Month: February 2020

Foreign trade financing is required especially to get funds to carry out foreign trade operations. Depending on the types and attributes of financing, there are five major methods of transactions in foreign trade. In this chapter, we will discuss the methods of transactions and finance normally utilized in foreign trade and investment operations.

Foreign Trade Payment Methods

The five major processes of transaction in foreign trade are the following −

1. Prepayment

Prepayment occurs when the payment of a debt or installment payment is done before the due date. A prepayment can include the entire balance or any upcoming part of the entire payment paid in advance of the due date. In prepayment, the borrower is obligated by a contract to pay for the due amount. Examples of prepayment include rent or loan repayments.

2. Letter of Credit

A Letter of Credit is a letter from a bank that guarantees that the payment due by the buyer to a seller will be made timely and for the given amount. In case the buyer cannot make payment, the bank will cover the entire or remaining portion of the payment.

3. Drafts

• Sight Draft − It is a kind of bill of exchange, where the exporter owns the title to the transported goods until the importer acknowledges and pays for them. Sight drafts are usually found in case of air shipments and ocean shipments for financing the transactions of goods in case of foreign trade.
• Time Draft − It is a type of foreign check guaranteed by the bank. However, it is not payable in full until the duration of time after it is obtained and accepted. In fact, time drafts are a short-term credit vehicle used for financing goods’ transactions in foreign trade.

4. Consignment

It is an arrangement to leave the goods in the possession of another party to sell. Typically, the party that sells receives a good percentage of the sale. Consignments are used to sell a variety of products including artwork, clothing, books, etc. Recently, consignment dealers have become quite trendy, such as those offering specialty items, infant clothing, and luxurious fashion items.

5. Open Account

Open account is a method of making payments for various trade transactions. In this arrangement, the supplier ships the goods to the buyer. After receiving and checking the concerned shipping documents, the buyer credits the supplier’s account in their own books with the required invoice amount.

The account is then usually settled periodically; say monthly, by sending bank drafts by the buyer, or arranging through wire transfers and air mails in favor of the exporter.

Trade Finance Methods

The most popular trade financing methods are the following:

1. Accounts Receivable Financing

It is a special type of asset-financing arrangement. In such an arrangement, a company utilizes the receivables – the money owed by the customers as a collateral in getting a finance.

In this type of financing, the company gets an amount that is a reduced value of the total receivables owed by customers. The time-frame of the receivables exert a large influence on the amount of financing. For older receivables, the company will get less financing. It is also, sometimes, referred to as “factoring”.

2. Letters of Credit

As mentioned earlier, Letters of Credit are one of the oldest methods of trade financing.

4. Banker’s Acceptance

A banker’s acceptance (BA) is a short-term debt instrument that is issued by a firm that guarantees payment by a commercial bank. BAs are used by firms as a part of the commercial transaction. These instruments are like T-Bills and are often used in case of money market funds.

BAs are also traded at a discount from the actual face value on the secondary market. This is an advantage because the BA is not required to be held until maturity. BAs are regular instruments that are used in foreign trade.

5. Working Capital Finance

Working capital finance is a process termed as the capital of a business and is used in its daily trading operations. It is calculated as the current assets minus the current liabilities. For many firms, this is fully made up of trade debtors (bills outstanding) and the trade creditors (the bills the firm needs to pay).

6. Forfaiting

Forfaiting is the purchase of the amount importers owe the exporter at a discounted value by paying cash. The forfaiter that is the buyer of the receivables then becomes the party the importer is obligated to pay the debt.

7. Countertrade

It is a form of foreign trade where goods are exchanged for other goods, in place of hard currency. Countertrade is classified into three major categories: barter, counter-purchase, and offset.

• Barter is the oldest countertrade process. It involves the direct receipt and offer of goods and services having an equivalent value.
• In a counter-purchase, the foreign seller contractually accepts to buy the goods or services obtained from the buyer’s nation for a defined amount.
• In an offset arrangement, the seller assists in marketing the products manufactured in the buying country. It may also allow a portion of the assembly of the exported products for the manufacturers to carry out in the buying country. This is often practiced in the aerospace and defense industries.

All India Financial Institutions (AIFI) is a group composed of development finance institutions and investment institutions that play a pivotal role in the financial markets. Also known as “financial instruments”, the financial institutions assist in the proper allocation of resources, sourcing from businesses that have a surplus and distributing to others who have deficits – this also assists with ensuring the continued circulation of money in the economy. Possibly of greatest significance, the financial institutions act as an intermediary between borrowers and final lenders, providing safety and liquidity. This process subsequently ensures earnings on the investments and savings involved

In Post-Independence India, people were encouraged to increase savings, a tactic intended to provide funds for investment by the Indian government. However, there was a huge gap between the supply of savings and demand for the investment opportunities in the country.

