D/A bill; in case of a D/P, bill,
the bank delivers the documents only after the importer pays the amount of the bill
on maturity. Generally, indent house is mentioned as the ‘Referee in case of need’
on the bill. In case, the importer cannot comply with the requirements regarding
acceptance or payment, the indent house does so on his behalf.
4. Clearing the Goods
Assuming that the importer has taken possession of the various documents
relating to the goods shipped, he will have to comply with the formalities prescribed
for clearing the goods. When the ship carrying the goods touches at a port, it is
notified in the news-papers and the importer has to secure the release of cargo from
the custody of the customs authorities. The first thing for him to do is to obtain the
‘Endorsement for Delivery’ Delivery or Order on the back of the Bill of Lading which
is the document of little to the goods. The shipping company win make such
endorsement only if it is satisfied that the freight has been paid. If freight has not
already been paid by the shipper or exporter, the importer will have to make the
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payment on this score before that he can be given a green signal by the shipping
company. The importer then presents two copies of the Port Trust Dues Receipt and
three-copies of the Bill of Entry to the Port Trust Office to obtain clearance
regarding dock dues, etc. Thereafter, one copy of the first form and two copies of
the second are presented to the Customs Office.
Bill of Entry
The Bill of Entry, drawn in triplicate, attests the fact that goods of specified
quantity, value and description are entering the bounds of the country. Separate
forms of the Bill of Entry are used for each one of the three classes of good: (i) free
goods which are exempted from customs duty, (ii) goods for home consumption,
and (iii) bonded goods.
5. Payment of Customs Duties
If the goods are free, no import duty is to be paid at the Customs Office. On
dutiable goods, the importer or his agent will pay the import duty which may be
specified i.e., based on weight, measurements, etc. It may be ad valorem i.e.,
according to the tariff value or the market value of the commodity or its invoice
value.
Payment of customs duty can also be made under the system called the
‘Permanent Deposit System.’ Under this system, an importer may maintain a
running account with the Customs Office and make deposits from time to time. The
duty payable on a particular consignment of goods received at the customs is
charged to the account and the importer is informed of this, in case the importer Is
not in a position to pay the customs duty on the whole of Imported goods, he may
apply to the customs authorities to get them placed in the ‘Bonded Warehouse.’ He
can then pay the duty on each instalment of goods that he withdraws from time to
time.
To save themselves from the botheration of going through all the above
mentioned formalities, the importers may entrust the job to clearing and forwarding
agents. In such a case, these will take it upon themselves to deliver the goods at the
exporter's warehouse. Clearing agents charge commission for their services.
21.3 IMPORT PROCEDURE SIMPLIFIED
As per the new Import Policy 1992-1997 Import procedure has been simplified:
(1) Against seven application forms required for import of various items in the
negative list only one form will now be required.
(2) Most of the imports are now free from licensing. However, when licensing is
required-cases like duty-free imports for export production – considerable
delegation of powers has been made to the regional licensing authorities.
(3) Under new procedure, import licences/customs clearance permits will have
validity of 12 months. However, capital goods licences and customs clearance
permits will be valid for 24 months. Revalidation may be granted on merits.
(4) Other highlights of import procedures are: granted licences for certain
items of raw materials, components, and consumables in the negative list of
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imports; decentralised application for second hand capital goods upto a CIF value
of Rs. 50 lakh to be considered by the regional licensing authorities.
(5) Imports through courier service upto a value of Rs. 5,000 at a time can be
made in accordance with the policy.
(6) Licences for import of cloves, cinnamon and cassia to be granted to the
extent of 10 per cent of best year's imports in value in any of the preceding
5 licensing years; subject to fulfilment of export obligations. Items qualifying for
exports include tea, coffee, tobacco and certain spices.
(7) Dealers of books may be granted licences on the basis of 20 per cent of the
purchase turnover for import of fiction' and other books.
(8) Import of motor vehicles including tourist coaches and air conditioning
units will be permitted within the entitlement of the licences given to hotels, travel
agents and tour operators.
(9) The import entitlement of anyone licensing year can be carried forward,
either in full or in part and added to the entitlement of the two succeeding licensing
years.
