Economics for Everyone - India’s Foreign Trade

Policy (FTP/EXIM)
Prof. M. Guruprasad, AICAR Business School | Mumbai | May 25, 2015 16:47 IST

NEWS

Commerce Ministry releases Foreign Trade Policy

2015-2020
New foreign trade policy: $900 bn exports by FY20
the target to double India’s exports in goods and
services over the next five years (from $465 billion to
$900 billion) and upping the Indian share of the
world exports pie from the current 2 percent to 3.5
percent over the same period.
Exports through Make in India underlined in FTP:
Commerce Minister Nirmala Sitharaman

Introduction

What does Darjeeling Tea, Basmathi Rice, Indian Carpet, Kancheepuram Silk, Mysore Sandalwood Oil, Indian
Garments, Indian Software, Surat Diamonds to name a few have in common. They represent the modern
symbols of Indian foreign trade.

On 1st April 2015, the new Foreign Trade Policy (FTP) for the period 2015-20 was announced which replaces
the 2009-14 FTP which expired on 31st March 2014. With the announcement of new policy, exporters’ one-year
wait for new FTP has come to end.

India's Foreign Trade Policy also known as Export Import Policy (EXIM) in general, aims at developing export
potential, improving export performance, encouraging foreign trade and creating favorable balance of payments
position. Foreign Trade Policy is prepared and announced by the Central Government (Ministry of Commerce).
Foreign Trade Policy or EXIM Policy is a set of guidelines and instructions established by the DGFT
(Directorate General of Foreign Trade) in matters related to the import and export of goods in India.

The foreign trade policy, has offered more incentives to exporters to help them tide over the effects of a likely
demand slump in their major markets such as the US and Europe.

Foreign trade is exchange of capital, goods, and services across international borders or territories. In most
countries, it represents a significant share of gross domestic product (GDP). While international trade has been
present throughout much of history, its economic, social, and political importance has been on the rise in recent
centuries.

The Foreign Trade Policy of India is guided by the Export Import in known as in short EXIM Policy of the
Indian Government and is regulated by the Foreign Trade Development and Regulation Act, 1992.

DGFT (Directorate General of Foreign Trade) is the main governing body in matters related to EXIM Policy.
The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and
regulation of foreign trade by facilitating imports into, and augmenting exports from India. Foreign Trade Act
has replaced the earlier law known as the imports and Exports (Control) Act 1947.
Indian EXIM Policy contains various policy related decisions taken by the government in the sphere of Foreign
Trade, i.e., with respect to imports and exports from the country and more especially export promotion
measures, policies and procedures related thereto.

Objectives Of The FTP (EXIM) Policy: -

The main objectives are:
To accelerate the economy from low level of economic activities to high level of economic activities by making
it a globally oriented vibrant economy and to derive maximum benefits from expanding global market
opportunities.
To stimulate sustained economic growth by providing access to essential raw materials, intermediates,
components,' consumables and capital goods required for augmenting production.
To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby,
improving their competitiveness.
To generate employment.
Opportunities and encourage the attainment of internationally accepted standards of quality.
To provide quality consumer products at reasonable prices.

In the light of the above mentioned objectives , there are two broad aspects of the FTP(EXIM) Policy; the
import policy which is concerned with regulation and management of imports and the export policy which is
concerned with exports not only promotion but also regulation. The main objective of the Government's EXIM
Policy is to promote exports to the maximum extent. Exports should be promoted in such a manner that the
economy of the country is not affected by unregulated exportable items specially needed within the country.
Export control is, therefore, exercised in respect of a limited number of items whose supply position demands
that their exports should be regulated in the larger interests of the country.

Governing Policy – Institutions

The Government of India notifies the foreign trade Policy for a period of five years (for example 2015 -20)
under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current Export Import
Policy covers the period 2015-2020. The FTP is updated every year on the 31st of March and the modifications,
improvements and new schemes become effective from 1st April of every year.
All types of changes or modifications related to the EXIM Policy is normally announced by the Union Minister
of Commerce and Industry who co-ordinates with the Ministry of Finance, the Directorate General of Foreign
Trade and network of DGFT Regional Offices.
FTP 2015-2020
Some highlights of the present Foreign Trade Policy 2015-2020