National Level Financial Institutions

1. Bank of Baroda

Started on 20th July 1908, under the Companies Act of 1897 that has now translated into a strong, trustworthy financial body, The Bank of Baroda.

The Bank orchestrated its business strategies around the centrality of the customer. It diversified into areas of merchant banking, housing finance, credit cards and mutual funds.

2. Bank of India

Bank of India is a premier and one of the oldest commercial banks in India, with presence all over India as also in all time zones of the world. The Bank has a glorious history dating back to the early years of this century. The Bank was founded in September 1906 and has all along maintained a position of pride among the top 5 commercial banks in the country.

3. Canara Bank

Canara Bank is one of the premier banks in the country, accredited with umpteen distinctions. The present stature of the Bank is due to its strong fundamentals and quality customer orientations. Profit making since inception, the Bank today epitomizes a perfect blend of commercial and social banking.

4. Central Bank of India

Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly ‘Swadeshi Bank’. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank as the ‘property of the nation and the country’s asset’. He also added that ‘Central Bank lives on people’s faith and regards itself as the people’s own bank’.

5. Corporation Bank

Established in the year 1906, Corporation Bank is an organization based on the traditional Indian values of service to the community. Corp Bank is regarded as one of the well-run banks in the comity of Public Sector Banks in the country. Corporation Bank is the first Public Sector Bank to publish the results under US GAAP. The Bank has been publishing the results under the US GAAP since 1998-99.

6. Dena Bank

Dena Bank, in July 1969 along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

7. Dhanalakshmi Bank

Dhanalakshmi Bank was incorporated on 14th November 1927 by a group of enterprising entrepreneurs at Thrissur, the cultural capital of Kerala. It became a Scheduled Commercial Bank in the year 1977. It has today attained national stature with 180 branches and 26 Extension Counters spread over the States of Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat, Delhi and West Bengal. The Bank serviced a business of Rs. 4223 crores as on 31.03.06 comprising deposits of Rs.2533 crores and advances of Rs.1690 crores. As at the end of March 2006, the Capital Adequacy Ratio of the Bank was 9.75% well above the mandatory requirement of 9%. The Bank made a net profit of Rs.9.51 crores for the year ended 31st March 2006.

8. National Bank for Agriculture and Rural Development (NABARD)

NABARD is established as a development Bank, in terms of the Preamble of the Act, “for providing and regulating Credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas and for matters connected therewith or incidental thereto.”

Features of NABARD

(i) Serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas;

(ii) Takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. ;

(iii) Co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation; and

(iv) Undertakes monitoring and evaluation of projects refinanced by it.

9. Oriental Bank of Commerce

Established in Lahore on 19th February 1943, Oriental Bank of Commerce made a modest beginning under its Founding Father, Late Rai Bahadur Lala Sohan Lal, the first Chairman of the Bank.

10. State Bank of India

State Bank of India was constituted on 1 July 1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates).

The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All the branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Business is more than banking because we touch the lives of people anywhere in many ways.

The idea of STATE TRADING was first evolved during Second World War when a supply department was set up under the control of Shri M.S.A. Haider on the pattern of United Kingdom Commerce Corporation in the U.K.

Both these organizations worked together till the war was over.

Again in 1949, the Ministry of Commerce considered a proposal for setting up a corporation for international trade. The proposal was given a serious thought after the devaluation of rupee in September 1949. The government appointed a committee to consider the question of state trading in India under the Chairmanship of Dr. P. S. Deshmukh.

The committee submitted its report in 1950 but due to changes in economic conditions of the country, the government again set up a Three Member Committee in 1956 under Shri S. V. Krishna Murti Rao. The committee recommended the setting up of the State Trading Corporation in India. Consequently, the State Trading Corporation of India was set up in 1956.

On the recommendation of the Deshmukh Committee chaired by Dr. P. S. Deshmukh and the review committee headed by Shri S.V. Krishna Murti Rao. The Government accepted the proposal of establishing the State Trading Corporation a registered body under Indian Companies Act.

Establishment of the State Trading Corporation (STC)

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 Project and Equipment Corporation of India Limited.

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.

Management the State Trading Corporation (STC)

The State Trading Corporation is a registered company under Indian Companies Act and managed by a Board of Directors including both executive and non-execu­tive directors. It is headed by a Chairman.

