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A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. Derived from the Latin word subsidium, a subsidy literally implies coming to assistance from behind. However, their beneficial potential is at its best when they are transparent, well targeted, and suitably designed for practical implementation. Like indirect taxes, they can alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Subsidies in areas such as education, health and environment at times merit justification on grounds that their benefits are spread well beyond the immediate recipients, and are shared by the population at large, present and future. For many other subsidies, however the case is not so clear-cut. Arising due to extensive governmental participation in a variety of economic activities, there are many subsidies that shelter inefficiencies or are of doubtful distributional credentials. Subsidies that are ineffective or distortionary need to be weaned out, for an undiscerning, uncontrolled and opaque growth of subsidies can be deleterious for a countrys public finances. Definition The Oxford English Dictionary defines subsidy asmoney granted by State, public body etc tokeep down the prices of commodities etc
food, water, electricity and education on the basis that no matter how impoverished, all should be allowed those most basic requirements. For example, some Governments offer lifetime rates for electricity, that is, the first increment of electricity each month is subsidises 3.EXPORT SUBSIDIES An export subsidy is a support from the government for products that are exported, as a means of assisting the countrys balance of payment. Usha Haley and George Haley identified the subsidies to manufacturing industry provided by the Chinese Government and how they have altered trade patterns.] Traditionally, economists have argued that subsidies benefit consumers but hurt the subsidizing countries. Haley and Haley provided data to show that over the decade after China joined the World Trade Organization industrial subsidies have helped give China an advantage in industries in which they previously enjoyed no comparative advantage such as the steel, glass, paper, auto parts, and solar industries. 4.EMPLOYMENT SUBSIDY An employment subsidy serves as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country (income subsidies) or to encourage research and development.[2] With an employment subsidy, the government provides assistance with wages. Another form of employment subsidy is the social security benefits. Employment subsidies allow a person receiving the benefit to enjoy some minimum standard of living.
5.Tax subsidy
Government can create exactly the same outcome through selective tax breaks as through cash payment. For example, suppose a government sends monetary assistance that reimburses 15% of all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is
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achieved by giving a health tax deduction. Tax subsidies are also known as tax expenditures. Tax subsidies are one of the main explanations for why the tax code is so complicated 6.ENVIRONMENTAL EXTERNALITIES As well as the conventional and formal subsidies as outlined above there are myriad implicit subsidies principally in the form of environmental externalities.These subsidies include anything that is emitted but not accounted for and thus is an externality. These include things such as car drivers who pollute everyones atmosphere without compensating everyone, farmers who usepesticides which can pollute everyones ecosystems again without compensating everyone or Britains electricity production which results in additional acid rain in Scandinavia. In these examples the polluter is effectively gaining a net benefit but not compensating those affected. Although they are not subsidies in the form of direct economic support from the Government, they are no less economically, socially and environmentally harmful.
imported good in the subsidizing country and this increases welfare by improving the terms of trade in the other imported or exported good1 Export subsidies are implemented by the government through various means. The most common ones are tax concessions and reduction in the costs of the factors of production like transport, electricity, raw materials. There are essentially two types of export subsidies: 1. Specific Export Subsidy: The subsidy provided is based on a fixed sum per unit. For example a specific amount of concession is granted to producers for every unit they export. This gives the producers an incentive to produce more units and export them. 2. Ad Valorem Export Subsidy: The subsidy provided is calculated as a proportion of the total value exported. For example the total subsidy for a firm is determined as a proportion of the total value of goods exported which is normally quite large. Therefore well crafted and targeted subsidies can successfully correct imbalances in the market provided that they are withdrawn gradually when their benefits have been realized since they can prove to be quite detrimental in the long run. The domestic consumers are the ones who lose out since the domestic price is far more than the export price. Thus the government should invest in research to gain information as to what products to subsidize and in what quantities. Research
shall also help the government to gain knowledge about foreign firms trying to enter the market. With this information dumping can easily be prevented and these firms can be kept in check.
on Subsidies and Countervailing Measures (ASCM), covering manufactured goods, and the WTO Agreement on Agriculture (AoA). Through it, ITC aims to respond to questions which governments and private exporters frequently confront when designing and implementing export promotion schemes.
which would mean that countries were always permitted to take countervailing measures against subsidized export of even the primary product where the above condition (i.e. "equitable share in world trade") is violated. In fact, several disputes related to agricultural subsidies were brought to the GATT.
