Está en la página 1de 200

International Business

MBA -13

1 - 24

ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION

MASTER OF BUSINESS ADMINSTRATION

SECOND YEAR

PAPER – 2.5

INTERNATIONAL BUSINESS
LESSONS: 1 - 24

Copyright Reserved
(For Private Circulation Only)

1
International Business

INTERNATIONAL BUSINESS

LESSON 1 - 12
Written by

Dr. K. VENUGOPALA RAO


S.K Institute of Management
S. K University
Anantapur

LESSON 13 - 24
Written by

Dr. V. MANICKAVASAGAM
Department of Corporate Secretary ship
Alagappa University
Karaikudi.

2
International Business

M. B. A.
SECOND YEAR

INTERNATIONAL BUSINESS
CONTENTS

Lesson Title Page


No. No.
1. Basis of International Trade 4
2. Gains from International Trade 11
3. Terms of Trade 17
4. Balance of Payments 24
5. The Out-Look for Export Marketing 30
6. Barriers to International marketing 37
7. Foreign Exchange Control 43
8. International Economic Organisation and Forums 53
9. World Bank (IBRD) 62
10. Asian Development Bank (ADB) 65
11. International Monetary System 70
12. International Liquidity 77
13. Analysis of India’s Exports Trend in Foreign Trade 86
14. Export Finance and Credit 101
15. Importance of International Marketing 113
16. Export Credit Guarantee Corporation 135
17. Export Market Research 145
18. Methodology and Techniques of Market Research 153
19. Export Licensing Procedure 164
20. Banking Procedure for Negotiation of Documents 178
21. Import Procedure 183
22. Import Policy of India 189
23. Highlights of New EXIM-Policy: 1992-97 195
24. Canalisation of Exports and Imports 198
Key Words 200

3
International Business

LESSON – 1

BASIS OF INTERNATIONAL TRADE


OBJECTIVES
When you have completed this unit, you should understand the following:
 Basis of International Trade
 Gains from International Trade
 Terms of Trade
 Balance of Payments
STRUCTURE
1.1 Preamble
1.2 Theories of International Trade
1.3 The Opportunity Cost Theory
1.4 Summary
1.5 Assignment Questions
1.1 PREAMBLE
By the term 'trade' is meant mercantile transaction or exchange of goods and
services among people or associations of people.
When exchange of goods and services take place between two individuals or
firms or institutions in the same country, such trade is called ‘domestic’ or
‘internal’ trade.
When exchanges of goods and services between individuals living in different
countries take place, such trade is called ‘international trade.’ To be more specific,
international trade in goods and services may take place between two individuals of
different countries, or between two firms or companies, between two countries or
between Governments of any two countries. Such trade transaction is called
‘international trade'. Thus, under the title international trade, India may buy or sell
goods and services to or from other countries may borrow capital or lend capital to
or from other countries; may buy technical services from other countries or sell
such services to any country. All such trading transactions between peoples of any
two countries constitute international trade.
1.2 THEORIES OF INTERNATIONAL TRADE
A number of theories have been put forward to explain the basis of trade
between nations. This chapter gives an outline of the important theories that
explain the basis of international trade.
The Comparative Cost Theory
In a nutshell the Comparative Cost Theory maintains that if trade is free, each
country in the long run, will tend to specialize in the production and export of those
commodities in whose production it enjoys a comparative advantage, and to obtain
by import those commodities which can be produced at home at a comparative

4
International Business

disadvantage; and that such specialisation is to the mutual advantage of the


countries participating in it.
David Ricardo illustrated the Comparative Cost Theory, in 1817, by using a
two-country, two-commodity model. His, illustration of the comparative cost theory
shows that trade between nations can be profitable even if one of the two nations
produces both the commodities more efficiently than the other nation provided that
it can produce one of these commodities with a comparatively greater efficiency
than the other commodity.
The law of comparative advantage indicates that a country should specialise in
the production of that commodity in which it is more efficient and leave the
production of the other commodity to the other country. The two nations will then
have more of both goods by engaging in trade.
In his celebrated "two countries, two commodity model". Ricardo has taken the
production costs of cloth and wine in England and Portugal to illustrate the
comparative cost theory.

No. of Units of Exchange Ratio


No. of Units of
Country Labour per Unit of between Wine and
Labour per Unit of
Cloth of Cloth
England 100 120 1 wine: 1.2 cloth
Portugal 90 80 1 wine: 0.88 cloth

From the above example, it is evident that Portugal has an absolute superiority
in both the branches of production. However a comparison of the cost of production
80 ⎛ 90 ⎞
of wine with the ratio of the cost of production of cloth ⎜ ⎟ in both the
120 ⎝ 100 ⎠
countries reveals, that though Portugal has an absolute superiority in both the
branches of production of wine, for she has a greater comparative advantage over
⎛ 80 90 ⎞
England in wine relating to cloth ⎜ ⎟ , and import cloth from England which
⎝ 120 100 ⎠
has a comparative advantage in cloth production. England will gain by specialising
in producing cloth and selling it in Portugal in exchange of wine.
In the absence of trade between England and Portugal, one unit of wine
commands 1.2 and 0.88 units of cloth in England and Portugal respectively. In the
event of trade taking place, on the assumption that within each country labour is
perfectly mobile between various industries.
Portugal will gain if she can get anything more than 0.88 units of cloth in
exchange of I unit of wine and England Will gain if she has to part with less than
1.2 unit of cloth against 1 unit of wine. Hence, any exchange ratio between 0.88
units and 1.2 units of cloth against I unit of wine represents a gain to both the
countries. The actual rate of exchange will be determined by the reciprocal demand.

5
International Business

Thus, according to Comparative Cost theory, free and unrestricted trade


among nations encourages specialisation on a larger scale. It there by tends to
bring about;
i) The most efficient allocation of world resources as well as the maximisation of
world production;
ii) A redistribution of relative product demands, resulting in a greater equality of
product prices among trading nations: and
iii) A redistribution of relative resource demands to correspond with relative
product demands, resulting in a relatively greater equality of resource prices
among trading nations.
The two country two commodity model of Ricardo is based on the following highly simplifying
assumptions.
i) Labour is the only element of cost:
ii) Production is subject to the law of constant returns:
iii) International trade is free from all barriers:
iv) No transport cost.
Quite naturally, the comparative cost theory has been severely criticised for its
unrealistic assumptions.
It should, however, be stated that the Comparative Cost Theory does provide
some convincing explanation of the basis of International trade.
1.3 THE OPPORTUNITY COST THEORY
The Opportunity Cost Theory, propounded by Professor Gottfried Haberler In
1983, has been applied to the theory of International trade as a substitute for the
doctrine of Comparative Cost expressed In terms of labour cost or real cost.
The opportunity cost of anything is the value of the alternatives or other
opportunities which have to be foregone In order to obtain that particular thing. For
example, assume that a given amount of productive resources can produce either
10 units of cloth or 20 units of wine. Then the opportunity cost of 1 unit of cloth is
2 units of wine.
Thus, the opportunity cost approach defines cost in terms of the value of the
alternatives of other opportunities which have to be foregone in order to achieve a
particular thing.
According to the opportunity cost theory, the basis of international trade is the
differences between nations in the opportunity costs of productions of commodities.
As far as the basis of International trade and specialisation are concerned, the
logic behind the comparative cost approach is the same. But there is a notable
difference in the treatment. But under the comparative cost approach, we measure
the cost of producing wine In terms of labour or in terms of any real cost, but under
the opportunity cost approach, we measure, in contrast to the comparative cost
approach, the cost of producing wine in terms of the amount of cloth foregone in
order to produce one more unit of wine.