Objects of the STC

The main objects of the STC are as follows:-

1. To organize 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.
2. 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 rationalizing distribution.
3. To implement such special arrangement for imports/export, internal trade or distribu­tion of particular commodities as the Union Government may specify in the public interest.
4. To arrest the declining trend in exports or to boost export by introducing new products in new markets.
5. To assist small exporters in their export trade.
6. To assist export-oriented organizations in their export and financial and organizational activities.

Workings of STC

The State Trading Corporation has completed 54 years of its existence. It has played a commendable role in achieving its objectives for which it was established.

Its workings can be evaluated by the facts written below:

1. The Turnover of the STC

The turnover of the STC over the years has increased. Before 1971-72 the turnover was quite insignificant but after that the increase was significant. The exports reached to the highest peak during 1980-85 and started declining afterwards.

In the beginning the STC efforts were guided by the policies of the Government. But in latter years it has developed the non-canalized exports such as of items marine products, garments, engineering goods and products and textiles.

2. Important Products

It deals in nearly 3000 commodities including agricultural and consumer items and items of construction materials, software, miscellaneous engineering items, fresh and processed food, leather and leather products, meat and marine products. The major imports of STC are edible oils, cement, explosives, natural rubber standard and glazed newsprint. Its trade is stretched over 115 countries.

Progress in Other Fields

The STC has taken various steps in different fields. These are:

1. It has diversified its product range and continued to add new items to its export basket like orthopedic shoes, sports shoe; upper compressors. H.D. Pipe etc.
2. Trying to spearhead the national effort to identify new markets for Indian commodities and manufactured goods and establish itself in these markets on long-term basis.
3. It has established 100 per cent export oriented production units mainly with foreign collaboration and equity participation and 100 per cent buy-back arrangements.
4. It has developed a reliable supply base for production of quality goods in association with the state undertakings, co-operative organisations and other in selected and identified sectors. If necessary STC shall undertake investments for development of such production base.
5. It has taken steps for improvement in quality grading, packing etc.
6. The STC also performs serving functions thereby bringing, buyers and sellers together and assisting them in fulfilling business contracts. It assists Government departments and industrial concerns in procuring supplies of plant and machinery from abroad. In some cases, it settles trade disputes amicably between Indian and foreign parties.
7. The original idea of its setting up was to develop foreign trade with socialist countries. It has therefore improved relations with countries of socialist block but at the same time, its operations are wider with non-communist countries.
8. The STC marketing expertise has been of particular advantage to small industries because they are unable to participate in foreign trade without STC support.

Weaknesses of the State Trading Corporation (STC)

There are certain inherent weaknesses of the STC, pointed out in a study conducted by Indian Institute of Management, Ahmedabad were:

1. Though the objectives of the STC were quite clear and well defined but it has not taken any major entrepreneurial decision of its own so far.
2. There seems to be no guidelines for the choice of new products to be exported and new markets to sell its products.
3. Not much expertise has been developed to locate and develop sources of supply for exportable products and also for procuring imports from sources of supply abroad.
4. Much of the expertise is in operation as an agent, in processing indents and tenders and transportation and distribution not in merchandising, procurement and marketing.
5. The set back in the exports of non-canalized items can be attributed to the STC’s failure to develop an appropriate supply base and take adequate promotional step among importers.

The other weaknesses which are also important are:

(a) It is guided by the bureaucrats who lack business experience and initiative, businessmen with practical knowledge should replace them.

(b) The interlocking of the activities of the Government of India and the STC makes possible the concealment of inefficiency under intricate official procedure. There is an urgent need of coordinating the trade of Private Traders and the STC.

(c) Moreover, the STC offices abroad have not been in a position to create an impact.

Conclusion

On the whole, the STC has developed a sound infrastructure for development of exports through it about 20 branches in India and 18 overseas offices and a large force of trained marketing personnel. Foreign offices provide market intelligence and can pursue the STC business matters with the various parties concerned.

With this sound infrastructure, STC should not only act as a casualising agency but should also make efforts to create an image of an effective trading house on lines of Japanese trading houses. It should provide new dimensions and leadership as the biggest export house in the country. It has stepped forward towards achieving its objectives of boosting exports.

Metals and Minerals Trading Corporation of India (MMTC) the largest international trading company of India and the first Public Sector Enterprise was established in 1963.

This enterprise has been accorded the status of “FIVE STAR EXPORT HOUSE” by Government of India for long Standing Contribution to Exports.