sufficiency, as consumer gains should more than offset producer losses, although the extent to which export subsidies destabilize markets influences this calculation. The assessment of the impact on the third category of countries, i.e. where self-sufficiency levels of the subsidized products or their close substitutes are high, is more complex. Where export subsidies depress world market prices, and where these prices are transmitted to domestic markets, producers would lose and consumers gain. A dark side of this effect is where there is a cumulating of these producer losses over time, as prolonged depressed prices and the resulting low returns undermine investment in agriculture, slowing down the growth of the sector. Net welfare loss is generally expected to be higher, the greater is the degree of self-sufficiency. Many developing countries belong to this group and almost all of them produce basic foods, which are the main products receiving export subsidies. In theory, importing countries could take advantage of the income transfers by capturing them at the border in the form of tariffs, at the same time maintaining higher prices in domestic markets. However, such action has to be consistent with other commitments on the type and level of tariff measures. Moreover, there may be difficult political economy considerations to resort to this option in practice. Finally, where the widespread use of export subsidies destabilizes world markets, which is likely, food importing countries face additional transaction costs in trying to cope with these unstable markets.
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The quantity of imports and exports is shown as the blue line segment on each countrys graph (the horizontal distance between the supply and demand curves at the free trade price). When a large exporting country implements an export subsidy, it will cause an increase in the price of the good on the domestic market and a decrease in the price in the rest of the world (RoW). Suppose after the subsidy the price in the importing country falls to PIMT and the price in the exporting country rises to PEXT. If the subsidy is a specific subsidy, then the subsidy rate would be S=PEXSPIMS, equal to the length of the green line segment in Table 7.10 "Welfare Effects of an Export Subsidy" provides a summary of the direction and magnitude of the welfare effects to producers, consumers,
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and the governments in the importing and exporting countries. The aggregate national welfare effects and the world welfare effects are also shown.
Importing Country Consumer Surplus Producer Surplus Govt. Revenue National Welfare World Welfare + (E + F + G) (E + F) 0 +G (F + H) (b + d)
Exporting Country (a + b) + (a + b + c) (b + c + d + f + g + h) (b + d + f + g + h)
Refer to Table 7.10 "Welfare Effects of an Export Subsidy" and to see how the magnitudes of the changes are represented.
EXPORT SUBSIDY EFFECTS ON THE EXPORTING COUNTRYS CONSUMERS. Consumers of the product in the exporting country experience a decrease in well-being as a result of the export subsidy. The increase in their domestic price lowers the amount of consumer surplus in the market.
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EXPORT SUBSIDY EFFECTS ON THE EXPORTING COUNTRYS PRODUCERS. Producers in the exporting country experience an increase in well-being as a result of the subsidy. The increase in the price of their product in their own market raises producer surplus in the industry. The price increase also induces an increase in output, an increase in employment, and an increase in profit, payments, or both to fixed costs. EXPORT SUBSIDY EFFECTS ON THE EXPORTING COUNTRYS GOVERNMENT. The government must pay the subsidy to exporters. These payments must come out of the general government budget. Who loses as a result of the subsidy payments depends on how the revenue is collected. If there is no change in total spending when the subsidy payments are made, then a reallocation of funds implies that funding to some other government program is reduced. If the subsidy is funded by raising tax revenues, then the individuals responsible for the higher taxes lose out. If the government borrows money to finance the subsidy payments, then the budget cut or the tax increase can be postponed until some future date. Regardless of how the subsidy is funded, however, someone in the domestic economy must ultimately pay for it. EXPORT SUBSIDY EFFECTS ON THE EXPORTING COUNTRY . The aggregate welfare effect for the country is found by summing the gains and losses to consumers and producers. The net effect consists of three components: a negative terms of trade effect ( f + g + h), a negative consumption distortion (b), and a negative production distortion (d). Since all three components are negative, the export subsidy must result in a reduction in national welfare for the exporting country. However, it is important to note that a redistribution of income occursthat is, some groups gain while others lose. The likely reason governments implement export subsidies is because they will benefit domestic exporting firms. The concerns of
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consumers must be weighed less heavily in their calculation since the sum of their losses exceeds the sum of the producers gains. EXPORT SUBSIDY EFFECTS ON THE IMPORTING COUNTRYS CONSUMERS. Consumers of the product in the importing country experience an increase in well-being as a result of the export subsidy. The decrease in the price of both imported goods and the domestic substitutes increases the amount of consumer surplus in the market. EXPORT SUBSIDY EFFECTS ON THE IMPORTING COUNTRYS PRODUCERS. Producers in the importing country suffer a decrease in well-being as a result of the export subsidy. The decrease in the price of their product on the domestic market reduces producer surplus in the industry. The price decrease also induces a decrease in the output of existing firms, a decrease in employment, and a decrease in profit, payments, or both to fixed costs. EXPORT SUBSIDY EFFECTS ON THE IMPORTING COUNTRYS GOVERNMENT. There is no effect on the importing countrys government revenue as a result of the exporters subsidy. EXPORT SUBSIDY EFFECTS ON THE IMPORTING COUNTRY . The aggregate welfare effect for the country is found by summing the gains and losses to consumers, producers, and the government. The net effect consists of three components: a positive terms of trade effect (F + G + H), a negative production distortion (F), and a negative consumption distortion (H). Although there are both positive and negative elements, the net national welfare effect reduces to area G, which is positive. This means that an export subsidy implemented by a large exporting country in a perfectly competitive market will raise national welfare in the importing country. This result has inspired some economists to argue that the proper response for an importing country when its trading partner implements an export subsidy is simply to send along a thank you note.