(10) A speica1 licensing committee headed by the Chief Controller of Imports
and Exports may consider applications for advice on the grant of licence for import
of restricted items.
(11) Import of spares for imported motor vehicles and tractors upto a
maximum value per year of Rs. 20,000 (for motor vehicles) and Rs. 10,000 for
tractors for each imported vehicle can be made without a licence.
(12) Similarly, aircraft spares can also be imported without a licence on the
basis of the manual of the aircraft or on the recommendations of the department of
civil aviation.
21.4 IMPORT CONTROLS
Import control is a powerful instrument of economic growth. It protects the
indigenous industry, optimises the use of scarce foreign exchange resources and
services as a vehicle of export promotion. It seeks to strengthen the industrial base
of the country, develops and diversifies the economic structure in consonance with
our social goals and in a measure, creates conditions of a self-generating economy.
Import control has wide ramifications. The livelihood and functioning of importers
are inevitably bound up with it. Import control is a versatile instrument in the
hands of the Government for conserving scarce foreign exchange, for diversifying
the economy for encouraging import substitution, for guiding the process of
industrial1sation and promoting exports.
Import trade control is regulated and administered under the provisions of the
Imports and Exports (control) Act 1947. Powers have been taken under it to
prohibit, restrict, and control imports or impose any conditions in respect of the
clearance of any goods.
21.5 IMPORT POLICY OF INDIA
The foreign trade policy refers to a set of policies which govern the external
economy, i.e., imports and exports of goods and services. In a developing country
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like India trade policy is one of the many economic instruments which are used to
suit the requirements of economic growth.
The foreign trade policy mainly includes the export and import policies of a
country. There may be two separate export and import policies or an integrated
policy of export and import may be followed. Up to 1981-82, India followed separate
policies for exports and imports and since 1982-83 an integrated policy was
prepared and followed. India's foreign trade policy was being prepared on annual
basis since 1984-85. In 1985-86, the first year of Seventh Plan, a three-year export
import policy (foreign trade policy) is prepared and announced in Parliament on
April 12, 1985 with retrospective effect from 1st April 1985 for the first time.
The main objectives of India's foreign trade policy, is to regulate the country's
foreign trade in such a manner that (i) on the one hand exports are encouraged,
and (ii) on the other hand imports of the country are controlled and limited to the
extent of foreign exchange available to the Government and for this purpose,
imports of these items which are indigenously available or not required are banned
except when price instability requires the imports. In a developing country like
India, the basic problem is the non-availability of certain crucial raw materials,
capital equipment and technology which are to be imported for the economic
growth of the country. Higher is the rate of development, higher is the demand for
imports. To pay for imports, exports should be increased through special efforts but
due to higher domestic demand and low productivity the exportable surplus is not
sufficient to meet out the imports. Though in the short run, the excess imports can
be financed through foreign aid, in long run imports must be financed by additional
exports. The basic objective of foreign trade policy, therefore, revolves around the
instruments and techniques of export-promotion and import management within
the resources.
21.6 SUMMARY
To summarise, the import of goods from abroad into India will be established
for sewing recognition from the government as an importer. There are many stages
involved in importing goods into India, they are placing the indent, obtaining
foreign exchange, arrangement for payment, clearing the goods, payment of
customs duties, import procedure, controls and policies to be followed.
21.7 ASSIGNMENT QUESITONS
1. What are import policies of the Central Government?
2. Explain briefly the import procedures and controls.
3. What is canalization of imports and exports?
4. What are import controls?
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LESSON – 22
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(4) Prices' will be maintained in the local market by importing the necessary
supplies.
22.2 RECENT CHANGES
Recently on the recommendations of Alexander Committee, the Government
has introduced certain changes in India's trade policy. The major recommendations
were –
i) In view of the changing domestic environment, the framework of trade
policy should be more development oriented rather than control oriented
as in the past. The excessive control should be removed to speed up the
process of industrial development and for maximising the capacity
utilisation. The committee has recommended its close-fisted restrictive
characteristics.
ii) The total importable items should be classified into three categories
(a) raw materials and components, consumables, stores and spare; capital
goods and equipment, and (c) consumer goods. A list of banned items
should be prepared which are either indigenously available or are not
essential for domestic needs.
iii) Tariffs should be used as a control mechanism rather than the import
licensing system.
iv) In order to remove the uncertainties which are associated With annual
policy changes, three-year export-import policies should be announced,
and the item wise changes should be affected to the minimum during this
period and should be made not more than once a year.
v) The CCI & E (Chief Controller of Imports and Exports) should be
redesignated as director general of foreign trade and it should have the
specific responsibility of not merely regulating the foreign trade but
promoting exports and further serving as a nodal point for dealing with the
complaints and difficulties of exporters.