This corporation is one of the two Highest Foreign Exchange earner for India is a leading international trading company with a turnover of over US $ 5 billion.

MMTC’s diverse trade activities encompass third country trade, Joint Ventures, link deals all modern day tools of international trading. Its vast international trade network which includes a wholly owned international subsidiary in SINGAPORE spans almost in all countries in Asia, Europe, Africa, Oceanic and America giving MMTC a global market coverage.

Aim of Metals and Minerals Trading Corporation of India (MMTC)

As the largest trading company of India and a major trading company of Asia MMTC aims at improving its position further by achieving sustainable and viable growth rate through excellence in all its activities generating optimum profits through total satisfaction of shareholders, customers, suppliers, employees and society.

Objectives of Metals and Minerals Trading Corporation of India (MMTC)

1. To be a leading International Trading House in India operating in the competitive Global trading environment with focus on “bulk” as Core competency and to improve returns on capital employed.
2. To retain the position of single largest trader in the country for product lines, like minerals, metals and precious metals.
3. To promote development of trade related infrastructure.
4. To provide support services to the medium and small scale sectors.
5. To render high quality of service to all categories of customers with professionalism and efficiency.
6. To streamline system within the company for settlement of commercial disputes.
7. To upgrade employees skills for achieving higher productivity.

Management of Metals and Minerals Trading Corporation of India (MMTC)

1. Chairman and Managing Director
2. Two Additional Secretary

• Additional Secretary and Financial Advisor, Department of Commerce
• Additional Secretary, Department of Commerce

3. Five Directors

• Director Finance
• Director Marketing
• Director Personnel
• Director Marketing
• Director Marketing

MMTC’S Position in the World Market

MMTC is a major global player in the minerals trade and is the single largest exporter of minerals from India, with its comprehensive infrastructural expertise to handle minerals, the company provides full logistic support from procurement, quality control to guaranteed timely deliveries of minerals from different ports, through a wide network of regional and port offices in India as well as international subsidiary.

MMTC has won the top export award from Chemicals and Allied Products Export Promotion Council (CAPEXIL) as the largest exporter of minerals from India for the seventeenth year in a row. MMTC continues to lead India’s foray in mineral exports with global success for four decades by redefining standards of global excellence by customer satisfaction world-wide. It continues to be the largest supplier of Iron ore, handling about 15% of India’s total exports.

MMTC has managed with commendable elan (impetuosity) the bulk operations spread across far-flung areas in the mineral rich states of the country and by exporting minerals from all the major parts of India, thus utilizing the extensive Network of infrastructure facilities.

MMTC drive for excellence is re-in forced by its marketing thrust in traditional markets like Japan, South Korea and Pakistan. MMTC is the Catalyst (re-composition of elements) in developing the Chinese market for Indian Iron ore. MMTC India’s largest foreign trade enterprise, reiterates its commitment to augment India’s share in the global market for minerals and ores. For our consistent and sustained performance in the global arena, we deeply thank our valued patrons, associates and partners who have helped us to react the pinnacle (highest point) of global standards.

MMTC’s role in the Nation’s mineral export does not stop with increasing the volume. MMTC has been making certain strategic plans which would facilitate in not only sustaining the present level (pressure) of exports but also equip the country to meet the challenges of larger volume of exports in future.

One of the bottle necks in increasing the Indian Iron Ore exports in the deficiency in port facilities especially in the East-Coast where the operations are free from the vagaries of weather-like closing of port operations during the monsoon period in Goa, Mangalore, Bellikari etc. In this direction, MMTC has been successful in obtaining an exclusive right to develop a temporary Iron Ore Terminal at Ennore near Chennai.

MMTC Unique Position in Imports

As An Importer of Fertilizers

MMTC has remained one of the largest institutional buyers of fertilizers across the globe. MMTC has built this unique position through its continued presence for about four decades in the fertilizers arena internationally. MMTC has been successful in building confidence both amongst its suppliers as well as its buyers in India and abroad through its unsuited transparency in dealings and commitments to contractual terms of international trade.

MMTC through these four decades of buying, selling and net working has created a strong leverage for itself benefiting both the suppliers as well as the buyers. It thereby adds value in the supply chain with its reliable sourcing ability.

Thus MMTC remains the single unique window for buying and selling of all fertilizer products globally. Thus MMTC has become a major fertilizer marketing company in India through its planned forward, integration of its import activities.