India to be made a significant participant in world trade by 2020

Commerce Minister announced two new schemes in Foreign Trade Policy 2015-2020Two New Schemes
announced in FTP Are MEIS & SEIS. FTP 2015-20 introduces two new schemes, namely "Merchandise
Exports from India Scheme (MEIS)" and "Services Exports from India Scheme (SEIS)". These schemes
(MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility
and usage.
Merchandize exports from India (MEIS) to promote specific services for specific Markets Foreign Trade
Policy
For services, all schemes have been replaced by a 'Services Export from India Scheme'(SEIS), which will
benefit all services exporters in India.
FTP would reduce export obligations by 25% and give boost to domestic manufacturing
Incentives (MEIS & SEIS) to be available for SEZs also. FTP benefits from both MEIS & SEIS will be
extended to units located in SEZs. – Both MEIS and SEIS firms and service providers can now get
subsidized office spaces in SEZ (Special Economic Zones), along with other benefits. With a view to
boost the Special Economic Zones, Government has decided to extend both the incentive schemes for
export of goods and services to units in SEZs.
e-Commerce of handicrafts, handlooms, books etc., eligible for benefits of MEIS. e-Commerce exports up
to Rs.25000 per consignment will get SFIS benefits.
e-Commerce Exports Eligible For Services Exports From India Scheme. – As part of Digital India vision,
mobile apps would be created to ease filing of taxes and stamp duty, automatic money transfer using
Internet Banking have been proposed. > Online procedure to upload digitally signed document by
Chartered Accountant/Company Secretary/Cost Accountant to be developed.
Agricultural and village industry products to be supported across the globe at rates of 3% and 5% under
MEIS. Higher level of support to be provided to processed and packaged agricultural and food items under
MEIS.
Industrial products to be supported in major markets at rates ranging from 2% to 3%.
Branding campaigns planned to promote exports in sectors where India has traditional Strength.
Business services, hotel and restaurants to get rewards scrips under SEIS at 3% and other specified
services at 5%.
Duty credit scrips to be freely transferable and usable for payment of customs duty, excise duty and
service tax.
Debits against scrips would be eligible for CENVAT credit or drawback also.
Nomenclature of Export House, Star Export House, Trading House, Premier Trading House certificate
changed to 1,2,3,4,5 Star Export House. – Some major overhauling of nomenclature and naming have
been done. For instance, Export House, Star Export House, Trading House, Star Trading House, Premier
Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. The
allocation of the status will now be based on US dollars, instead of Indian Rupees
The criteria for export performance for recognition of status holder have been changed from Rupees to US
dollar earnings. – A new position called ‘Status Holder’ have been formulated, which will recognize and
reward those entrepreneurs who have helped India to become a major export player. All IT and ITeS firms,
Outsourcing companies and KPOs can rejoice.
Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as
originating from India. – Tax and duty on Indian manufacturers have been reduced, to boost Make in India
vision
Reduced Export Obligation (EO) (75%) for domestic procurement under EPCG scheme.
Inter-ministerial consultations to be held online for issue of various licences.
No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.
Validity period of SCOMET export authorisation extended from present 12 months to 24 months.

Export obligation period for export items related to defence, military store, aerospace and nuclear energy to be
24 months instead of 18 months

Calicut Airport, Kerala and Arakonam ICDs(Inland Container Depots), Tamil Nadu notified as registered
ports for import and export.
Vishakhapatnam and Bhimavarm added as Towns of Export Excellence.
Certificate from independent chartered engineer for redemption of EPCG authorisation no longer required.

Now let us understand how this achieves the desired objectives of the nation.

Impact on the Economy:

According to some experts the focus in this FTP has been “Simplicity And Stability”. Accordingly, the policy on
the one hand seeks to realign the multiple schemes with the objective of reducing complexities. On the other had
it want to promote the increased use of technology to reduce the transaction cost and manual compliances.

Supporters have given their verdict for this new FTP, stating it as ‘progressive’, ‘path breaking’ and
‘development friendly’ as exports of books, handicraft, handlooms, toys, textiles, defence and ecommerce
platforms would be easier and faster.According to them, a big step is cleaning up the plethora of export
promotion schemes and clubbing them under two schemes, one for goods (Merchandise Exports from India
Scheme) and one for services (Services Exports from India Scheme).The duty scrips under these schemes come
without conditions and can be freely transferred.

One significant announcement in the policy is that it will move away from relying largely on subsidies and sops.
Critics however point out that, this is prompted by World Trade Organisation (WTO) requirements that export
promotion subsidies should be phased out, but according to some experts there are ways of getting around it and
other countries are doing it all the time.

There has been talk of boosting services exports for quite a few years now, but information technology and
information technology-enabled services (IT/ITES) dominated the basket. The share of this segment in the
overall export basket is 50 percent and 90 percent in the services export basket.

More importantly, this sector was overly dependent on western markets and, consequently, extremely vulnerable
to even the smallest of developments there. The policy, fortunately, turns its attention to other sectors where
India has inherent advantages – healthcare, education, R&D, logistics, professional services, entertainment, as
well as services incidental to manufacturing.

By extending benefits under EPCG on domestic procurements and offering them more products under MEIS, the
policy further seeks to incentives the exports. Right direction.