6
International Business

Heckscher-Ohlin Thesis
Bertil Ohlin and Eli Heckscher have explained the basis of international trade
in terms of factor endowments. The classifiable theory demonstrated that the basis
of international trade was the comparative cost difference. However, it did not
explain the causes of such comparative cost difference. The alternative formulation
of the comparative cost doctrine developed by Heckscher and Ohlin explains why
comparative cost differences exist internationally. They attribute international (and
inter-regional) differences in comparative costs to:
a) Different prevailing endowments of the factors of production; and
b) The fact that the production of various commodities requires that the
factors of production be used with different degrees of intensity.
In short, it is the difference in factor intensities in the production functions of
goods along with the actual differences in relative factor endowments of the
countries which explains the international differences in the comparative cost of
production.
Thus, in a nutshell, the Heckscher-Ohlin theory states that a country will
specialise in the production and export of the goods whose production requires a
relatively large amount of the factor with which the country is relatively well
endowed with capital only if the ratio of capital to other factors is higher than in
other countries.
For example. assume that:
i) In Country A:
Supply of labour = 25 units
Supply of capital = 20 units
Capital/labour ratio = 0.8 units
ii) In Country B:
Supply of labour = 12 units
Supply of capital = 15 units
Capital/labour ratio = 1025 units
In the above example. even though Country A has more capital in absolute
terms. Country B is more richly endowed with capital because the ratio of capital to
labour in Country A (1.8) is lower than in Country B (1.25).
The two-country, two-commodity model of Heckscher and Ohlin is based on a
number of explicit and implicit assumptions. The important assumptions of the
model are:
i) Both the product and factor markets in both the countries are characterised
by perfect competition.
ii) The factors of production are perfectly mobile within each country but
immobile between countries.
iii) The factors of production are of identical quality In both the countries.

7
International Business

iv) Factor supplies in each country are fixed.


v) The factors of production are fully employed in both the countries.
vi) There is free trade between the countries. i.e., there are no artificial barriers to
trade.
vii) The factor endowments .of one country vary from those of the other
viii) International trade is costless i.e., there is no transport cost.
Most of the above assumptions are obviously unrealistic. The Heckscher-
Ohl1n model has been criticised mainly for it’s over simplifying and unrealistic
assumptions.
Wassily W. Leontiefs study has revealed that the USA, which is a capital rich
country. Imported capital intensive goods and exported labour intensive goods. This
is popularly known as the Leontief Paradox, which Is a negation of the Heckscher-
Ohlin thesis. It should, however, be pointed out that Leontiefs study has been
articled as unscientific.
Despite Its drawbacks, the Heckscher-Ohl1n theory has certain definite merits. These are:
i) The Heckscher-Ohlin theory rightly points out that the immediate basis of
International trade is the differences in the 8na1 price of a commodity as
between countries, although the actual basis or ultimate cause of trade Is the
comparative cost differences In production.
ii) The Heckscher-Oh11n theory is superior to the Comparative Cost theory In
some other respects also. The Richardian theory points out that comparative
cost difference Is the basis of International trade: but It does not explain the
reasons for the existence of comparative cost differences between nations. The
Heckscher-Ohl1n theory explains the reasons for the differences in factor
endowments.
iii) Further, Heckscher and Oh11n made It very clear that 'International trade Is
but a special case of Inter-local .or Inter-regional trade', and hence there Is no
need for a special theory. of International trade. Ohl1n states that regions and
nations trade with each other for the same reasons that lnd1v1duals specialise
and trade.
The modem theory of trade is also called the General Equilibrium Theory of
International trade because it points out that the general demand and supply
analysts applicable to Inter-regional trade may generally be used without
substantial changes in dealing with problems of International trade.
iv) Another merit of the Heckscher; Ohlin theory is that it indicates the impact of
trade on product and factor prices.
The Availability Approach
The availability approach to the theory of international trade seeks to explain
the pattern of trade in terms of domestic availability and non-availability of goods.
Availability influences operation through both demand and supply forces.

8
International Business

In a nutshell the availability approach purports that a nation would tend to


import those commodities which are not readily available domestically and export
those whose domestic supply can be easily expanded beyond the quantity needed to
satisfy the domestic demand.
Kravis argues that Leontiefs findings that the United States' exports have a
higher labour content and a lower capital' content than its imports may be
explained better and more simply by the availability factor. Goods that happen to
have high capital content are bought abroad because they are not available at
home. Some are unavailable in the absolute sense (for example, diamonds) others
in the sense that an increase in output may be achieved only at much higher costs
(that is, the domestic supply is inelastic). When unavailability at home is due to
lack of natural resources (relative to demand) the comparative advantage argument
is perfectly adequate.
According to Kravis, there are other factors of the availability explanation of
commodity trade pattern that cannot be so readily subsumed under the ruberic
'comparative advantage'. One of these is the effect of technological change.
Historical data for the United States indicate that exports have tended to increase
most in those industries which have new or improved products that are available
only in the 'United States or in a f~ other places at the most. Product differentiation
and government restrictions are the other factor tending to increase the proport1o~
of international trade that represents purchases of goods that are not available at
home.
According to, Kravis, there are, thus, four bases of the availability factor, namely:
i) Natural resources;
ii) Technological progress;
iii) Product differentiation; and
iv) Government policy.
The first three of the four bases – natural resources, technological progress
and product differentiation - probably tend, on the whole, to increase the volume of
international trade. The absence of free competition, a necessary condition for the
unfettered operation of the law of com~t1ve advantage; tends, to limit trade to
goods that cannot be produced by the importing country, argues Kravis. The most
important restrictions on international competition are those imposed by the
governments and by cartels. Those imports that are unavailable or available only at
a formidable cost are subject to the least governmental interference. Kravis is of the
opinion that the quantitative importance of the availability factor in international
trade is considerable. This appears to apply especially to half of world trade that
consists of trade between the industrial areas on the one hand and the primary
producing areas on the other.
The availability approach has, undoubtedly, considerable merit in its
explanation of the pattern of trade.
1.4 SUMMARY
Trade is mean mercantile transaction. When exchange of goods and services
made among two individuals of the same country is internal trade. If it is between
9
International Business

two nations constitute international trade. A number of theories have been


developed for the basis of international trade namely – the comparative cost theory
– maintains that trade free, in long run, it will enjoys a comparative advantage. The
opportunity cost theory – the opportunity cost of anything is the value of the
alternatives. Heckscher – ohlin thesis states interms of factor endowments and the
availability approach seeks domestic availability and non-availability of goods. It
has considerable merit in the basis of trade.
1.5 ASSIGNMENT QUESTIONS
1. What is internal trade?
2. What do you understand by international trade?
3. Explain the comparative cost theory of international trade
4. Describe Heckscher – ohlin Thesis contribution for basis for international
trade.
5. Discuss the availability approach of international trade.
‰

