A Decade of Economic Reforms - Review by RBI
[Source: RBI Report on Currency and Finance 2001-2002 dated March 31, 2003]

Module: 5 - External Sector

Trade Reforms - Removal of Quantitative Restrictions

India has been following a consistent policy for gradual removal of import restrictions since 1991, when the economic reforms were initiated. India began removing BoP related Quantitative Restrictions (QRs) unilaterally since 1996. QRs were removed on 488 items in 1996, 391 items in 1997 and 894 items in 1998. As per India’s commitments to the WTO, out of the remaining 1,429 items for which QRs were maintained on BoP grounds under the General Agreement on Tariffs and Trade (GATT) provisions, QRs on 714 items were removed on March 31, 2000 and the balance QRs on 715 items were removed on March 31, 2001. With this progressive removal of QRs maintained on BoP considerations, restrictions, still in force only relate to those items as permissible under Articles XX and XXI of the GATT on grounds such as security, health, safety, or moral conduct. While removing QRs, the Government has taken several safeguard measures (adjustment of tariffs, imposition of temporary QRs, safeguard duties, anti-dumping duties and restricting the import of certain agricultural products) in order to guard against any surge in imports on account of dumping. A high-powered Standing Group functions on a war footing for tracking, collating and analysing data on 300 sensitive items of importance to the public.

Reflecting the relaxation of quantitative restrictions, the proportion of canalised items in total imports in value terms declined from 27 per cent to 19 per cent between the ten-year period from 1988-89 to 1997-98. With effect from April 1998, 340 items were shifted from the ‘Restricted list’ to the ‘Open General Licence (OGL) list’. With effect from March 31, 1999, the convention of publishing a negative list for imports and exports was discontinued. The share of tariff lines without restrictions has now gradually increased to around 95 per cent since April 1, 2001 from a level of 61 per cent as on April 1, 1996.

The policy thrust on exports during the 1980s and 1990s was promoted through several schemes. These schemes have been refined further during the 1990s and new schemes have also been introduced.

• Export Processing Zones (EPZs) were set up as enclaves separated from the Domestic Tariff Area (DTA) by fiscal barriers and intended to provide an internationally competitive duty free environment for export production at low cost. Eight of the EPZs have since been converted into Special Economic Zones (SEZs).

• The Export Oriented Units (EOUs) Scheme, which is complementary to the EPZ scheme, was set up in 1981 under which a unit can be set up in any of the seven EPZs or at any other location in the country and be eligible for a host of liberal package of incentives which include same entitlements as given to EPZs.

• In order to fully exploit the potential in the Information Technology (IT) sector and to promote IT related exports, the Central Government has set up Software Technology Parks (100 per cent EOUs) since 1991.

• To build a strong and efficient electronics industry with good export potential, Electronic Hardware Technology Parks (EHTPs) were also set up.

• The SEZ Scheme was announced in March 2000 in order to promote export production in a hassle-free atmosphere.

• The proposal to set up Agriculture Economic Zones (AEZs) was announced in March 2001 to promote the export of agro and agro-based products, and 45 AEZs have been sanctioned so far. The Central Government would assist the State Governments in the development of necessary infrastructure, flow of credit and other facilities for promoting agro exports.

In addition, schemes were put in place for imports undertaken by exporters so as to neutralise the impact of any duties on those imports. Such schemes are Export Promotion Capital Goods (EPCG), Duty Free Replenishment Certificate (DFRC), Duty Remission Scheme and the Duty Entitlement Passbook (DEPB) Scheme. The issue of multiplicity in these schemes is being addressed.

Steps have also been taken to simplify the rules and procedures and improve the speed of transactions in the Directorate General of Foreign Trade (DGFT) with the help of information technology aimed at reducing transactions costs. A common commodity classification for imports and exports has been adopted by both, the Directorate General of Commercial Intelligence and Statistics (DGCI&S) and the Central Board of Excise and Customs (CBEC) to eliminate the classification disputes. In the area of customs, the percentage of physical examination of export cargo has already been reduced substantially except for few sensitive destinations while a major push is being given to Electronic Data Interchange (EDI) and ‘System based Appraisal’. Export Promotion Councils have been set up to function as a conduit between the exporters and the Government and to provide essential services required by the exporters.