According to the Commerce Minister Nirmala Sitaraman, It's a focused policy, one in which exports through
Make in India is underlined by looking at sectors that give greater employment and have high-tech value
addition. That is because the intention is to join the global value chain and above all, the environment part,
where you are looking at eco-friendly systems and producing wealth out of waste. So, the priority areas are
technology-driven, labour-intensive-driven and environment-driven. You are also looking at traditional markets,
emerging markets and diversifying into new markets.

History of trade Policy of India

Even though the popular view is that India’s export promotion started with the economic reforms post nineties.
A study foreign trade policy shows that efforts have been made to make our trade competitive even before that.
To understand this, we need to know the background history and evolution of foreign trade in India.

India is looked upon as a country with immense resources available through its length and breadth. India was
famed for her fabulous wealth ever since the ancient times till the establishment of the British Empire. Indian
trade history reflects that despite the frequent political upheavals during the 12th to the 16th centuries, the
country was still prosperous. Descriptions of the wide variety of excellent goods sold in the Indian markets of
those days are found in the records of foreign travellers. India was well known for its textiles one of the chief
items of export. Textiles from Gujarat were sent to the Arab countries and to South-east Asia. Trade history of
India also shows hardwood furniture, embellished with inlay work was a very popular item for expert. Although
the expensive carvings and inlays were inspired by the ornate Mughal style, the furniture was modelled on the
European design. Carpets were used both in ancient and medieval India. But the skill of carpet weaving touched
new heights during the 16th century. A larger variety of ornamental work in cut stones, ivory, pearl and tortoise
shells were produced in South India. Pearl fishing was a major industry here. Indian arts and crafts patronized by
Indian rulers, were unmatched for their beauty and skill and were very popular in the European countries. River
routes also promoted trade between different parts of the country. India’s exports were seen too far exceed her
imports both in the number of items as well as in volume. Arab traders shipped Indian goods to European
countries through the Red Sea and the Mediterranean ports. With huge earnings from her exports of various
commodities, the state coffers were amply stocked with gold and silver.

India today stands as a trillion economy. Darjeeling tea, Indian khadi cotton, Kashmiri carpets, Indian spices
and dry fruit are just a few of the famous gifts India has given to the world. The economic levels have improved
in the urban and semi-urban areas. Literacy is penetrating deep in to even the far reach areas, thus creating
awareness and to higher consumption patterns for all kinds of goods across all sections of the society. Promoting
the availability of goods from different parts of the world has seen a rise in more trade with other countries.

Indian trade history is remarkable. Indian trade has benefited and so has the world. The country has realized that
at the end of the day, maximizing use of one’s own resources is what makes all the difference.

India’ Trade Policy Philosophy: Theoretical Background

On analytical grounds, trade policy can be broadly divided into two groups –

Inward oriented and (b) Outward oriented.

Inward – oriented policy:- An inward oriented strategy is the one in which trade and industrial incentives
are biased in favour of production for domestic market over the export market. Thus, an inward oriented
policy is often designated as the import substitution strategy.
Outward – oriented policy : - On the contrary, an outward oriented strategy is the one in which trade and
industrial policies do not discriminate between production for domestic goods and foreign goods. Thus, an
outward oriented strategy is often designated as the export promotion strategy.

As remarked by World Bank in its World Development Report (1987) – “Inward – oriented regimes are
generally characterized by high levels of protection for manufacturing, direct controls on imports and
investments, and overvalued exchange rates. By contrast, outward orientation links the domestic economy to the
world economy.” The solution to the problem of BOP for a country depends on the trade policy / export –
import policy of the country. Hence, a systematic study of BOP of a country should take into account the
changes in the trade policy of a country over a period of time.

Trade Policy Evolution

In a broader sense, after independence for almost forty years or so India adopted inward oriented strategy. The
basic rationale behind it was that it would help rapid industrialization through import substitution and at the
same time save valuable foreign exchange. This strategy covers the period from First Five Year Plan (1951 – 56)
to the Seventh Five Year Plan (1985 – 90). This period is considered as the period of “Licence – Quota Raj”
wherein there was a controlled and restrictive environment. However, the decade of 1990 is marked with a near
U turn as India adopted gradually a path of economic liberalization. It followed the policy of Liberalization,
Privatization and Globalization (LPG) to solve its BOP and related problems. A series of economic reforms were
introduced in various sectors to tackle the BOP and other problems. Hence, the Indian economy which was a
closed economy for almost forty years now became relatively more open posing challenges for macroeconomic
management. Thus, from 1990 onwards India adopted an outward oriented strategy which can be considered as a
significant turnaround from the earlier period. The adoption of outward oriented strategy was a major departure
from the relatively protectionist trade policies pursued in earlier years.
There is no doubt that in the broader sense of the term India followed an inward - oriented trade policy after
independence till 1990. However, an in depth analysis of India’s trade policy shows that there were certain shifts
in policy stance from time to time. Taking this into account trade policy of India can be broadly divided into the
following phases

Phase I – Import Restriction and Import Substitution (From 143 1950’s to 1970s),
Phase II – Export Promotion & Import Liberalisation (From 1970s to 1990s), and
Phase III – Outward Orientation – (From 1990 onwards).