In line with these recommendations, the import policy has introduced
substantive liberalisation. So far as exports are concerned, the basic thrust remains
toward export promotion subject to the restrictions which might have to be imposed
in order to take care 'of the domestic requirements. In line with the changes in
import policy, export of many items have been decanalised. In order to ensure
proper unit value realization, minimum export prices have been stipulated for a
number of items. The Government has announced a long term (1985-88) export
import policy for three-year period commencing from 1st April 1985 giving affect to
the most of the recommendations.
The Government of India has also announced the long-term fiscal policy on
December-19, 1985 for a period of 5 years (1985-90). Some major policy decisions
regarding imports are -
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(a) To protect the domestic capital goods industry, capital goods in composition
with domestic goods would be taxed at higher rates applicable to components where
they are allowed to be freely imported.
(b) Project imports would be treated as now, as, a special category with lower
rates of duty.
(c) Non-essential consumer goods would continue to be banned from being
imported while essential items like food, edible oils and life-saving drugs would be
imported through canalisation and at low or nil duty rates.
(d) Appropriate technology imports would be facilitated and in this, connection,
a number of steps have been initiated by the Government. Side by side, the
Government would accelerate the development of indigenous technology. The
Government has rationalised the excise and customs duties to facilitate the import
of essential raw materials, components and other peripheral devices for the
domestic electronics and computer industries.
22.3 SALIENT FEATURES OF NEW EXIM POLICY 1992-97
1. Under the new policy the scope of duty exemption scheme has been
enlarged by introducing value-based advance licensing besides the quantity based
advance licence. This will give greater flexibility to the exporter to import and export
goods within the over all value limits and without any quantity restrictions except
in the case of sensitive goods.
2. New policy sheds the mood of export pessimism. The policy has a
pronounced bias towards exports and strengthened special schemes directed
towards exports.
3. The scope of duty exemption has been enlarged by introducing value-based
licences besides the quality-based ones. This gives greater flexibility to the
exporters to import and export goods within the overall value limits and without
any quantitative restrictions except in the case of sensitive goods.
4. The export houses, trading houses and star trading houses will be eligible
for the facility of self-certification under the advance licence scheme. Exports of
specified products will be brought under the self-certificate scheme later.
5. The export promotion of capital goods (EPCG) Scheme has been liberalised
and two windows are now available for import of capital goods at concessional rates
of customs duty of 25% or 15% with corresponding export obligations. Both new
and second hand capital goods may be imported under the scheme. Domestic
manufactures of capital goods, who may require to import components may also
avail themselves EPCG Scheme at the concessional rate of customs duty at 15% of
CIF value. The export obligation for import at 25% duty will be four times of CIF
value of capital goods over a five year period.
6. The gem and jewellery scheme is continued with little modifications.
7. Under the new policy, the 100% EOUs and EPZs will be allowed to install
not only own machinery but also machinery taken on lease. They may also export
their production through export houses trading houses or star trading houses. The
EOU/EPZ schemes have been extended to agriculture, horticulture, aquaculture,
poultry and animal husbandry. The new policy also allows inter-unit transfers.
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These units could also be considered for taking up services as an area of activity on
merits.
8. The Deemed exports have been defined arid benefits such as duty
exemption schemes, duty drawback schemes and exemption from terminal excise
duty have been extended to deemed exports. Certain categories of exports and
exporters will be eligible to receive special import licences. These include deemed
exports, export houses, trading houses and star trading houses and manufacturers
who acquire ISO 9000 (gems) or BIS 14000 (gems) certification of quality.