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It is worth noting here that the World Trade Organization (WTO) allows countries to impose countervailing duties to retaliate against its trading partners when it can be shown that an exporting countrys government has used export subsidies. It is also important to note that not everyones welfare rises when there is an increase in national welfare. Instead, there is a redistribution of income. Consumers of the product will benefit, but producers and payers of government taxes will lose. A national welfare increase, then, means that the sum of the gains exceeds the sum of the losses across all individuals in the economy. Economists generally argue that, in this case, compensation from winners to losers can potentially alleviate the redistribution problem. 2.3 CURRENT STATUS OF EXPORT SUBSIDIES IN INDIA 1. INDIA TO BOOST EXPORTS WITH SUBSIDIES India is set to reintroduce incentives to revive the countrys flailing export sector in a fresh attempt to boost its slowing economy and rein in a rapidly widening trade deficit. Asias third-largest economy plans to reintroduce and expand previously phased-out subsidies to boost overseas sales of textile and engineering goods, a senior official confirmed. India recently lifted export bans on cotton and basmati rice to boost the agricultural sector. We have not finalised the exact measure that we are going to introduce but...we will give subsidies to make exports a little more attractive abroad, the official said. The new package could provide exporters with subsidies worth as much as Rs20bn ($372m), an increase on a similar package announced last year but phased out at the end of March. The move follows weak exports in April and comes against a backdrop of growing concern about Indias rising import bill.
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The countrys deficit increased to $13.4bn in April, against $8.9bn last year, according to data released on Thursday. Exports grew 3.2 per cent to $24.5bn from a year ago, while imports rose 3.8 per cent to $37.9bn. The nations current account deficit is set to grow to more than $74bn during the current financial year, or about 4 per cent of gross domestic product, according to figures from Citigroup in Mumbai. India raises interest subsidy to prop up weak exports India has increased an interest subsidy for some export goods to 3 percent from 2 percent and has extended that subsidy to include more items in a bid to prop up the country's flagging overseas sales, Trade Minister Anand Sharma said on Wednesday.
Fighting a falling rupee and a widening current account deficit that hit a record high of 4.8 percent last fiscal year, India is taking steps to curb imports and boost exports.
India has revised down its export target to $325 billion for the 2013/14 fiscal year, Sharma said, from $350 billion earlier.
2 EXPORT SUBSIDIES UP BY RS 2,000 CR The government on 31st july 2013 provided an additional rs 2,000 crore to lift the countrys export sector from the current morass It also promised to clear pending claims of exporters expeditiously. The efforts are intended to perk up India's merchandise exports that has declined 1.4 per cent to $72.46 billion in the April-June (2013) period ."A number of steps are under way to augment exports. I have offered Commerce Minister Anand Sharma full support and provided additional funds of Rs 2,000 crore today. This will include increasing the interest subvention from 2 per cent to 3 per cent on certain exports,"
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Finance Minister P Chidambaram told reporters here. The interest subsidy will be available to exporters from 8th august itself. The measures were promptly welcomed by exporters body, the Federation of Indian Export Organisations (FIEO), which said the steps will help in reducing the cost of credit and adding to competitiveness of exports. FIEO President Rafeeque Ahmed, however, demanded an immediate implementation of Padmanabhan Committee recommendations for bringing exports under priority sector and also sought an export development fund with sizable corpus for aggressive marketing. The Finance Ministry has also provided Rs 450 crore to meet the additional expenses for the remaining part of the current fiscal on account of hiking interest subsidy to 3 per cent. About Rs 1,550 crore was the last year's balance which would be paid under various incentive programmes, Chidambaram said. Earlier, announcing the scheme, Commerce and Industry Minister Anand Sharma said the government is making available the required resources to clear all claims of the exporters...and the provisions are being made to ensure that claims of the all the exporters are settled forthwith. Sharma said the government was also considering raising plan allocation for Market Access Initiative, Market Development Assistance and Central Assistance to States for Developing Export Infrastructure and other Allied Activities Scheme.