Economic (Trade) Reforms in India:

In order to understand the evolution of the Foreign trade policy (EXIM policy) over time we need to understand
the larger framework and evolution of Macroeconomic policy in India before and after the liberalisation in the
90’s. The subsequent trade policies were developed keeping in view this larger framework and in sequence to it.

In the early eighties, the Government of India appointed a special EXIM Policy Committee to review the
government previous export import policies. The committee was later on approved by the Government of India.
Mr. V. P. Singh, the then Commerce Minister and announced the EXIM Policy on April, 1985. Initially the
EXIM Policy was introduced for the period of three years with main objective to boost the export business in
India

Now, let us understand the history and evolution of foreign trade policy in India we need to understand it under
different phases

Policy in Practice: Trends in Foreign Trade Policy

1950 -1990:

India entered into planned development era in 1950’s and at that time Import Substitution was a major element
of India’s trade and industrial policy. In 1950 India’s share in the total world trade was 1.78% which reduced to
0.6% in 1995. During 2003-04 India’s share in the global trade was 0.8%, in 2005 it was 1.0%.

The PC Alexander Committee (1978) was the first committee to review and recommend on Import –Export
Policies and Procedures. This committee recommended the simplification of the Import Licensing procedure and
provided a framework involving a shift in the emphasis from “control to development”. In 1980 Tandon
Committee gave recommendations on export strategies in eightees.In the Export Import policy of 1978-79, for
the first time in India’s History decentralization of some licensing functions took place and the powers of
regional licensing authorities was enhanced.

Export Oriented Units were set up under the EOU scheme introduced in early 1981. The export and Import Bank
of India (website) was set up in 1982 to take over the operations of international finance wing of the IDBI. Other
major objectives was to provide financial assistance to exporters and importers.

In the Trade Policy of 1985-88 some measures were taken based upon the recommendation of Abid Husain
Committee 1984. This committee envisaged “Growth Led Exports, rather than Export Led Growth”. The
recommendation of this committee stressed upon the need for harmonizing the foreign trade policies with other
domestic policies. This committee recommended announcement of foreign trade policies for longer terms.

The export import pass book scheme was introduced in 1985 as per recommendation of Abid Hussain
Committee. In 1985 Vishvanath pratap Singh Government developed a 3 year exim policy.Tax Reform
Committee chaired by Raja J Chelliah suggested minimizing the role of quantitative restrictions and reducing the
tariff rates substantially. Export Processing Zones were set up to push up exports. They are now SEZ
Main Features of Trade Policies- Era of reforms (next phase of reforms since nineties)

As discussed the massive trade liberalisation measures adopted after 1991 mark a major departure from the
relatively protectionist trade policies pursued in earlier years. Accordingly, Substantial simplification and
liberalisation has been carried out in the reform period. Foreign Trade Policy (FTP) or Export Import Policy
(EXIM) is believed to be an important step towards the economic reforms of India. In order to liberalize imports
and boost exports, the Government of India for the first time introduced the Indian EXIM Policy on April I,
1992.

In the light of the reform policy objectives successive governments have been taking various trade reforms.
Successive annual Union Budgets have also extended a number of tax benefits and exemptions to the exporters.
These include reduction in the peak rate of customs duty to 15 per cent; significant reduction in duty rates for
critical inputs for the Information Technology sector, which is an important export sector; grant of concessions
for building infrastructure by way of 10-years tax holiday to the developers of SEZs; Facilities and tax benefits
to exporters of goods and merchandise; reduction in the customs duty on specified equipment for ports and
airports to 10 per cent to encourage the development of world class infrastructure facilities, etc. A number of tax
benefits have also been announced for the three integral parts of the ‘convergence revolution’ the Information
Technology sector, the Telecommunication sector, and the Entertainment industry.

In order to bring stability and continuity, the Export Import Policy was made for the duration of 5 years.
However, the Central government reserves the right in public interest to make any amendments to the trade
Policy in exercise of the powers conferred by Section-5 of the Act. Such amendment shall be made by means of
a Notification published in the Gazette of India.

Prior to 2004, the Foreign Trade Policy was called EXIM Policy. Each FTP will be having objectives and set
guidelines to achieve those objectives. After the introduction of liberalisation in Indian economy, 1992-97 policy
was the first EXIM Policy which aimed to dismantle the protectionist and regulatory policy towards a globally
oriented economy.