MMTC is the single Largest Bullion Trader in the Indian Sub-Continent

MMTC is the largest importer of gold and silver in the Indian sub-continent handling about 100 MT of gold and 500 MT of silver annually. It has opened retail Jewellery Show Room at Maker Bhawan in Mumbai. It supplies branded hall marked gold and Studded Jewellery. It has also opened a DUTY FREE Jewellery store in the Departure Longue at SAHAR International Air Port Mumbai, India.

Agro Products and MMTC

MMTC (A Government of India Enterprise) is a global player in the Agro-trade with its comprehensive infrastructural expertise to handle agro-products. MMTC Limited provides full logistic support procurement, quality control to guaranteed timely deliveries of agro-products from different parts of India through a wide network of regional and port offices in India and its control abroad.

Activities of MMTC beyond Trading

Social and Welfare Activities of MMTC

MMTC’s Social and Welfare activities promote welfare of the employees through various schemes like sports activities, liberal loan facilities, like house building, advance convergence loan, household loan, marriage advances etc.

MMTC also provides subsidized canteen facilities, medical treatment, residential accommodation in some of the major cities for its employees. MMTC also takes care of employee’s families through merit scholarship, tuition fee, re-imbursement etc. It is committed towards environmental up keep through afore station in the mining areas development of tribal areas and infrastructural development through rail links, port facilities etc.

HRD Mantra in MMTC

HRD Mantra in MMTC is to provide more and more job enrichment opportunities to all, so as to ensure that employees remain motivated to realize their full potential for organizational goals and self-development. Opportunities are also provided to all to enrich their knowledge base and technical skills through in-house training programmes and through trainings/seminars organized by reputed outside agencies.

Human resource development in MMTC, therefore is a continuous exercise compatible with the change in business patterns and technological innovations in an era of diversification and search for new business opportunities. Not with-standing the culture of a Public-Sector Organization.

We in MMTC realise that our most importance asset is the employee. We should design our HR policies to meet the above objective.

Following are some of the HR Policies followed in MMTC

1. In an IT driven culture, computer literacy is imparted to all employee’s.
2. Non-graduate employees are encouraged through various incentive schemes to become graduates. Likewise, post-graduate qualifications are encouraged through incentives for promotion to higher levels.
3. Graduate employees are encouraged to obtain professional qualifications through corporate sponsorships.
4. Through job rotation employees are constantly motivated to acquire knowledge and operational skills in different areas of company’s operations. This exercise obviously prepares employees for managing higher positions more completely.
5. As an incentive to better performers merit based promotions are considered.
6. Regular training programmes for upgrading employee, skills, knowledge and attitudes in areas like IT, ERP, e-commerce, international training practices, general management techniques etc. are organized in an effort to keep employees morale and commitment high.
7. Specialization is encouraged in higher management positions through specialized management development programmes arranged within India and outside India.
8. General management training programmes for all categories of managers are periodically organized through reputed institutions like IIM, IIFT, MDI etc.
9. Periodical training programmes are also organized for the development of SC/ST/OBC employees and women employees.

Career with Metals and Minerals Trading Corporation of India (MMTC)

MMTC has been the Front-runner in selecting brilliant graduates for appointment as Deputy Mangers (El) the indication level for executives in trading and financial discipline through prestigious institute by way of campuses interviews. Strapping reservations for SC/ST/OBC are followed both in recruitment and promotions. To motivate talent within the company staff cadre employees are encouraged to become Deputy Managers through Limited Competitive Test.

Minimum experience for promotion from one level to the next higher level in three years depending upon availability of vacancies. Recruitment of staff in MMTC is banned for the time being while the corporation is focusing on skill development of existing manpower.

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment (FDI). The benefits a company gains by being in a special economic zone may mean that it can produce and trade goods at a lower price, aimed at being globally competitive. In some countries, the zones have been criticized for being little more than labor camps, with workers denied fundamental labor rights.

The definition of an SEZ is determined individually by each country. According to the World Bank in 2008, the modern-day special economic zone typically includes a “geographically limited area, usually physically secured (fenced-in); single management or administration; eligibility for benefits based upon physical location within the zone; separate customs area (duty-free benefits) and streamlined procedures.

Objectives of SEZs

In an era of intense competition for markets and investment, SEZs attract export-oriented foreign direct investment and develop industrial skills and resources to successfully compete in the international economy.

• They can promote foreign trade.
• They can create employment.
• They can develop relatively less developed areas, and thus reduce disparities in socio-economic development, besides accelerating industrialization and urbanization.

The SEZ Scenario in India

The Union government notified SEZ rules in February 2006 operationalizing the Special Economic Zones Act, 2005.