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An important aspect of the current framework of disciplines on subsidies is that India together with other low-income countries has been exempted from the prohibition on export subsidies for non-agricultural products. However, this exemption does not imply immunity from countervailing duty procedures, should the subsidised products cause material injury to domestic industries in importing countries. Consequently, while Indian exports have benefited from export incentives in some destinations, the importing countries have countervailed against these incentives. Indeed, some export incentives given in India are countervailable in terms of the SCM Agreement. Over the years as tariffs have been reduced and certain non-tariff barriers have been removed and as competition has increased, there has been increasing tendency to use contingent measures such as Anti Dumping, Countervailing Duty and Safeguard Duty especially by the developed industrialised countries, and more recently also by developing countries. 3.2. WTO Agreement on Subsidies and Countervailing Measures (SCM)5 Export incentives play an important role in encouraging exports from a country.Almost every country provides incentives to its exporters. However, not all types ofexport incentives are actionable under the SCM Agreement. To analyse what kind ofexport subsidy is actionable and what is not, a good understanding of the main provisions of the Agreement is an absolute must. We study the main provisions of theAgreement below. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) that has been tightened under the Uruguay Round, addresses two distinct but related issues. These issues relate to (A) the multilateral disciplines (set of rules) on theprovision of subsidies that a Member nation must follow, and (B) the countervailing measures to neutralise the adverse effect of
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subsidised imports. Multilateral disciplines are enforced through invocation of the WTO Dispute Settlement Mechanism (DSM). More precisely, certain subsidies are prohibited and certain other types of subsidies can be challenged if they cause adverse effects to the interests of other Members.
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(A) PROHIBITED SUBSIDIES Two types of subsidies are prohibited for most countries. These are subsidies that are contingent upon export performance (or export subsidies), or upon the use of domestic over imported goods (local content subsidy). Such subsidies are designed to affect trade, and are therefore likely to cause adverse effects to the interests of other Members. (B) ACTIONABLE SUBSIDIES Most domestic subsidies come under the category of actionable subsidy if they arespecific to an enterprise or group of enterprises. These subsidies although not prohibited can be challenged, either through multilateral dispute settlement or through countervailing action, if such subsidies cause adverse effects to the interests of another Member. Adverse effect can be caused in three possible ways: (i) Injury (ii) nullification or impairment, and (iii) serious prejudice. (C) NON-ACTIONABLE SUBSIDIES The SCM Agreement identifies three specific subsidies, which are non-actionable and therefore cannot be challenged multilaterally or be subject to countervailing action. These subsidies relate to research subsidies, assistance to disadvantaged regions, and environmental subsidies. These subsidies are either unlikely to cause adverse effects or are considered to be of some merit and thus not to be discouraged.
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countervailing duty the Member country must establish the following three substantive aspects: (a) that the imports are subsidised (b) that an injury is caused to the domestic industry and (c) that there exists a causal link between the subsidised imports and the injury. There is well laid out procedure to be followed in the conduct of countervailing investigations and the imposition of countervailing measures. Failure to respect either the substantive or procedural requirements can be taken to dispute settlement and can form the basis for the invalidation of the measure. All countervailing duties normally have a life of not more than 5 years. If there is a change in the extent of subsidy or in the injury to domestic industry, a case can be made for the review of CVDs within reasonable period of time. If no review takes place within five years all CVDs must automatically terminate, and any case for the imposition of CVDs has to be made afresh.
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Like many governments elsewhere, GOI too has been giving several export incentives to Indian exporters to promote exports from the country. In the past GOI devised several export promotion measures to correct for the anti-export bias that existed in the economy on account of import-substitution policy. Export incentives are given by GOI through several institutions/agencies and under various Acts. Export incentives are primarily given by Ministry of Commerce through its Directorate General of Foreign Trade (DGFT), and through Ministry of Finance.