10
International Business

LESSON – 2

GAINS FROM INTERNATIONAL TRADE


OBJECTIVES
™ To understand the main advantages of international trade
™ To know the conditions necessary for recapping maximum advantage
™ To learn the factors determining gains from international trade
2.0 PREAMBLE
Just as domestic or Internal trade benefits both sellers and buyers. In the
same way, International trade, as shown below, benefits all the countries
participating In International trading transactions.
STRUCTURE
2.0 Preamble
2.1 The Main Gain or Advantages of International Trade
2.2 Conditions Necessary for Reaping Maximum Advantages of International
Trade
2.3 Factors Determining Gains from International Trade
2.4 Summary
2.5 Assignment Questions
2.1 THE MAIN GAIN OR ADVANTAGES OF INTERNATIONAL TRADE
1) Benefits of International Speclal1sation: There are about 150 countries in
the world and each country is endowed with some special resources or facilities in
the form of natural resources, capital equipment, skilled labour or entrepreneurial
ability. For example, some countries like the Middle East countries are rich in
crude 0il; Australia is endowed with vast stretches of land with comparatively small
population, favouring sheep fanning and production of wool and woolen goods;
some countries like the United States, West Germany and Japan possess In
abundance advanced manufacturing capacities, plenty of capital and skilled
manpower.
In the absence of International trade, every country will have to be self
sufficient In the case of her requirements trying to produce goods and services for
which she has capacity as also other goods the country finds it difficult or
impossible to produce.
International trade promotes special1sation on the basis of comparative cost
advantage. Thus Austral1a with plenty of fertile and land relatively small labour-
force would produce wool and wollen goods, while Japan with plenty of capital and
high technology would special1se In capital-intensive high-tech goods like watches;
cameras, cars, motor-cycles, calculators, T.V. sets, scooters, etc. Austral1a would
export goods In the production of which it has comparative cost advantage and
import goods from Japan which it would find cheaper to import than to produce
them In the country itself. Thus, international trade helps International
special1sation on the basis of comparative cost benefits for the participating
countries. (But it should be noted that pattern of special1sation may change over
11
International Business

years. Thus, England was ahead of other countries in the sphere of manufactured
goods in the 18th and 19th centuries; but later Germany, the United States and
Japan caught up with England which was left far behind in the production of which
it once enjoyed comparative advantage). Thus international trade helps or is based
on special1sation and ensures all the advantages of specialisation to participating
countries, the main advantage being the availability of goods at cheaper price than
if the country were to try to produce those goods within the country itself.
2) International special1sation and possibility of exporting goods to other
countries make possible large-scale production of goods and therefore, their
production at lower cost due to large scale production. International trade thus,
enables peoples of the world to get a large variety of goods at cheaper prices than If
the country were to try to produce those goods itself (even If it were possible). This
means international trade leads to more efficient use of world's resources.
3) International trade opens the" entire world markets for goods produced in a
country. Thus, international trade by expanding" the size of the markets becomes
source of employment to people in the world.
International trade thus lead" to relatively higher level of employment of
labour. For example, If we take a recent example, India has been exporting ready-
made garments to the extent of Rs. 2,000 crores annually at present.
This provides employment to hundreds of tailors, women-workers who can"
work at home, to designers, cutters, packers and so on. If India were not to export
these ready-made garments, their sale would be confined to only domestic markets
which cannot absorb all that is being produced at present with the help of domestic
consumption and exports. If exports are stopped." that will mean unemployment of
a large number of presently employed workers.
4) The act that international trade provides employment to relatively larger
number of people also means that it enables a vast number of people all over the
world to earn income. For example, export of crude oil and petroleum products by
Middle East countries had raised the level of income of people in those countries to
a relatively high level than If crud~ on were not be exported to others countries.
Also, prosperity of the Middle East countries due to rise in crude oil prices during
1970 gave a boost to India's exports to those countries and brought prosperity, for
example, to people in Kerala.
5) Equalisation of prices of Factors of Production: If there were no
international trade and If, for example, Australia with abundant availability of land
were not to export wheat and wool that could result in low value or price for land
and its use. But international trade changes this picture. Since Australia cannot
export land, it exports products where land plays a prominent part, namely wheat
and wool and therefore, land prices go on rising. Similarly, since countries cannot
export factors of production they export goes produced with the help of those
factors of production. International trade thus tends to bring about equalisation,
not only of prices of commodities but also of returns of factors of production. Thus,

12
International Business

international trade tends to equalise prices of internationally traded goods.


Equalisation of income is an important and significant achievement of international
trade. (If there is no complete equalisation of commodity and factor prices, that is
mainly because, many countries have been putting obstacles in the way of
international trade and smooth and uninterrupted flow of goods among countries).
6) International trade also includes transfer of capital and of technical know-
how. This transfer of capital and technical know- how to backward or developing
countries helps their rapid economic development and alleviation of mass poverty
in those countries. Thus backward or developing countries get the opportunities of
sharing benefits of higher productivity and production levels in developed countries
due to transfer of capital and technology from developed countries by above types of
transfer. they are in a position to pay back what all funds they have borrowed and
fees for royalty for acquiring technical know- how.
7) International trade exposes backward countries to technological
developments that are taking place in developed countries through international
trade. This exposure and the above type of transfer namely of capital and technical
know-how from developed to developing countries helps the spread of new
industrial culture helps to mould new and modern value-system helps better and
more efficient utilisation of natural and human resources lying idle or under-
utilized for centuries in developing countries. This benefits and accelerates
economic development of developing countries. Thus benefits of development come
to be shared by both developed and developing countries because of international
trade.
8) It was felt at one time by the classical school that by making every country
dependent upon other countries because of international trade and buying and
selling of goods and services making every country closely dependent upon other
countries was between different countries would end.
But unfortunately World War I and World War II have shown that such a
consummation has not come about because of cut-throat competition among
competing developed countries to capture markets in various countries of the world
especially in backward countries in Africa, Asia and Latin America. But the fact
remains that international trade results in mutual dependence and therefore. in
increasing possibilities of cooperation among nations which would not be possible if
each country were to try to be economically self sufficient and completely isolate
itself from all other countries by not taking part in international trade.
2.2 CONDITIONS NECESSARY FOR REAPING MAXIMUM ADVANTAGES OF
INTERNATIONAL TRADE
Advantages of international trade can be maximised or in other terms fuller
advantages of international trade can be reaped, if the following conditions are fulfilled:
1) There should be free trade and there should be no obstacles to international
movements of goods and services. There can be natural obstacles such as
prohibitive transport cost and ignorance, etc. But at present these obstacles to
international trade are of not much significance. What is emphasised here is that
13
International Business