9. The important role of Export Promotion Councils, export houses, trading
houses and star trading houses has been reiterated. The registration cum-
membership certificate (RCMC) issued by EPCS will continue to be the essential
requirement for any importer to avail of the benefits or concessions or to apply for
any licence under the new policy.
10. The handbook of procedures has been published on May 1. 1992. The
procedures are simple, transparent, and easy to administer. The simplified
procedure relates for both imports and exports of a number of items including
cameras, motor vehicles, air craft and helicopters and delegated considerable power
to the regional licensing authorities. Only one application form each has been
prescribed for exports and imports, as also for legal undertakings and bank
guarantees as against several set of application forms earlier. The procedure for
project exports has been clearly defined and the terms and conditions in respect of
46 items in the negative list, which might be exported without a licence have been
simplified. The multiplicity of controlling agencies have been considerably reduced.
11. The licence for import of cameras with accessories upto Rs. 60.000 by
accredited correspondents and camera and other equipment by accredited foreign
correspondents of foreign TVs and new agencies has been done away with. These
could be imported on the recommendation of the Press Information Bureau now.
12. The foreign Trade (Development and Regulation) Bill 1992 would replace
the import and Export Control Act. 1947. The new Bill relating to foreign trade
comprise the new Act, the rules and orders made there under and the new export
and import policy. Violation of the law would attract monetary penalties,
confiscation of goods and/or suspension or cancellation of licence.
13. The list of canalised items has been drastically reduced in the new EXIM
Policy for 1992-97, with only and items on import side and 10 items on the export
side, throwing certain canalising agency partially and others fully out of Job on this
count. In the import category, the major items which have been decanalised include
newsprint, natural rubber, cinematographic films and all kind of steel and pig iron.
On the import side, there would only be four canalising agencies which include
Indian oil Corporation (lOC). Minerals and Metal Trading Corporation (MMTC),
State Trading Corporation (STC) and Food Corporation of India (FCI). Earlier there
used to be about a dozen agencies for importing canal1sed items. The canalised
items on the import side include petroleum products, all types of nitrogenous,
phosphatic, potassium and complex fertilizers, drugs, edible oils, seeds and oil
seeds, fatty acid oils and cereals. On the export side sugar, iron and steel, railway
wagons, passenger coaches and locomotives, exposed cinematographic films and
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raw jute are few of the major items which have been taken out of the canal1sed list.
The reduced canal1sed lists for exports include petroleum products, butter, gum
karaya, gum resin, mica waste and scrap, rare earth minerals, iron ore, chrome ore,
all grades of bauxite, manganese ores, iron ore concentrate and pallets, major
seeds, onions, powder milk and pure milk ghee. Subsequently, a lesser number of
agencies will be engaged in handling canalised items. The agencies which shall lose
all strength on account of canalisation include Project and Equipment Corporation
(PEC), Steel Authority of India Ltd., (SAIL), National Film Development Corporation
(NFDC), Jute Corporation of India, Indian Petro Chemicals Corporation Limited
(lPCL) and Metal Scrap Trading Corporation (MSTC).
14. The import of newsprint has been decanalised certain conditions have
been set out for the newsprint import to which the use will have to hold a
‘certificate for entitlement to Import of Newsprint’ issued by the Registrar of
Newspapers for India (RNI). The imported newsprint will be subject to Actual User
condition and will have to be used only for the publication for which the entitlement
has been issued. The quota for entitlement will be determined by RNI. The new
Policy while decanalising import of newsprint removes it from the Open General
Licensing (OGL) list and places it under the restricted items. It restricts the import
of glazed newsprint to only those periodicals which are regularly published and
which have multicolour printing requirements under the new rule no sale, loan
transfer or disposal of news print in any other manner will be permissible without
prior written consent of the RNI. An violation of the prescribed norms arid
conditions will dlsqual1fy the newspaper concerned for future import-entitlement
certificate.
22.4 SUMMARY
The prime focus of India’s import policy is to develop our export of traditional
as well non-traditional items. The import policy envisages that priority sectors
should be allowed to import their requirements. It has to satisfy many objectives.
Recently, Alexander committee has recommended certain changes introduced in the
policy, as per that more importance to development oriented, import on three
classification, control mechanism, etc. Above all, the main features of new EXIM
policy 1992-97 is duty exemption scheme.
