India’s 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 Asian
economic crisis and fluctuations in petroleum prices, which resulted in a
slowdown to 4.8% in 1997/98, the economy recovered to grow at over 6% during
the two subsequent years. Social indicators, such as poverty and infant mortality
have also improved during the last ten years. Higher growth during this period is,
in part, due to continued structural reform, including trade liberalization, leading
to 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 reform
process and increase competition in the economy.

Recognizing the important linkages between trade and economic growth, the
Government has simplified the tariff, eliminated quantitative restrictions on
imports, and reduced export restrictions. It plans to further simplify and reduce
the tariff. To help counteract the anti-export bias, inherent in import and other
constraints, export promotion measures have gained in importance. The
Government has recently announced a further increase in these measures and
pledged to reduce export restrictions. The policy has also suggested the creation
and strengthening of enclaves such as export processing and special economic
zones, which would "immunize" exporters from the constraints affecting the rest
of the economy, such as infrastructure and administrative problems. The
Government estimates that annual export growth of almost 12% is required in
order to raise India’s share of world trade from its present level of 0.8% to a
target of more than 1% by 2009.

Impediments to the growth of India’s international trade

New tariff barriers faced by Indian products in various overseas markets are
severely constraining our exports. These barriers may broadly be enumerated
as:

(i) restrictive import policy regimes (import charges other than customs
tariff, quantitative restrictions, import licensing, custom barriers);
(ii) standards, testing, labelling and certification (including phytosanitary
standards), which are set at unrealistic high levels for developing
countries or are scientifically unjustified;
(iii) export subsidies (including agricultural export subsidies, preferential
export financing schemes etc.);
 (iv) barriers on services (visible and invisible barriers restricting
movements of service providers, etc.); (v) government procurement
regimes; and
(v) other barriers including anti-dumping and countervailing measures.

Special Focus
With a view to doubling our percentage share of global trade within 5 years and
expanding employment opportunities, especially in semi urban and rural areas,
certain special focus initiatives have been identified for the agriculture,
handlooms, handicraft, gems & jewellery and leather sectors.

Government of India shall make concerted efforts to promote exports in these

sectors by specific sectoral strategies that shall be notified from time to time.

Further Sectoral Initiatives in other sectors will also be announced from time to
time.

For the present, the thrust sectors indicated below shall be extended the
following facilities:

Agriculture

1. A new scheme called the Vishesh Krishi Upaj Yojana (Special Agricultural
Produce Scheme) for promoting the export of fruits, vegetables, flowers,
minor forest produce, and their value added products has been
introduced.
2. Funds shall be earmarked under ASIDE for development of Agri Export
Zones (AEZ)
3. Import of capital goods shall be permitted duty free under the EPCG
Scheme
4. Units in AEZ shall be exempt from Bank Guarantee under the EPCG
Scheme.
5. Capital goods imported under EPCG shall be permitted to be installed
anywhere in the AEZ.
6. Import of restricted items, such as panels, shall be allowed under the
various export promotion schemes .
7. Import of inputs such as pesticides shall be permitted under the Advance
Licence for agro exports.
8. New towns of export excellence with a threshold limit of Rs 250 crore shall
be notified.
Handlooms

1. Specific funds would be earmarked under MAI/ MDA Scheme for

promoting handloom exports
2. Duty free import entitlement of specified trimmings and embellishments
shall 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 consignment
basis for re-export after repair shall be permitted.
5. New towns of export excellence with a threshold limit of Rs 250 crore shall
be notified.

Handicraft

1. New Handicraft SEZs shall be established which would procure products

from 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. The
entitlement is broad banded, and shall extend also to merchant exporters
tied up with supporting manufacturers.
3. The Handicraft Export Promotion Council shall be authorized to import
trimmings, embellishments and consumables on behalf of those exporters
for whom directly importing may not be viable.
4. Specific funds would be earmarked under MAI & MDA Schemes for
promoting Handicraft exports.
5. CVD is exempted on duty free import of trimmings, embellishments and
consumables.
6. New towns of export excellence with a reduced threshold limit of Rs 250
crore shall be notified.

Gems & Jewellery

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

replenishment 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 100,000
4. Duty free re-import entitlement for rejected jewellery shall be 2% of the
FOB value of exports
5. Cutting and polishing of gems and jewellery, shall be treated as
manufacturing for the purposes of exemption under Section 10A of the
Income Tax Act
Leather and Footwear

1. Duty free import entitlement of specified items shall be 5% of FOB value of

exports during the preceding financial year.
2. The duty free entitlement for the import of trimmings, embellishments and
footwear components for footwear (leather as well as synthetic), gloves,
travel bags and handbags shall be 3% of FOB value of exports of the
previous 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 exempt
from basic customs duty.
4. Re-export of unsuitable imported materials such as raw hides & skins and
wet blue leathers is permitted.
5. CVD is exempted on lining and interlining material notified at S.No 168 of
Customs Notification No 21/2002 dated 01.03.2002.
6. CVD is exempted on raw, tanned and dressed fur skins falling under
Chapter 43 of ITC(HS).

Critical Evaluation of the India’s Foreign Trade Policy

The government of India seems to have introduced a number of policies with a

view to augmenting the countries trade with the rest of the world. However, the
policies are criticized on some ground or the other. The major criticisms against
India’s trade policy are as follows.

1. Unrealistic Export Target: India aims to increase its share in the

global trade from the present 0.8 per cent to 1.5 per cent within the
next five years. This requires a CAGR of 20.4 per cent over the
same period which is quite unrealistic.
2. Burden of Tax Incentives: The government, through its export
promotion schemes, has virtually given complete freedom to
exporters 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 a
sharp rise in ‘circular trading’ in the name of increasing exports.
The scheme has given incentives for achieving higher exports
without any linkage to the volume of imports. For example, suppose
that an exporter, with a turnover of Rs. 500 crore in 2006-07
imports inputs worth Rs. 1,000 crore in 2007-08. He can now claim
credit for 100 per cent export growth by re-exporting the imported
goods even with a normal value addition. Under the new scheme,
the exporter will be eligible for an incentive of upto 15 per cent on
the incremental value of his exports (for 100 per cent incremental
 export growth, the incentive is 15 per cent). This will translate in to
a reward of Rs. 75 crore (15 per cent of Rs. 500 crore) on a
nominal value addition. Thus, the target plus scheme carries the
danger of circular trading. This may create danger for the
government in the long run.
4. Risk of Importing Outdated Machinery: The recent trade policy of
the government allows industrialists to import second hand
machinery of any age limit. This may result in the import of very old
machines from the Western countries which may not help the
country’s quality export objective.
5. Failure of the Policy to Take a Holistic View of Trade Issues