there should be no man-made obstacle such as total or partial prohibitions on


import of certain goods and services (to protect competing domestic industries and
employment), tariff and custom duties, quota-fixation etc. Such man-made
restrictions should be absent, if full advantages of international trade are to be
reaped.
2) There should be exist perfect competition in participating countries as that
alone will ensure most efficient use of factors of production lowest cost of
production and prices. This means if monopolistic or oligopolistic competition exists
in international trade gains from international trade to that extent will be limited.
2.3 FACTORS DETERMINING GAINS FROM INTERNATIONAL TRADE
Following factors determine how gains from international trade will be shared
by participating countries:
(1) Differences in cost ratios or Relative Cost Advantage: As Prof. Harrod has
pointed out 'A country gains by foreign trade. if and when, the traders find that
there exists abroad a ratio of prices very different from that to which they are
accustomed to at home. They buy what to then seem cheap and sell what to them
seems dear. The bigger the gap between what to them seems low profits and high
profits and more important the article affected, greater will be the gain from trade'.
If Australia has a comparative advantage over England in the production of
wheat and if England has comparative' advantage in the production of cloth. both
Australia and England will gain specialisation from international trade. The size of
the gain from international trade will depend upon the cost of production of each
commodity in both the countries. If due to increase in the efficiency of labour, cost
of production of wheat declines in Australia, England will gain more from
international trade. Opposite will take place in case efficiency of English labour
goes up and cost of production of cloth declines. Australia will have greater gain
than before from international trade. Thus, greater the comparative cost differences
or greater the relative cost advantage, larger the gains from international trade.
The point can be explained with some illustrations
Let us assume that the original position was as follows:
X number of man days produce in:
England 200 'units of cloth or 200 units of wheat:
Australia 80 units of cloth or 160 units of wheat:
If due to increased efficiency of labour in Australia in the production 01 wheat.
let us assume that the new position is as follows:
X number of mandays produce in Australia either 80 units of clof1l or 240
units of wheat.
If all the other conditions remain the same, in the new situation. Australia will
be in a position to offer England not up to 2 units of wheat for one unit of cloth but
up to a maximum of 3 units of wheat for one unit of English cloth. England will.

14
International Business

therefore, benefit because of increased efficiency of Australian labour in the


production of wheat.
If on the other hand, because of Improvement In the efficiency of labour In
England In the production of cloth, let us assume that:
X number of mandays can produce In England - either 400 units of cloth (not
200 units as before) or 200 units of wheat, whereas In Australia X number of
mandays produce, as In the ortginal1llustration, either 80 units of cloth or 160
units of wheat. This means now England, due to increased efficiency of labour in
the production of cloth, w1ll be w1ll1ng to offer not as before anything upto 1 unit
of cloth for 1 unit of wheat from Australia. This means, other conditions remaining
the same, this increased labour efficiency in the production of cloth will be more
beneficial to Australia.
(2) Reciprocal Demand or Relative Elasticity’s of Each other's Commodities:
within the lower and upper limits fixed by comparative cost advantage, the actual
terms of trade will be determined by relative elasticity’s of demand for each other's
commodity. If, for example England wants Australian wheat more urgently (I.e., If
the demand Is more In elastic} than Australian demand for English cloth, gains
from Inter national trade would be more In favour of Australia, though both the
countries would be gaining from International trade.
(3) Size of Participating Countries: What Is the relationship between size of a
country and gains from International trade?
One argument Is that a small country gains more from International trade
than a large country. A small country does not normally possess diverse types of
productive resources; also the size of the domestic market is small or limited. And
therefore, by specialising on the basis of its advantageous resources and by
exchanging its goods against goods produced In other countries, the small country
can thus get commodities It cannot produce because of its small size and lack of
different varieties of resources.
If both the trading countries are small and both specialise and enter into
international trade, gains from international trade would be relatively smaller as
both the small countries have relatively small exportable surplus.
If one of the trading countries is large and the other small exportable surplus
with the large country would be fairly large; but the exportable surplus with the
small country would be relatively small. While the small country can exchange the
entire exportable surplus in exchange for goods in which the large country has
specialised, the large country would not be in a position to exchange its entire
exportable surplus and while the gains from international trade in the case of small
country would be substantial, for the larger country gains would be limited.
If however, both the internationally 'trading countries are large, both with large
exportable surplus of commodities in which they have specialised, both the large
countries would be reaping substantial gain from international trade.

15
International Business

(4) Level of Income in a Country and Gains from International Trade: The level
of income of people in a country has great influence on sharing gains from
international trade.
If, for example, exports of a country are in great demand because level of
income of people in the importing country is fairly high such goods will be in a
position to command higher price and income level of people in the country
exporting those goods will rise. This will mean higher wages in export industries.
The rising income of people in export industries will also mean increasing demand
for other domestic goods whose prices will also go up and therefore level of income
of people producing those goods would also rise.
On the other hand, if in a country, demand for imported goods from the other
country is relatively small or elastic" (i.e., imported goods are not urgently wanted)
people in the importing country will be getting imported goods at relatively lower
price; income of the people producing such goods will be lower. This will also mean
lower demand for other domestically produced goods while they will be paying high
prices for imported goods (assuming that demand for such goods is inelastic in the
importing country).
2.4 SUMMARY
As like domestic trade, international trade also benefited in international
transactions. They are – specialization, large-scale production opens the entire
world market, equalization of prices of factors of production, transfers, etc., It also
made conditions for recapping maximum advantage and makes factors determining
gains such as differences in cost ratios and reciprocal demand.
2.5 ASSIGNMENT QUESTIONS
1. What are the main advantages of international trade?
2. Explain briefly the conditions necessary for recapping maximum advantages
of international trade.
3. Enumerate the factors determining gains from international trade.
‰

16
International Business

LESSON – 3

TERMS OF TRADE
OBJECTIVES
™ To know the different concepts of terms of trade
™ To understand the factors influences on terms of trade
™ To have an idea about the problems of measurement of terms of trade
STRUCTURE
3.1 Preamble
3.2 Different Concepts of Terms of Trade
3.3 Influences on Terms of Trade
3.4 Problems of Measurement of Terms of Trade
3.5 Summary
3.6 Assignment questions
3.1 PREAMBLE
The 'terms of trade' is one of the measurements of the gains from international
trade to a particular country,
In international economics, the phrase 'terms of trade' refers to the ratio index
of export prices to import prices. In other words, it is the rate at which a country's
exports are exchanged for imports.
If we take the example given to illustrate the Comparative Cost Theory in
lesson - 1 we find that when England and Portugal are at trade with each other. the
exchange ratio between them must be some where between the two extremes of 1
unit of wine to 1.2 units of cloth (cost ratio in England) and 1 unit of wine to 0.88
units of cloth (cost ratio in Portugal).
The terms of trade are the extract ratio at which the exchange of goods takes
place between the two countries. For instance when England and Portugal are at
trade; if one unit of wine is exchanged for 1. 1 units of cloth the terms of trade are 1
unit of wine to 1.1 unit’s cloth.
John Stuart Mill, one of the great classical economists has shown that the
terms of trade between two commodities depend upon the strength of the world
supply and demand for each of the two commodities. In other words, the terms of
trade are determined by reciprocal demand. If people have an intense desire for
wine (relative to the available supply) the exchange ratio will settle, in our example,
near 1 unit of Wine to 1.2 units of cloth. On the other hand, if cloth is very much in
demand in both the countries, the final exchange ratio will settle near 1 unit of
wine to 0.88 units of cloth.
3.2 DIFFERENT CONCEPTS OF TERMS OF TRADE
The above interpretation of the terms of trade is narrow. Of course in the early
days, the concept meant what we have stated above. But later, their terms of trade
measures have been extended to cover trends in the rate of consumption of
productive resources to effect foreign trade and net utility from trade.