The economic rationale for establishing Special Economic Zones (SEZs) is not clearly laid down in trade theory. It is, however, obvious that these Zones can be justified either on considerations of equity where a less developed area is accorded special tax and non-tax benefits or on considerations of efficiency, where a region has a spatial advantage in terms of costs. SEZ, as an institutional measure, supports the economic policy shift from import substitution to export promotion with a view to promoting export-led growth to facilitate larger incomes and employment. For these reasons, a large number of countries have taken initiatives to set up SEZs over the last half century or so. India followed suit in recent years, with a view to improve its competitive position.

The Special Economic Zone (SEZ) Scheme was announced on March 31, 2000 in order to promote export production in a hassle-free atmosphere. A separate chapter on SEZ was added to the EXIM Policy for the five-year period 1997-2002 in April 2001. SEZs are specifically delineated duty-free enclaves, deemed as foreign territory for the purposes of trade operations and application of duties and tariffs. SEZs can be set up for the manufacture of goods and the rendering of services, production, processing, assembling, trading, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery and articles thereof or in connection therewith. Units for generation/ distribution of power can also be set up in the SEZs. Goods going into the SEZ area from the Domestic Tariff Area (DTA) are treated as deemed exports and goods coming from the SEZ area into DTA are treated as if the goods are being imported.

The incentives offered under the SEZ Scheme include duty-free importation/domestic procurement of goods for the development of SEZ and setting up of units, 100 per cent Foreign Direct Investment (FDI) in manufacturing sector under the automatic route, 100 per cent income tax exemption for the first five years and 50 per cent tax for two years thereafter. Other incentives include sub-contracting of part of production abroad, reimbursement/exemption of Central Sales Tax on domestic purchases by the SEZ units and retention of 100 per cent foreign exchange earnings in the Exchange Earners Foreign Currency (EEFC) Account.

In the EXIM policy for 2002-07 as announced in March 2002, SEZs were given the following concessions: Overseas Banking Units (OBUs) which would, inter alia, be exempt from CRR and SLR requirements would be permitted to be set up in SEZs. These OBUs would give access to SEZ units and SEZ developers to international finance at international rates. SEZ units would be extended income tax exemptions and would be exempt from External Commercial Borrowing (ECB) restrictions and would be allowed to make overseas investment and carry out commodity hedging. SEZs would be exempted from Central Sales Tax in respect of supplies from DTA and transactions from DTA to SEZs would be treated as exports under the Indian Income Tax and Customs Acts.

So far, eight existing export promotion zones have been converted into SEZs and approval has been given for the setting up of 17 SEZs in the States of Gujarat, Maharashtra, Tamil Nadu, West Bengal, Orissa, Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Karnataka.

[ Source :
1. Export Import Policy 2002-07, Ministry of Commerce and Industry, Government of India, March 2002.
2. Government of India, Press Releases dated July 19, November 22, 2002 and March 3, 2003.]

Trade finance is a crucial element in the design of trade policies. From time to time, the Reserve Bank has undertaken several measures to ensure adequate and timely availability of credit for exports at competitive interest rates. The Reserve Bank’s export credit refinance schemes have played a pivotal role in this area. Commercial banks have been providing credit to exporters at pre-shipment and post-shipment stages, both in rupees as well as foreign currency. The rupee export credit has been generally available at rate of interest linked to the Prime Lending Rate (PLR). The export credit in foreign currency is provided at internationally competitive interest rates linked to London Inter-Bank Offer Rate (LIBOR) or similar interest rates. The Reserve Bank has been adjusting interest rates on rupee export credit from time to utime taking into account the need to maintain competitiveness by looking at interest rate differentials, as also other factors like inflation and developments in financial markets. The Reserve Bank has also taken measures to support institutional arrangements for export promotion, such as policy initiatives to provide a liberalised environment for the operations of SEZ units. These measures include:

1. exemption from interest rate surcharge on import finance;

2. release of foreign exchange to DTA units for buying goods from EOU/EPZ/SEZ units;

3. permitting 100 per cent retention of foreign exchange in Exchange Earners Foreign Currency (EEFC) accounts;

4. permitting overseas investment by SEZ units from the EEFC accounts through the automatic route, write-off of unrealised export bills and

5. permitting SEZ units to enter into a contract in overseas commodity exchanges or markets to hedge the price risk in the commodity on export/import provided that the contract is made on a ‘stand alone’ basis.