22.5 ASSIGNMENT QUESITONS
1. What are the objectives of import policy of India?
2. Name the criteria’s to be followed in our import policy.
3. Describe the recommendations of Alexander’s Committee in view of
changes incorporation.
4. Critically examine the salient features of New EXIM Policy 1992-97.
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LESSON – 23
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The new policy is noteworthy but its efficiency will largely depend on actual
implementation and generation of additional exports in a substantive way.
The negative list continues to be large. Even decanalised items like fertilizers
and newsprint have been brought in its fold. Restrictive regime continues despite
open and free policy frame.
Export of many items, like rice and cotton yarn are being subjected to certain
terms and conditions.
Trading with RPA and ACU countries has not been given the attention it
deserves. The exports to Asian Clearing Union Countries will generate exchange at
official rate only.
There are several other areas which need urgent attention. These include re-
structuring of customs duty especially with regard to capital goods, removal of
export duties, allowing all export linked imports at official exchange rate. In
addition, there needs to be liberal facility for trading and re-export. While fixing
shipping freight, there are obvious policy anomalies-while freight is determined at
market rates, the shipper is allowed at 60:40 ratio and this tends to make the
exports non-competitive. The new policy is likely to boost exports of agro-products
rather than value added goods.
The success of the new reform measures largely hinges on the acceleration in
exports to the tune of 16 per cent postulated in the IMF /World Bank perspectives
and a reigning of inflation to single digit m 1992-93.
Greater transparency since case by case licensing will be replaced by a general
scheme of guidelines and flexibility as the actual user condition is being withdrawn
except in a few cases. The realisation of ambitious export growth rate in a
recessionary climate prevailing in OECD countries is daunting.
A facility of self-certification and self-declaration under advance licence
scheme is being made available to export houses, trading houses and star trading
houses. Export of specified production will be brought under the scheme later.
The advance licensing scheme announces the concept of broad banding of
exports and imports by providing licence for a class of produces instead of
individual items.
All licences under duty exemption schemes are to be made transferable.
Special Import Licence: Three categories namely deemed exports; export
houses, trading and star trading houses; manufactures with ISO 9000 and BIS
14000 certification to be made eligible for special import licence.
Special incentives will be made available to exporters for achieving
internationally acceptable quality standards. The incentives include
recognition/reward to manufacturers who have acquired internationally recognised
certification of quality standards as ISO 9000 (series). BIS 14000 (series) etc.
Upgradation of laboratories/trading houses, role of export houses/trading
houses/star trading houses.
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LESSON – 24
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Imports
MMTCis vested with the responsibility of importing non-Ferrous metals,
industrial raw materials, steel, and Fertilizer raw materials. Intermediates and
finished fertilizers.
24.3 IMPORT OF CANALLSED ITEMS
(a) The total turnover of canalised non-ferrous metals during 1991 was
Rs. 290.25 crores as compared to Rs. 490.18 crores.
(b) Industria1 Raw materials: 1be turnover of canalised industrial raw material
during 1990-91 was Rs. 86.60 crores.
(c) Steel: MMTC imported steel items worth Rs. 508.40 crores during 1990-91
as compared to Rs. 724.50 crores during 1989-90.
(d) Fertil1zer Raw Materials, intermediates and finished fertilizers: during
1991, MMTC has imported fertil1zers worth Rs. 4006.96 crores as against
Rs. 2195.19 crores during 1990.
24.4 SUMMARY
Exports and Imports made through by STC and MMTC. As per Government
documents, there were Rs.629.7 crores (1990-91) canalized exports and Rs.4,069.8
crores (1990-91) canalized imports were made. The Government have totaled
turnover of canalized metals during 1991 was Rs.290.25 crores as compared to
Rs.400.18 corres. Like wise, industrial raw materials, steel and fertilizer raw
materials have also increased to sizeable amount.
24.5 ASSIGNMENT QUESTIONS
1. Discuss the canalisation of imports and exports.
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KEY WORDS
1. International trade
2. Terms of Trade
5. Export Marketing
9. International Marketing
13. Canalisation
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