Some eight working SEZs were there initially, all converted from what were export processing zones. These SEZs are in Gujarat (Kandla and Surat), Kerala (Kochi), Maharashtra (Santa Cruz, Mumbai), West Bengal (Falta), Tamil Nadu (Chennai), Andhra Pradesh (Visakhapatnam) and Uttar Pradesh (Noida).

Some other SEZs that have come up in the; countries as of 2009-10 were as follows:

(i) Nokia Special Economic Zone, Tamil Nadu (telecom equipments)

(ii) Apache SEZ, Andhra Pradesh (footwear)

(iii) Mahindra City SEZ, Tamil Nadu (apparel and fashion accessories, IT, hardware-auto ancillary)

(iv) Wipro Limited, Andhra Pradesh (IT)

(v) ETL Infrastructure IT SEZ, Tamil Nadu (IT)

(vi) Flextronics SEZ, Tamil Nadu (electronic hardware)

(vii) Divvy’s Laboratories Ltd., Andhra Pradesh

(viii) Wipro Limited, Karnataka—2 SEZs in Sarjapur and Electronic City (IT)

(ix) Biocon Limited, Karnataka (biotech)

(x) Manyata Promoters Private Ltd., Karnataka (IT)

(xi) Hyderabad Gems Ltd, Hyderabad (gems and jewellery)

(xii) Serum Bio-Pharma Park, Maharashtra (pharma)

(xiii) Mundra Port and Special Economic Zone Gujarat

(xiv) Moser Baer SEZ, Noida, Uttar Pradesh (non- conventional energy)

(xv) Chandigarh Administration, Chandigarh (IT)

(xvi) Maharashtra Airport Development S Corporation Ltd, Maharashtra (multiproduct)

The SEZ scheme got mired in controversy leading to a freeze on them for some time.

On April 5, 2007, the government lifted the freeze on approving new SEZs but changed several parameters to make the policy more acceptable. The empowered Group of Ministers (eGoM) which gave the go-ahead heeded the political concerns over crucial features of the policy.

The eGoM introduced a 5,000-hectare ceiling on the size of SEZs, tighter norms for utilization of land for core activities (raising the minimum share of the processing area within them from 35 per cent to 50 per cent and reviewing list of non- processing activities), and barring states from getting into land acquisition. More importantly, – the eGoM said that at least one member of each displaced family be given a job in the SEZ.

However, no cap on the number of SEZs was fixed and the objections raised by the finance ministry, particularly those related to loss of revenue because of tax sops to developers, was turned down by the eGoM.

The eGoM also settled for a new comprehensive policy on land acquisition. To ensure that existing projects do not get hit, the ministerial panel decided to fix February 10, 2006 as the cut-off date.

The eGoM’s new norms for the SEZs have provided a partial solution to this controversy- marred concept. Firstly, the main objective of the policy—promoting the production of goods and services rather than real estate and commercial development—is sought to be strengthened by raising the processing area in an SEZ uniformly to 50 per cent of its extent.

Secondly, a ceiling of 5,000 hectares is fixed on the size to keep the administrative and social costs of dislocating people from farms and homes manageable. Thirdly, the most significant change is the ban on the exercise of the state’s power of eminent domain to compulsorily acquire land in the case of pending applications for SEZs.

Compulsory acquisition has been the lightning rod for protests by farmers, social activists and political parties and the change in policy should serve to defuse much of the opposition to SEZs on the ground. The use of the Land Acquisition Act of 1894 involves the obvious inequity in compulsorily acquiring land at low prices from farmers, ostensibly for a public purpose, and handing it to industries and real estate developers.

The change of use invariably saw land values increase several fold, the gains of appreciation going to government agencies, industries, and real estate developers rather than to the farmers. With SEZ developers now having to buy land from willing sellers possibly at much higher prices, farmers will no longer be uprooted against their will.

Still, two major policy areas remain unaddressed. Firstly, income tax concessions and exemption from import duties, service tax, Central sales tax, and state taxes are offered to SEZ developers and units. These results in a substantial loss of revenue and the question arise if such tax incentives-led industrialization is sustainable.

Secondly, rapid growth and industrialization have brought to the fore the issue of conversion of farmland and wasteland to industrial, commercial, and residential uses. The reform of land use planning laws and regulations to make them more transparent and rule-based and the development of efficient land markets brook no delay. An important component of the policy should be the rehabilitation of farmers and farm labour, who will be unsettled from their traditional avocations.

(i) Area of an SEZ capped at 5,000 hectares; States can fix lower ceiling.

(ii) State governments barred from acquiring land; developers will have to do it on their own.

