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GCSA QUESTION NO. 3

Q.3 What policy framework has been laid down by government of India in making the country and its business enterprise competitive? Discuss few policy measures of GOI to develop competitiveness.

Ans: Trade Policy Measures

The government has announced many trade policy measures to increase the competitiveness of Indian Business sector in the Annual Supplement to foreign trade policy released on 5 June 2012. Many measures were also taken by the government in Union Budget 2012-13 and the RBI in its monetary and credit policies during the course of the year to help internationalization of Indian businesses.

Policy for Promoting State wise Exports

The top five states in India’s exports in 2011-12 were Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, and Karnataka, accounting for 63.4 percent of India’s exports.

The Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) Scheme provides assistance to state governments/ union territory (UT) administrations for creating for creating appropriate infrastructure for development and growth of exports. The budget outlay for financial year 2012-13 under the ASIDE scheme is 655.5 crore of which 573.22 crore has been sanctioned/released till the end of January 2013. The outlay has two components: state and central. Statewise allocation under the state component of ASIDE shows that the top five states in terms of allocation in 2012-13 are Gujrat, Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh which are also the top five states in India’s exports. Among the northeastern states, those with significant allocation are Assam, Meghalaya and Tripura.

Special Economic Zones

Special Economic Zone Act and Rules were notified in February 2006. Formal approvals have been granted for setting up of 579 SEZs, of which 384 have been notified. Of the total employment provided to 9,45,990 persons to SEZs as a whole, that to 8,11,286 persons is incremental employment generated after February 2006 when the Act had come into force. This is apart from the million mandays of employment created by the developer for infrastructure activities. During 2010-11, physical exports from SEZs were worth Rs 3,15,867.85 crore. In the next year (2011-12), the figure rose to Rs 3,64,477.73 crore, registering 15.4 per cent growth. In the first half of 2012-13, it has been to the tune of Rs 2,39,626.78 crore approximately, registering a growth of 36 per cent over exports in the corresponding period of the previous year. The total investment in SEZs till September 30, 2012 was Rs 2,18,795.41 crore approximately, including Rs 2,14,759.90 crore in the newly notified zones. Hundred per cent Foreign Direct Investment (FDI) is allowed in SEZs through the automatic route. A total of 160 SEZs are exporting goods & services, of this 98 are IT/ITeS, 17 multi-products and 50 other sector-specific SEZs. The total number of units in these SEZs is 3,306.

Contingency Trade Policy and Non-Tariff Measures

Anti-dumping investigations initiated by all countries, which hit a high in 2001, declined almost steadily till 2007.”They picked up once again in 2008 but started declining to reach a low in 2011. However, in 2012 they have again increased with 114 investigations (up to June) compared to 68 in 2011In 2011, India topped the list of countries initiating such investigations, but in 2012 (up to June) Brazil is at the top followed by Argentina and Canada. India, the US, and EU with seven investigations each are at fourth spot. Trade and investment measures have pointed towards a slowdown in trade restrictive measures; the persistence of the global crisis has added to political and economic pressures on governments to resort to contingency trade policies and non tariff measures. Moreover the new measures implemented over the past five months that can be considered as restricting or potentially restricting trade add to the restrictions adopted since the outbreak of the global crisis. The trade coverage of the restrictive measures put in place since October 2008, excluding those that have been terminated, is estimated to be around 3 percent of world merchandise trade and 4 per cent f trade of G-20 economies.

Some Important Trade Policy Measures

Budget Related

Imports of equipment for initial setting up or substantial expansion of fertilizer projects are fully exempted from basic customs duty of five per cent for three years up to March 31, 2015.

  • Basic customs duty on equipment required for high speed trains safety and efficiency cut from 10 per cent to 7.5 per cent. The basic customs duty was also reduced on some water soluble fertilizers and liquid fertilizers, other than urea, from 7.5 per cent to 5 per cent and from 5 per cent to 2.5 per cent.
  • Proposal to fully exempt from basic customs duty parts of aircraft and testing equipment imported for maintenance, repair and overhaul purposes.
  • Reduction in basic customs duty on machinery and instruments for surveying and prospecting from 10 per cent or 7.5 per cent to 2.5 per cent. In addition, full exemption from basic customs duty is being provided to coal mining projects..
  • Reduction in basic customs duty on plant and machinery imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants from 7.5 per cent to 2.5 per cent

Credit Related

RBI on 23rd November 2011 announced two major changes in the External Commercial Borrowings (ECB) guidelines.

1. Increase in the ceiling of all-in-costs

In the light of increased credit spreads and tighter liquidity in global financial markets, RBI has increased the all-in-cost ceilings for a 3yr – 5yr tenor ECB by 50 bp, to 6M LIBOR+350 bp. The ceiling for 5yr + tenor ECB remains unchanged at 6 M Libor + 500 bps.
The increased ceiling is to come into effect immediately and will be applicable till 31st March 2012. Thereafter it is subject to review.

2. Parking of ECB Proceeds

RBI has further stated that the ECB raised abroad for the purpose of rupee expenditure have to be immediately converted into rupee and bought to the credit of AD category I bank in India. Also the rupee funds as per the previous guidelines cannot be invested in capital markets, real-estate and inter-corporate lending.

However proceeds of ECB raised to meet foreign exchange expenditure of the project, can be retained overseas. There is no change in this regard and the ECB funds parked overseas, like before are permitted to park into liquid assets like such as CDs, T-bills and other monetary instruments with maturity less than a year and ratings not less than ‘AA-‘.

The above steps have been taken by RBI to ensure availability of long-term funding to the corporate clients in the current times of tight credit and risk aversion. Also one of the motives of RBI is to ensure smooth inflow of FDI flows in to the country , which can also act as a support to stronger rupee.

3. Foreign Currency – INR Swaps

RBI by a separate measure, removed the ceiling of USD 100 mn on the net supply of foreign exchange resulting from Rupee-FC swaps. As a result, Indian corporates are freer to swap long term rupee loans in to USD notionally, in order to save interest costs. This however would be of limited significance, as the Indian Corporate swapping rupees, say , to USD is not allowed to hedge the currency and interest rate risks for repayment of the notional USD loan.

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