17
International Business

Gerald M. Meier has classified the different concepts of terms of trade into the
following three categories.
Those that relate to the ratio of exchange between commodities:
a) Gross barter terms of trade;
b) Net barter terms of trade; and
c) Income terms of trade
Those that relate to the interchange between productive resources:
a) Single factoral terms of trade; and
b) Double factoral terms of trade
Those that interpret the gains from trade in terms of utility " analysis:
a) Real cost terms of trade: and
b) Utility terms of trade.
Net Barter Terms of Trade
The net barter terms of trade, also called the commodity terms of trade,
measures the relative changes In the Import and export prices and Is expressed as:
PX
N =
pm

where PX and pm are the price Index number of exports and Imports.
For example, with 1968-69 as the above, the unit value Index of India's
exports Increased to 120 by 1972-73, but the respective Index of Imports declined
to 97. Hence, India's net barter term of trade in 1972-73 was 124. This implies that
because of .the higher rate of Increase in the export price 24 per cent more Imports
could be received, on tire basis of price relations only, In exchange for a given
volume of exports. However, by 1979-80, the unit value Index of exports Increased
to 236 and of Imports to 360. Therefore, In 1979-80, N = 66. This deterioration in
India's net barter terms of trade was caused mainly by the hike In the price oil, one
of her most important import items.
The concept of net barter terms trade suffers from certain drawbacks. It
measures only the gain or loss arising out of relative changes In export and Import
prices and completely Ignores the Impact of such factors as:
i) The changes in the level of volume of exports and Imports:
ii) The changes in the quality of exports & Imports
iii) The changes in the composition of trade
iv) The changes In the productivity of export Indusb1es: and
v) Unilateral payments.
Gross Barter Terms of Trade
Taussig introduced the concept of gross barter terms of trade to correct the
commodity of net barter terms of trade for unilateral transaction. Exports or
18
International Business

Imports which are surrendered without compensation or received without counter


payment, such as b1butes and immigrants' remittances.
The gross barter terms of trade Is the ratio of physical quantity of Imports to
the physical quantity of exports. It may be expressed as:
Qm
G =
Qx

Where Qm and Qx are the volume Index numbers of Imports and exports
respectively.
A rise In G is regarded as a favourable change.
The appropriateness of incorporating unilateral payments into the terms of
trade has, however, been questioned Haberler has suggested that allowance should
be made separately for unilateral transactions, instead of incorporating them in the
terms of trade index.
Though Taussing introduced the concept of gross barter terms of trade as an
Improvement on the net barter terms of trade, it too does not reflect the Impact of
changes in productivity. Further, it may not reflect the changes in the quality' and
composition of foreign trade.
Income Terms of Trade
G.S. Dorrance has modified the net barter terms and presented the income
terms of trade. The income terms of trade, which indicates a nation's capacity -to
import, is represented as:
Px • Qm
I =
Pm
It may also be expressed as:
I = N • Qx

Px
Because N =
Pm
These income terms of trade indicates a nation's capacity to Imp0r:t because
when the index of total exports earnings (Px . Qx) is divided by the Import price
index, we get the quantum of imports that can be made with, the exporting
earnings.
Therefore, a rise in 1 indicates that the nation's capacity to Import, based on
exports, has increased, i.e., it, can o6tain a larger volume' of imports from the sale
of its exports.
It should, 'however,. be clear, that I indicates only the export-based capacity to
Import and not the total capacity of the nation to Import; for the total capacity to
(import depends also on such factors as capital inflow, receipts from invisibles, and
unilateral payments.
Even when export prices decline and import prices remain constant, the
income terms of trade Improve, if the physical volume' of exports increases more
19
International Business

than in proportion to the fall in export prices. This very well demonstrates that a
change in the income terms of trade terms of need not necessarily reflect a real gain
or loss. This is a serious drawback of this concept.
Single and Double Factoral Terms of Trade
Jacob Viner has introduced the concepts of single factoral and double factoral
terms of trade to modify the net barter terms of trade 80 as to reflect the changes in
productivity.
The single factoral terms of trade Is the net barter terms of trade adjusted for
changes In the efficiency or product1v1ty of a country's factors In the export
industries. It may be expressed as:
S = N.ZX
where ZX is the export productivity index.
The double factoral terms of trade Is the net barter terms of trade corrected for
changes In the product1v1ty In producing Imports as well as exports. It may be
expressed as:
D = N.ZX / Zm
where Zm is an Import product1v1ty Index. A rise In D Is a favourable movement.
because It implies that one unit of home factors embodied In exports Is now
exchanged for more units of the foreign factors embodied In Imports.
D will diverge from S when there Is a change in the factor cost of producing
imports; but, as Gerald Merier states, this has no welfare significance for the
importing country even though it indicates a change In productivity in the other
country from which commodities are Imported. What matters to the importing
country is whether it receives more goods per unit of its 'exported factor Input' (an
Improvement in S) - not whether these imports contain more or less foreign Inputs
than before.
The factoral terms of trade, both single and double, are of little practical
importance because it is very difficult to measure statistically the changes in the
productive efficiency of the factors of production. Another of their drawbacks is that
they do not reflect the real gain arising out of international trade.
Real Cost Terms of Trade
the concept of real terms of trade, Introduced by Jacob Viner, measures the
gain from international trade In uUl1ty terms.
The total amount of gain from trade may be defined in utility terms as the
excess of total utility accruing from imports over the total sacrifice of utility
Involved in the surrender of exports. (Exports result In loss of utility to the
exporting country because the resources used for export production could have
been utllised for products meant for' domestic consumption. Imports on the other
hand respect a gain in utility).
To determine the real cost terms of trade we correct the single factoral terms of
trade Index by multiplying S by the reciprocal of an Index of the amount of
20
International Business

dlsutll1ty per unit of productive resources used In producing exports. The real cost
terms of Trade may be represented as:
R=N.Fx.Rx
where Fx = index of productivity efficiency in export industries and Rx = index of
the amount of disutility incurred' per unit of productive factors in the export sector.
A rise in R indicates that the quantity of imports obtained per unit of real cost
is greater. R may rise as a result of a change in the methods of producing exports,
or a change in the factor' proportions used in exports.
Utility Terms of Trade
The concept of utility terms of trade, which too was introduced by Jacob Viner,
marks an improvement on the real cost terms of trade.
Viner points out that the extent of gain from trade depends not only on the
quality of foreign goods obtained per unit of real cost involved in the production of
the export commodities, but also on the relative desirability of the import
commodities as compared to the commodities which could have been produced for
home consumption with the productive., resources now' devoted to the production
for export. To take account of changes in the relative desirability of the import
commodities and of the native commodities whose internal consumption is
precluded by the allocation of productive resources to production for export when
such changes in relative desirability are due to changes in tastes, it would be
necessary to incorporate in the 'real cost trade index' an index of relative average
utility per unit of imported commodities and of native commodities whose internal
consumption is precluded by the allocation of resources to production for export.
The utility terms of trade may be represented as:
U = N . Fx . Rx . Urn
where Urn = index of relative utility of imports as compared with the
commodities that could have been produced for internal consumption with those
productive factors which are at present devoted to the production of export goods.
3.3 INFTUENCES ON TERMS OF TRADE
The terms of trade of a country depend on a number of factors. The important
factors that influence the terms of trade are:
I) Elasticity of Demand and Supply
The elasticity of demand for exports and imports and the elasticity of supply of
exports and imports of a country significantly influence its terms of trade. When the
demand for a country's exports is less price elastic than its imports, the terms of
trade tend to be favourable because, under such a situation, 'exports can command
a relatively higher price than imports. On the other hand, if the demand for imports
is less elastic than that for exports the terms of trade tend to be unfavourable.
If the supply of a country's exports is more elastic than its imports, the terms
of trade is likely to be favourable because by constracting and expanding the supply

