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Indias Foreign Trade Policy

The Indian economy has grown rapidly over the past decade, with real GDP

growth averaging some 6% annually. Despite external shocks, such as the Asianeconomic crisis and fluctuations in petroleum prices, which resulted in aslowdown to 4.8% in 1997/98, the economy recovered to grow at over 6% duringthe two subsequent years. Social indicators, such as poverty and infant mortalityhave also improved during the last ten years. Higher growth during this period is,in part, due to continued structural reform, including trade liberalization, leadingto efficiency gains. In order to achieve further significant reductions in poverty,India is currently targeting higher real GDP growth of between 7% and 9%(compared with 5.4% expected for 2001/02); to meet this goal it will be important,as stressed by the authorities, to continue, and even accelerate, the reformprocess and increase competition in the economy.

Recognizing the important linkages between trade and economic growth, theGovernment has simplified the tariff, eliminated quantitative restrictions onimports, and reduced export restrictions. It plans to further simplify and reducethe tariff. To help counteract the anti-export bias, inherent in import and otherconstraints, export promotion measures have gained in importance. TheGovernment has recently announced a further increase in these measures andpledged to reduce export restrictions. The policy has also suggested the creationand strengthening of enclaves such as export processing and special economiczones, which would "immunize" exporters from the constraints affecting the restof the economy, such as infrastructure and administrative problems. The

Government estimates that annual export growth of almost 12% is required inorder to raise Indias share of world trade from its present level of 0.8% to atarget of more than 1% by 2009.

Impediments to the growth of Indias international trade

New tariff barriers faced by Indian products in various overseas markets areseverely constraining our exports. These barriers may broadly be enumeratedas:

(i) restrictive import policy regimes (import charges other than customstariff, quantitative restrictions, import licensing, custom barriers);

(ii) standards, testing, labelling and certification (including phytosanitarystandards), which are set at unrealistic high levels for developingcountries or are scientifically unjustified;

(iii) export subsidies (including agricultural export subsidies, preferentialexport financing schemes etc.);

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Handlooms

1. Specific funds would be earmarked under MAI/ MDA Scheme forpromoting handloom exports

2. Duty free import entitlement of specified trimmings and embellishmentsshall be 5% of FOB value of exports during the previous financial year.

3. Duty free import entitlement of hand knotted carpet samples shall be 1%of FOB value of exports during the previous financial year.

4. Duty free import of old pieces of hand knotted carpets on consignmentbasis for re-export after repair shall be permitted.

5. New towns of export excellence with a threshold limit of Rs 250 crore shallbe notified.

Handicraft

1. New Handicraft SEZs shall be established which would procure productsfrom the cottage sector and do the finishing for exports

2. Duty free import entitlement of trimmings and embellishments shall be 5%of the FOB value of exports during the previous financial year. Theentitlement is broad banded, and shall extend also to merchant exporterstied up with supporting manufacturers.

3. The Handicraft Export Promotion Council shall be authorized to importtrimmings, embellishments and consumables on behalf of those exportersfor whom directly importing may not be viable.

4. Specific funds would be earmarked under MAI & MDA Schemes forpromoting Handicraft exports.

5. CVD is exempted on duty free import of trimmings, embellishments andconsumables.

6. New towns of export excellence with a reduced threshold limit of Rs 250crore shall be notified.

Gems & Jewellery

1. Import of gold of 18 carat and above shall be allowed under thereplenishment scheme

2. Duty free import entitlement of consumables for metals other than Gold,Platinum shall be 2% of FOB value of exports during the previous financial

year.3. Duty free import entitlement of commercial samples shall be Rs 100,0004. Duty free re-import entitlement for rejected jewellery shall be 2% of the

FOB value of exports5. Cutting and polishing of gems and jewellery, shall be treated as

manufacturing for the purposes of exemption under Section 10A of theIncome Tax Act

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Leather and Footwear

1. Duty free import entitlement of specified items shall be 5% of FOB value ofexports during the preceding financial year.

2. The duty free entitlement for the import of trimmings, embellishments andfootwear components for footwear (leather as well as synthetic), gloves,travel bags and handbags shall be 3% of FOB value of exports of theprevious financial year. The entitlement shall also cover packing material,such as printed and non printed shoeboxes, small cartons made of wood,tin or plastic materials for packing footwear .

3. Machinery and equipment for Effluent Treatment Plants shall be exemptfrom basic customs duty.

4. Re-export of unsuitable imported materials such as raw hides & skins andwet blue leathers is permitted.

5. CVD is exempted on lining and interlining material notified at S.No 168 ofCustoms Notification No 21/2002 dated 01.03.2002.

6. CVD is exempted on raw, tanned and dressed fur skins falling underChapter 43 of ITC(HS).

Critical Evaluation of the Indias Foreign Trade Policy

The government of India seems to have introduced a number of policies with aview to augmenting the countries trade with the rest of the world. However, thepolicies are criticized on some ground or the other. The major criticisms againstIndias trade policy are as follows.

1. Unrealistic Export Target: India aims to increase its share in theglobal trade from the present 0.8 per cent to 1.5 per cent within thenext five years. This requires a CAGR of 20.4 per cent over thesame period which is quite unrealistic.

2. Burden of Tax Incentives: The government, through its exportpromotion schemes, has virtually given complete freedom toexporters to evade tax through the export promotion licenses.This will bring more loss than gain from trade to the government.

3. Danger of Circular Trading: The target plus scheme may lead to asharp rise in circular trading in the name of increasing exports.The scheme has given incentives for achieving higher exportswithout any linkage to the volume of imports. For example, supposethat an exporter, with a turnover of Rs. 500 crore in 2006-07imports inputs worth Rs. 1,000 crore in 2007-08. He can now claimcredit for 100 per cent export growth by re-exporting the importedgoods even with a normal value addition. Under the new scheme,the exporter will be eligible for an incentive of upto 15 per cent onthe incremental value of his exports (for 100 per cent incremental

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export growth, the incentive is 15 per cent). This will translate in toa reward of Rs. 75 crore (15 per cent of Rs. 500 crore) on anominal value addition. Thus, the target plus scheme carries thedanger of circular trading. This may create danger for thegovernment in the long run.

4. Risk of Importing Outdated Machinery: The recent trade policy ofthe government allows industrialists to import second handmachinery of any age limit. This may result in the import of very oldmachines from the Western countries which may not help thecountrys quality export objective.

5. Failure of the Policy to Take a Holistic View of Trade Issues