(iii) At least one job per family of those displaced.

(iv) Developers to devote at least 50 per cent area to core activities like manufacturing.

(v) List of non-processing activities may be reviewed.

(vi) No cap on number of SEZs.

(vii) Tax exemptions.

The Appearance of Modern SEZs

The first modern SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first was in Shannon Airport in Clare, Ireland. In the 1970s, zones were established in Latin America and East Asia. The first one in China appeared in 1979, the Shenzhen Special Economic Zone. The first four Chinese SEZs were all based in southeastern coastal China and included Shenzhen, Zhuhai, Shantou, and Xiamen. China allowed, and continues to allow, these areas to offer tax incentives to foreign investors and develop their infrastructure without approval. The SEZs essentially act as liberal economic environments that promote innovation and advancement within China’s borders. The SEZs continue to exist with great success.

The success of Shenzhen and the other SEZs prompted the Chinese government to add 14 cities plus Hainan Island to the list of SEZs in 1984. The 14 cities include Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qinhuangdao, Qingdao, Shanghai, Tianjin, Wenzhou, Yantai, and Zhanjiang. New SEZs are continually being declared and include border cities, provincial capital cities, and autonomous regions.

Benefits of SEZ

The benefits of operating within an SEZ include tax breaks for business owners and independence. However, the macroeconomic and socioeconomic benefits for a country using an SEZ strategy are a subject of debate.

In the case of China, mainstream economists agree that the country’s SEZs helped liberalize the once traditional state. China was able to use the SEZs as a way to slowly implement national reform that would have been otherwise impossible. Studies have also found that SEZs elsewhere increase export levels for the implementing country and other countries that supply it with intermediate products. However, there is a risk that countries may abuse the system and use it to retain protectionist barriers in the form of taxes and fees. SEZs also create an excessive bureaucracy that funnels money away from the system, which makes it less efficient.

• SEZs are subject to unique economic regulations that differ from other areas in the same country.
• SEZs are supposed to facilitate rapid economic growth by leveraging tax incentives to attract foreign investment and spark technological advancement.
• The first four SEZs in China were all based in the southeastern coastal region, including Shenzhen, Zhuhai, Shantou, and Xiamen.

Export Processing Zones (EPZs) can be summarized as a unit bearing clusters of specially designed zones of aggressive economic activity for the promotion of export. The main concept of Export Processing Zones was conceived in the early 1970s to promote the growth of the sickening export business of India. Further, the meaning of Export Processing Zones (EPZs) can be broadly defined as an area enjoying special government of India support with respect to fiscal incentives, tax rebates and other exclusive benefits for the growth of export.

Export Processing Zones (EPZs) also encompasses pre-defined infrastructural facilities and regulations pertaining to establishment of such zones and environmental stipulations, respectively. These Export Processing Zones of India were established to help the growth of Indian export commodities, especially from the fast growing sectors.

Objectives of setting up of EPZs

• Encourage and generate the economic development
• Encourage Foreign Direct Investments (FDI)
• To channel the sources of foreign exchange within the system in a phased manner
• Foster the establishment and development of industrial enterprises within the said zones
• Encourage and generate wider economic activities by encouraging foreign investments for the development of the zones
• To channel the foreign exchange earnings for the further development of these zones and explore new areas for the development of Indian exports
• Encourage establishment and development of Indian industries and business enterprises and facilitate with proper infrastructure Generate employment opportunity
• Upgrade labor and management skills
• Acquire advanced technology for increased productivity
• Ensure world class quality of products

Three-tier management system in EPZs

1. Tier one is headed by the Ministry of Commerce headed by the Commerce Secretary, which drafts and implements policies and reviews the performance of each such zones
2. Tier two is headed by the Board of Approval (BOA), which is responsible for examination of proposals for opening up of new enterprises in the zone and which is headed by a person of the level of Additional Secretary
3. The Development Commissioner, who is the chief executive of the Export Processing Zone, heads the three tiers. The Development Commissioner is vested with the power for the day-to-day function of the zone. Further, he is the head of functions relating to administration, approval of investment, and he also enforces various regulatory provisions.