21
International Business

of exports In accordance with market conditions. it may be possible to maintain the


export prices.
II) Competitive Conditions
The competitive conditions obtaining in the international market are another
important Influence on the terms of trade. If a country enjoys a monopoly or
oligopoly power in case of the goods, it exports; and if there is a large number of an
alternative source of supply of Imports the country would have favourable terms of
trade. The absence of close substitutes enables a. country to sell her products at
high prices. It is the near monopoly power enjoyed by the oil cartel that enabled the
OPEC countries to improve their terms of trade by hiking the oil prices.
iii) Tastes and Preferences
Changes in tastes and preferences may also cause changes in the terms of
trade. A change in the tastes and preferences in favour of a country's export goods
would help to improve us terms of trade and vice-versa.
iv) Rate of exchange
Changes in the rate of exchange of the currency also affect the terms of trade.
For instance if a country's currency appreciates the terms of trade of that country
will, ceteris paribus. Improve because the currency appreciation causes an increase
in the prices of exports and a decrease in import prices.
Tariffs and Quotas
The terms of trade of a country may be affected by tariffs and quotas. Tariffs
and quotas if not maintained In relation by other countries may have the effect of
improving the terms of trade under certain conditions.
vi) Economic Development
There are two important effects of economic development to be considered
namely, the demand effect and the supply effect. The demand effect refers to the
increase in demand for imports as a result of increase in income associated with
economic development. The supply effect refers to the increase in the supply of
import competing goods or import substitutes. The net effect on the terms of trade
will obviously depend upon the extent of these effects.
3.4 PROBLEMS OF MEASUREMENT OF TERMS OF TRADE
The use of price indices to measure the terms of trade suffers from the
following limitations.
i) Change In Quality
Over the years the quality of internationally traded goods may undergo a
change but the price indices may not reflect this change in quality.
ii) Changes in Composition
The changes in the composition of the goods over a period of time may not be
reflected in the price indices.

22
International Business

iii) Price Differences


The price indices of import and export of goods are usually based on the price
declarations made to the customs authorities. which may differ from 4he actual
market selling prices of the imports and exports.
iv) Problem of Weightage
Another problem associated with the price index pertains to that of assigning
appropriate weights to the various commodities that enter into the international
trade of the country.
3.5 SUMMARY
Terms of trade, which measures the gains from international trade to a
particular country. There are different concepts evolved such as net barter terms of
trade, gross barter terms of trade, single and double factorial terms of trade, real
cost and utility terms. Some factors may also influence – elasticity of demand and
supply, competitive conditions, tastes and preferences, rate of exchange, tariffs and
quotas and economic development. The problems of measurement are change in
quality, competition, price difference and problem of weight age.
3.6 ASSIGNMENT QUESTIONS
1. What do you meant by net barter term of trade?
2. What is a gross barter term of trade?
3. Explain real cost terms of trade?
4. What are the factors influences on terms of trade?
5. Discuss briefly the problems of measurement of terms of trade?
‰

23
International Business

LESSON – 4

BALANCE OF PAYMENTS
OBJECTIVES
™ To learn the concept of balance of trade and balance of payments
™ To understand the balance of payments on Current Account and Balance of
Payments on Capital Account
™ To know the Balance of Payments of Capital Account
STRUCTURE
4.1 Preamble
4.2 Balance of Payments on Current Account and Balance of Payments on
Capital Account
4.3 Balance of Payments on Capital Account
4.4 Summary
4.5 Assignment questions
4.1 PREAMBLE
Just as India (or for that matter any other country) exports commodities and
imports commodities (which are visible items of the country's exports and imports).
India also sells or exports various services like shipping, insurances, tourism,
educational and technical services, etc. which is called 'invisible' items of exports.
In the same way just as India has to make payments for commodity imports
(i.e. for visible exports), she also imports or purchases various types of services
from other countries such as services of foreign shipping companies to bring goods
home from abroad, off foreign insurance companies, educational facilities in foreign
universities, for Indian tourists who avail of foreigners hotel and tourist services for
which. India has to make payments.
Thus, compared to the concept of ‘Balance of Trade’, ‘Balance of Payments’ is a
more comprehensive concept. The concept of balance of payments includes not only
payments to be made and received for commodity imports and commodity exports.
respectively, but also includes payments which a country has to make to other
countries and which that country receives from other countries for various invisible
items of imports' and exports, respectively. Invisible items of export of a country
and imports by the country include items like: shipping, banking, insurance,
tourism, royalty payments and other fees, payment of interest of foreign debts, etc.
Thus, India has to make payments to other countries not only for commodity
imports but also for the import of above services rendered to her by other countries.
In the same way, India receives payments not only for export of commodities but
also for export of various invisible items which other countries purchase from India.
Thus, balance of payments statement includes all the payments which a
country has to receive for exporting visible and invisible items and which the
country has to, pay for importing all the visible and invisible items.

24
International Business

As we have already seen, balance of trade of a country need not balance. This
is because even if there is unfavourable or adverse balance of trade, the gap can be
filled by the surplus of value of invisible exports over value of import of invisible
items.
But when it is the question of balance of payments (namely total payments
which a country has to receive for exports of visible and invisible items, and which
the country has to make for imports of visible and invisible items), it needs to be
noted that these total payments to be made and received must balance each other.
If debit items (i.e. payments to be made to other countries) in the balance of
payments go on exceeding credit items or payments like to be received by the
country (i.e. If balance of payments a country does not balance year after year), It
becomes a matter of grave concern and steps will have to be taken to see that in the
long run all the parents to be made to other countries and all the payments to be
received from other countries are made to balance.
If In a particular year, total payments to be received on account of visible and
invisible exports are less than total payments to be made on account of visible and
invisible imports, the gap can be filled by using foreign exchange reserves built
during the past years, or by raising loans from abroad and utilising them for filling
the gap. But this can not go on forever, because sooner or later the foreign
exchange reserve is bound to get exhausted and time will come when foreign debts
will have to be repaid.
4.2 BALANCE OF PAYMENTS ON CURRENT ACCOUNT AND BALANCE OF PAYMENTS
ON CAPITAL ACCOUNT
Distinction is made between ‘Balance of Payments on Current Account and
‘Balance of Paymentts on ‘Capital Account.’
‘Balance of payments on current account refers to payments to and by a
country for currently purchased or sold goods and services; it also includes interest
paid to and by the country on debts as also donations and gifts made to other
countries or received from other countries.
Balance of payments on capital account, on other hand, refers to payments to
and by a country of debts and such other long term claims on each other.
It would be seen that balance of payment on current account influences the
level of income of the people in the concerned country directly and almost
immediately. Thus, when India imports goods and services from foreign countries
and pays for them, that money could have been used to purchase Indian goods and
services. If not money flows out of the country and to that extent reduces the level
of income of people In India.
On the other hand, when India sells her commodities and services to foreign
countries, the producers of those goods and services get Income and that pushes
up the level of income of people in India. Thus, balance of payments on current
account has a direct impact of the level of Income of people in a country. (Balance
of payments on current account is also known as balance of payments on trading
account).