(A)EXPORT PROMOTION CAPITAL GOODS (EPCG) SCHEME: The apparent rationale behind this scheme seems to permit technological upgradation while respecting the need to preserving scarce foreign exchange resources. About the Scheme: The scheme, first introduced on April 1, 1990 and amended from time to time, allows for the import of capital goods at concessional customs duty.
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Under this scheme an exporting producer (i.e., every manufacturer who exports) or merchant/exporter (i.e., traders) who is tied to a producer, is eligible for the scheme. For availing of the scheme, a company is required to provide the details of the type and the value of capital goods to be imported. Depending on the level of export commitment the company is willing to take, the company is allowed to import the capital good at concessional customs duty of 5%. Since April 2000 the threshold limit for eligibility has been removed, and the two alternate routes (with different export obligations) to avail the scheme that existed prior to this have been merged into a single window scheme with a uniform customs duty of 5 per cent.
(B) DUTY EXEMPTION/DUTY REMISSION SCHEMES:- While duty exemption scheme enables import of inputs required for exportproduction, the duty remission scheme enables post export replenishment/ remissionof duty on inputs used in the export product.DGFT currently has three duty exemption/duty remission schemes. Table 2 showsthe popularity of these schemes. These are (i) Advance Licence (ii) Duty Free Replenishment Certificate, and (iii) Duty Exemption Passbook Scheme. (i) Advance Licence: Advance Licence is issued under Duty Exemption Scheme to allow import of inputs which are physically incorporated in the export product. Import of raw material is on the basis of quantity based advance licence. (ii) Duty Free Replenishment Certificate (DFRC): Both Duty Free Replenishment Certificate (DFRC) and Duty Entitlement Passbook (DEPB) Scheme are duty remission schemes. These schemes allow drawback of import charges on inputs used in the export product. Under DFRC, merchant-exporter or manufacturer-exporter obtains, after completion
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of exports, transferable duty free replenishment certificate for importing inputs used in the export products as per SIONs. The scheme was introduced in April 2000 and allows imports of inputs used in the manufacture of goods without payment of Basic Customs Duty, Special Additional Duty (and also Surcharge, if any) (iii) Duty Entitlement Passbook Scheme (DEPB): The Pass Book Scheme came into force on May 30, 1995 and remained in force till March 31, 1997. After the Pass Book Scheme was terminated, DEPB came into effect from on April 7, 1997. DEPB is of two types: on pre-export basis and post-export basis. Since there were very few takers of the DEPB on pre-export basis the scheme was withdrawn subsequently. Now of these two schemes, the scheme on post-export basis only is allowed. DEPB is an optional facility given to exporters who are not interested in going through the licensing route. (c) Schemes for EOUs/EPZs:- There are schemes for export production units that are isolated from domestic production units such as EOUs and EPZs. For the purpose of customs and excise these units are considered as outside domestic tariff area. These units or units located in these zones produce primarily for export market. However, they are allowed to sell certain percentage of their product in domestic tariff region as well after payment of excise, subject to their fulfilment of their export obligation. The export obligation is in terms of minimum Net Foreign Exchange Earning as a percentage of Exports and Export performance. (d) Export Promotion Schemes for Diamond Gem & Jewellery: Prior to April 1, 2001, import of raw diamonds was on the restricted list, meaning that import of diamonds meant for exports was allowed at zero percent duty to diamond exporters. However, this situation changed thereafter. Raw diamonds are no longer a restricted item. Anybody can imports raw diamonds after paying
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5 per cent customs. However, for export purposes a license is issued to exporters which entitles them to import raw diamonds without paying any customs. Similarly, for the import of gold and other precious metal. Customs for the import of gold is 250 rupees per 10 gms. Since the scheme only entitles exporters to import of raw diamonds and other precious metals without paying any duty, there is no question of subsidy and hence no problem of countervailability of the scheme.
(A)DUTY DRAWBACK SCHEME:- Exporters or processors, who are unable to avail of various schemes like EOUs/EPZs or to obtain refund of duties paid on inputs, can avail duty drawback. Under Duty Drawback excise duty and customs duty paid on inputs is refunded to the exporter of finished products. Section 75 of the Customs Act (CA) 1962 allows for the reimbursement to exporters of the duties of Customs and Central excise borne by imported and indigenous raw materials used in the production of exports.
(B )INCOME TAX EXEMPTION (UNDER SECTIONS 80HHC, 10A, 10B): MOF tax exempts export profits. The Income Tax Act 1961 is the legal basis under which the Income tax exemption scheme operates. The Act is amended yearly by the Finance Act. Under the Act, profits from exports are exempted from income tax. The sections of the Income Tax Act under which export income from manufactures is exempted are section 10A, 10B, and 80HHC.