Prominent Indian Export Processing Zones

• Kandla Free Trade Zone (KAFTZ), Kandla, Gujarat
• Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz, Maharashtra
• Cochin Export Processing Zone (CEPZ), Cochin, Kerala
• Falta Export Processing Zone (FEPZ), Falta,West Bengal
• Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu
• Noida Export Processing Zone (NEPZ), Noida, Uttar Pradesh
• Visakhapatnam Export Processing Zone (VEPZ), Visakhapatnam, Andhra Pradesh
• While the Santa Cruz Electronics Export Processing Zone (SEEPZ) is meant exclusively for the exports of electronics and gems and jewelry, all other zones are multi-product zones. 100% foreign equity is welcome in EOUs and EPZs

Export promotion has been defined as “those public policy measures which actually or potentially enhance exporting activity at the company, industry, or national level”. Although many forces determine the international flow of goods and services, export promotion is one of the principal opportunities that governments have to influence the volume and types of goods and services exported from their areas of jurisdiction.

Government of India, like in almost all other nations, has been endeavouring to develop exports. Export development is important to the firm and to the economy as a whole. Government measures aim, normally, at an over all improvement of the export performance of the nation for the general benefit of the economy. Such measures help exporting firms in several ways.

Export Promotion strategy promotes only the industries that have potential for developing and competing with foreign rivals. Since the goal is to trade abroad, there becomes competition, which in turn remedies the returns to scale. The main goal of the export promotion is to prepare the “potential” industries for competition with the foreign rivals. So the industries at their childhood must be protected for a while.

Exporters, facing the increasing competition, have to improve their technologies, their quality continuously in order to compete with their rivals. They have to make research and development studies.

Comparative advantage theory implies that a country must specialize in the production that uses the mostly possessed factors of production. By this way the structure of the overall industry is in harmony with the country structure. If the country has advantage in human capital then the EP strategy may be a remedy to the unemployment problem.

The indirect effect of the EP strategy appears in the export values of the countries. The increase in exports raises the foreign exchange inflow. However, there may be an increase in import expenditures due to the increasing income of the country, which in turn worsens the country’s trade balance.

The trade strategy of nation has impact not only on the volume and composition of foreign trade, but also on the pattern of investment and direction of development, entrepreneurial and business behaviour, consumption pattern, etc. Since the commencement of planned development, India followed a strong inward-oriented policy.

Import Substitution

Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports, with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.

Import substitution implies indigenous production of raw materials, intermediate goods and final consumer and capital goods. Import substitution was the major plank of India’s foreign trade policy during the early-years of economic planning.

Later, however, it was realized that large imports of capital goods and equipment would help the country build up domestic production capacity and help meet the domestic requirements. The presumption was in-built in the Mahalanobis strategy of heavy- industry-led growth. A further assumption of the strategy was that once the production capacity within the country was built up, it would be possible to give up imports to a large extent.

The progress of import substitution in the country was quite satisfactory. For instance, in the sphere of consumer goods we acquired the capacity to produce exportable surplus in which we are competing effectively in the international markets. Likewise, indigenous production of capital goods also expanded fast with the country gradually becoming self-sufficient in their production too.

But all this does not mean that the country’s requirements of imports have decreased or show signs of falling. On the contrary, India’s imports have been mounting.

The approach of ‘import and adapt’, continuously fell short of global advancement in technology. More importantly, imports keep our industry on its toes in terms of price, quality and technology. Hence, our policies and efforts should be geared to develop ways and means with which to finance the rising needs of imports in the country.

Export Promotion

The terms ‘export promotion’, ‘outward-orientation’, and ‘export-led growth’ have all been used interchangeably to describe the policies adopted in the successful developing countries. Import substitution and export promotion are not competitive, but each requires a different set of policies to be pursued. Three distinct phases can be seen in India’s approaches and policy towards exports.

(i) The early phase, which lasted up to about 1972-73, was one of extreme export pessimism with a fear that exports are subject to low growth in demand, high fluctuations in prices and lead to economic dependency.

(ii) The second phase began in 1973 after the first oil crisis and lasted for about ten years. In this phase, although-it was not explicitly stated, it was recognised that policies of import substitution by themselves could not bring about viability in India’s BOP.

(iii) In the third and more recent phase, exports are being seen as an integral part of industrial and development- policy. The anti- export bias of the policy has paved way for pro-export policy.

The policy has emphasized technological upgradation, increase in the size of plants, freer imports and domestic and international competition for the entire industrial sector as being essential for export promotion.

The ‘import substitution’ strategy of industrialization relied on encouraging domestic production to cater to the domestic market. This was sought to be realized by high tariffs and a high degree of protection granted to the domestic industry. The major drawback of this strategy was that it led to an inefficient and high cost industrial structure, which also adversely affected the prospects for export growth.

Thus, it worked as a ‘bias’ against exports. The argument for import liberalization rests on the need to reduce the protection granted to the domestic industry for domestic production, thereby reducing the ‘bias’ against exports.