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Under section 10A profits that a firm in Export Processing Zone makes is exempted from income tax. Similarly, section 10B exempts Export Oriented Units from paying income tax on its profits. Any firm in Domestic Tariff Area (DTA) exporting goods can claim exemption from income tax on the profits it makes from exports under the section 80 HHC. (C) LOAN GUARANTEES: The Ministry of Finance provides loan guarantees primarily to public sector industries on ad hoc basis. This loan guarantee is not necessarily on the basis of either export performance or on the use of domestic over imported goods Therefore, the unit stands to benefit from the government provided loan guarantee to the extent of the difference between the actual amount and the amount it would have paid in the absence of government loan guarantee. Moreover, such benefit is limited to public sector companies selected by the government on ad hoc basis and not widely available based on any economic criteria, the benefit is specific.
4.3 EXPORT CREDIT THROUGH ECGC :Export Credit Guarantee Corporation of India (ECGC) limited is the only agency that provides credit guarantee to India exports. Formed in July 1957 as Export Risks Insurance Corporation, it was converted into Export Credit & Guarantee Corporation Limited in 1964 and later to ECGC in 1983. ECGC is fully owned by GOI, and functions under the Ministry of Commerce. Broadly, ECGC provides four types of services or schemes. (a) standard protection to exporters against payment risks involved in exports on short-term credit (b) specific protection to Indian firms against payment risks involved in exports on deferred terms of payment, services rendered to foreign clients, and turnkey projects taken abroad (c) financial guarantee to Indian banks to protect them against risks in extending
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financial support to exporters both at pre and post-shipment, and (d) special covers such as Transfer guarantee, insurance for buyers credit, overseas investment insurance, and exchange risk fluctuation.
Export insurance: Insurance on an export consignment depends on the nature of export contract, that is, whether the contract is CIF or FOB. If it is CIF, in which case insurance is bought by the exporter himself, exporters in India have to buy insurance from one of the subsidiaries of General Insurance Corporation of India only. However, this scenario is all set to change with the entry of private insurance players in the Indian insurance market that has recently been opened to competition from private players.
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5. CONCLUSION
Except for the local content (or import substitution) subsidy, developing countries like India have been exempted from the prohibition on export subsidy, which means that India can continue giving export subsidies. However, exemption from prohibited subsides does not accord immunity from the countervailing duty actions if the subsidised exports adversely affects domestic industry of the importing Member countries. In this paper we examine the status of various export promotion schemes of government of India (GOI) within the SCM Agreement. Clearly, some of the GOI schemes such as income tax exemption of export profits are subsidies as per the provisions of the SCM Agreement and hence countervailable. This scheme is on its way out as the phase out plan for the scheme has already been announced. However, some other export promotion schemes such as Duty Entitlement Passbook Scheme (DEPB) have been countervailed by some of our trading partners, more for its form than for its spirit. There is some thinking within the government that the scheme can be made non-countervailable by effecting necessary changes in its form. Schemes such as Export Promotion Capital Goods Scheme which are also countervailable under the current provision of the SCM Agreement, must not be
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countervailed if one were to strictly go by the basic idea behind the SCM Agreement, that is, of allowing trade of tax free commodities. For this reason refund of customs duty on capital goods (as is true of inputs) used in production of exports should also be allowed under the SCM Agreement.42 There is no denying the fact that Indian exporters face many impediments such as higher electricity tariffs, higher interest rates, un-refunded taxes at state level, inflexible labour laws, lack of physical infrastructure, inefficient systems and practices. All these impediments by raising up transaction costs of exports tend to make Indias exports uncompetitive in international markets. The best option in such a situation is to remove these impediments per se rather than neutralising their adverse effect through subsidies. Having said that, there may be some role of export subsidies partly because our tariff rates are still high by international standards (making production for domestic market more lucrative), partly to counter the negative effect of subsidised exports from our trading partners, and finally to help exports where we have potential comparative advantage, particularly since exchange rate depreciation is politically unpalatable. Indeed, India needs to restructure its export incentives. Given the WTO reality and the SCM Agreement, India needs to be strategic in devising its export incentives some of which could given across the board to all exporters with some exclusions, while other incentives could be given selectively to industries where the country has a comparative advantage.
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INTERNET http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=254&Mode=0
http://www.thehindu.com/business/Economy/2-interest-subsidy-for-exports-extended-forone-more-year/article4242010.ece
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