25
International Business

On the other hand, ‘balance of payments on capital account’ does not have
such a direct and immediate impact on the current level of income of the people in
a country; but it influences the volume of assets which a country holds and that
will have effect on the level of income of people in a country in the long run.
The concepts of ‘Balance of Payments on Current Account’ and ‘Balance of
Payments on Capital Account’ can be explained and properly understood by taking
Indian figures of some past year for which detailed figures are available. It will be
seen from Table showing balance of payments on current account (and also on
capital account) that there are visible items as also invisible items. Both visible
items and invisible items make balance of payments on current account. Payments
for invisible items are similar to payments made for ‘visible items.’ Both provide
income to people who provide goods and services. It may be pointed out that the
most important item in the balance of payments on current account is export and
import of goods (visible items).
India' Balance of Payments on Current Account and
Balance of Payments on Capital Account
Rs.in crores
Items 1980-81 1985-86
1 Imports 12,543.6 21,163.6
.
2 Exports 6,576.4 11,577.6
.
3 Trade Balance (2-1) (-) 5,967.2 9,586.0
.
4 Non-Monetary Gold Movement Net 23.3
.
5 Invisibles:
.
Receipts 5,326.7 7,343.4
Payments 1,578.1 4,244.6
Service Charges on Debts (Net) 3,748.5 3,098.7
6 Balance of Payments on:
.
Current Account (Net) (-) 2,218.6 5,297.0
7 Capital Transactions:
.
a) Private

i. Receipts 162.6 2,566.9


ii. Payments 65.6 212.6
iii. Net 97.0 2,354.3
b) Governments
i. Receipts 1,010.9 2,233.2
ii. Payments 1,198.3 804.6
26
International Business

iii. Net (-) 187.4 1,428.6


c) Amortization Payments (Gross) (-) 686.1 (-) 1,464.2
d) Repurchase of Rs. from IMF (-) 7.6 (-) 253.0
e) Banking Capital (Net) 12.7 186.1
8 Errors and Commission (-) 158.0 580.1
.
9 Total Surplus Deficit (-) 3,147.9 (-) 3,626.9
.
Balance of Payments Deficit Financed by:
10. External Assistance (Loans, grants, etc.) 1,692.6 2,920.4
11. Drawings from IMF 818.8 –
12 Allocation SDRs 120.5 –
13. Decline in Reserves 526.0 706.5
Total (10 to 13) 3,147.9 3,626.9
Source: Economic Survey 1987-88, Government of India, S-66/S-67.

It would also be seen from Table that when all current account receipts and
payments are taken into consideration, India had an overall deficit in the balance of
payments on current account of Rs. 2,218.6 in 1980-81 and deficit of Rs. 5,279 in
1985-86.
Some of the important invisible items in India's balance of payments on current account were
as follows:
Rs.in crores
Items 1980-81 1985-86
1. Foreign Travel:
Receipts 1165.6 1189.7
Payments 90.3 411.6
Net 1075.3 777.5
2. Transportation:
Receipts 361.6 603.9
Payments 355.1 816.1
Net 6.5 (-) 212.2
3. Insurance:
Receipts 48.4 78.6
Payments 34.3 83.3
Net 14.4 (-) 4.7
4. Investments Income:
Receipts 855.1 669.1
Payments 369.7 618.7

27
International Business

Net 485.4 (-) 949.6


5. . . . . . . . . . . . . . . . . .
6. . . . . . . . . . . . . . . . . .
7. . . . . . . . . . . . . . . . . .
Total (1 to 7)
Receipts 5326.7 7343.4
Payments 1578.1 4244.7
Net 3748.6 3098.7
Source: Economic Survey 1987-88, Government of India, S-68.
4.3 BALANCE OF PAYMENTS ON CAPITAL ACCOUNT
As we have already observed, 'balance of payments on Capital Account' refers
to loans, payment of debts, and sale and purchase of assets to and from foreigners.
The concept of balance of payments on capital account will become clear from
Table.
When we consider balance of payments on current account' .and 'balance of
payments on capital account', it should be noted that surplus in the balance of
payments on current account should be equal to deficit in balance of payments on
capital account and deficit in balance-of payment on current account should be
equal to surplus in balcp1ce of payments on capital account.
For example, if India is selling goods and services to foreign countries of
greater value than value of goods and services bought by India from other
countries, India will have surplus in her balance payments on current account.
India, with this surplus, will either buy gold or lend that amount as loan to
foreigners or purchase some other asset in foreign countries. These are debit items
for India on the balance of payments on capital account. If, on the other hand, the
total value of India's exports of goods and services is less than the total value of
goods and services purchased by India from other countries, there will be a deficit
in India's balance of payments on current account. How will India make payments
"to foreign countries for these extra goods and' services purchased by India from
foreign countries to meet that deficit? These are credit items in India's balance of
payments on capital account. This means that a country's balance of payments on
current account and her balance of payments on capital account together will
always balance each other.
4.4 SUMMARY
We have analysed the concepts of ‘Balance of Trade’. Balance of Payments on
Current Account' and Balance of 'Balance of Payments on Capital Account.
We have already noted that it is not necessary that every year total value of
commodity exports of a country should equal total value of commodity imports of
the country. Even if the total value of commodity exports of the country does not
equal its imports, this should not be a matter of grave concern.

28
International Business

Similarly, when we consider 'Balance of Payments on Current Account' (i.e.


total value of exports of commodities and services and total value of commodity and
service imports), it is again not necessary that the credits and debits should exactly
balance each other every year.
But when we consider all the three together, namely balance of trade, balance
of payments on current account and balance of payments on capital account, the
situation is radically different. If the total debts which a country incurs because of
commodity imports, of various services and on account of debts repayment and
servicing changes on debts raised in foreign countries, go on exceeding the total of
all the credits on amount of the country's exports of commodities, services and
repayment of loans, etc., for some years, the gap may be filled by using its stock of
gold, or reserve of foreign currencies built over past years or by additional
borrowing from, foreign countries.
But clearly there is a limit to the use of stock of gold, reserves of foreign
currencies and borrowing from abroad to fill the gap appearing in the, balance of
payments of a country year after year.
This would mean that if we take into consideration the overall picture of
balance of payments in all its aspects, a country cannot go on facing deficits year
after year. Measures will have to be taken to correct such imbalance in the overall
balance of payments position of a country.
What measures of policy is or should be adopted under such circumstances to
successfully meet the situation w1ll be considered at length in later chapters.
4.5 ASSIGNMENT QUESTIONS
1. Give an outline of the important theories that explain the basis of
international trade.
2. Explain the major advantages of international trade.
3. Bring out the different concepts of terms of trade as classified by
Gerald M. Meir.
4. Explain clearly the meaning of Balance of Payments. Distinguish between
BOP on Current account and, BOP on Capital a/c.
‰

29
International Business

LESSON – 5

THE OUT-LOOK FOR EXPORT MARKETING


OBJECTIVES
To know the following:
™ Outlook of export marketing.
™ Barriers to International Trade.
™ Foreign Exchange Control.
STRUCTURE
5.1 Introduction
5.2 India’s Weakness
5.3 Definition
5.4 Salient Features of Export Marketing
5.5 Basic Functions of Export Marketing
5.6 Environmental Factors in Export Marketing
5.7 Summary
5.8 Assignment Questions
5.1 INTRODUCTION
Export marketing is of growing importance to Indian business. It is the duty of
an exporter to support the economic development of his country. One should try to
sell a portion of one's output abroad. Benefits are gained in the obtaining of quotas
for imported materials in exchange of proof of the export of finished goods. There
are many benefits which accrue to an exporter.
These are listed below
i) A much bigger area of market, so that the exporter may be less dependent
upon the tastes and preferences of one particular country;
ii) With a global market, the exporter is much less likely to be affected by the
business cycles and political instability of a particular country - if one
country has a recession and sales are difficult, the exporter may export to
other markets which are relative’s prosperous;
iii) A good network of market Implies that if a competitor captures one market,
only a portion of his sales are likely to be affected;
iv) Due to bulk selling because of bulk orders. economical manufacturing Is
possible for the manufacturer exporter;
v) If export marketing Is properly handled, the payment Is guaranteed and
quick:

30
International Business

vi) Exports help in developing domestic trade. Domestic consumers are


inclined to have more faith in products which they know are selling abroad
Exports creating a "goodwill" In the eyes of the consumers.
The potential exporter must learn how to make a start and how to find export
customers. He must also understand the terms used In International business, the
procedure for collecting payment from customers abroad and have some knowledge
of shipping, marine insurance and packing. Export marketing brings large orders
and they must, therefore assure themselves that their production capacity is
sufficient to cope with those orders.
The markets abroad are expanding due to the growing economy of various
nations and. in particular of the oil rich countries of the Middle East. Expectations
have gone up everywhere. This is a global phenomenon. A strong desire for higher
standards of living on the part of the citizens of the world has again give a boost to
export markets. A worldwide approach to export marketing management is,
therefore, essential. Export marketing is a part of the broad marketing system and
all the principles of internal marketing apply equally to Export Marketing; but some
additional skills are also required.
a) Managing Export Marketing Plans: This requires the capacity to
comprehend the economic, political and commercial connections of .the various
nations and to design an effective export marketing strategy.
b) Adapt to Export Markets Tastes and Preferences: Certain responsibilities
which India as a nation must accept are listed below;
i) To demonstrate. to the world how well the economy can be managed by a
democratic country:
ii) To produce the highest quality merchandise at the lowest' possible production
cost;
iii) To sell products everywhere in competition with other countries;
iv) To assist in the development of natural resources and the national industries
of other countries which desire such help? Export Market opportunities,
Export marketing opportunities for Indian businessmen stem from certain
fundamental conditions listed below:
a) We have built up a physical manufacturing machine capable of
supplying merchandise in larger quantities than before.
b) We have the financial structure and resources with which to finance the
export trade.
c) We have a sizable merchant fleet.
d) We have developed the system of standardised mass .production in
various Items to a point where it is cheaper for us in spite of our
increasing labour costs.

31
International Business

e) We have a sk1IIed and intelligent labour force which Is available at a


comparatively cheaper price.
f) We have the requisite infrastructure for export marketing.
5.2 INDIA’S WEAKNESSES
1. India's Business and industry have not decided to make exports a "must".
2. Inflation, high prices, and black markets are staring us in the face. If this
situation persists, it may put our price level beyond the means of our
customers abroad, no matter how badly they may need our products.
3. If our internal economy continues to be as badly managed as it has been in
recent years, we may find ourselves impoverished to the point where we
cannot supply our own essential needs, let alone have enough with which to
supply other nations.
4. The economy of standardised mass production rests upon high per capita
output. Any attempt by selfish and ignorant groups to promote their own
interests by limiting output may completely destroy the gains we have made
in the export-markets.
5. The impoverishment of our national leadership may be a fatal bar to the
future extension of our economy and to raising the real standard of living in
India.
5.3 DEFINITION
Export marketing includes the management of marketing activities for
products which cross the national boundaries of a country. It involves the
management of marketing not only in one's country but also in foreign countries to
some extent.
Other related areas of export marketing include
a) Importing-buying from abroad;
b) Management of international operations;
c) Operating marketing facilities abroad;
d) Establishing production facilities in foreign countries and creating licensing
arrangements.
Export marketing in confronted with three major decisions which' are inter-related;
a) Whether to engage in export marketing activities at all;
b) it) A decision in regard to what particular markets should be served;
c) What method should be used to get tile products into the hands of buyers
abroad.
The principle of comparative advantage is the basis of export marketing. Every
nation specialties in the production of goods in which it is relatively more efficient,
exporting them, and importing in turn those products in which it is least efficient.

32
International Business

Comparative advantage changes over a period of time. India was a groundnut


exporting country till a few years ago. Now it is an importing country. Shifts in
markets also continue in developing and poorer nations. Middle-eastern countries
are now markets for almost every item because of rising incomes and standard of
living in those places.
Major Government interventions in the trade process are caused by Import
restrictions viz.
i) Tariffs;
ii) Particular restrictions-Imports by quota system;
iii) Buy home-made woducts;
iv) Encourage national exports;
v) Management of exchange rates.
Although both internal and export marketing have much in common, the
components of legal environment differ; so do the laws and regulations from
country to country. Taxes and tariffs vary widely; so do the various restrictions and
exchange controls and quotas. Currencies and exchange rates, too, vary from
country to country. Governmental and banking Institutions are quite different.
Business environment varies because of differences in language, customs,
traditions, cultural differences, geographic distances and climatic conditions. Skill,
background and Insight into the foregoing factors are required to solve export
marketing problems.
How to solve Export Marketing Problems?
i) Have an international outlook.
ii) Export targets must be realistically assessed and the segment of the world
market to be focused on.
iii) Relevant environmental factors in the export market must be analysed.
iv) An export marketing strategy must be designed with regard to the following
factors.
a) Size and extent of export market must be decided.
b) Buyer behaviour must be analysed,
c) Foreign competition must be evaluated,
d) Legal, political and business factors must be examined, and
e) Costs must be calculated to arrive at the final price and terms of sale.
In export marketing, service is the most important thing. The products
exported should be acceptable to the consumers abroad; and this calls for a
constant study of consumers abroad and the adaptation of products, packaging
and presentation. The exporter should have respect for all nationalities.

33
International Business

Basic principle of Successful Export Marketing


Export marketing is an orderly methodical and a somewhat technical process
of adapting Indian merchandising and marketing methods to conditions in
countries outside India.
5.4 SALIENT FEATURES OF EXPORT MARKETING
i) The process of export marketing must be orderly.
ii) The process of export marketing must be methodical.
iii) It must be somewhat technical.
iv) The process must be adaptable.
5.5 BASIC FUNCTIONS OF EXPORT MARKETING
These functions include:
i) The direction and supervision of exports, including. the development of an
export policy;
ii) The adaptation of the product for export, including export packing;
iii) Selling, including such related functions as advertising, sales promotion, sales
training, translation, service and the like;
iv) Transportation of the product, including documentation for shipment,
railways, ocean shipping, marine insurance, export credit and guarantee and
other related matters;
v) Credit and terms of payment;
vi) Financing, including exchange, invoicing and collection:
vii) After sales service.
To sum up we may say that there "is a necessity in India to develop export
marketing; and these calls for knowledge of sources of information and how to
evaluate and use them. In the ultimate analysis. India's exports will be determined
by a variety of factors, namely
i) International division of labour
ii) Comparative costs
iii) Surplus production
iv) Balance of international payments
v) Purchasing power of the importing country
vi) Trade promotion
One of the requirements of export marketing is knowledge of languages and
customs of different people and how to deal with them. Every company's
management cannot have them because they have no power; at the same time.
Their neglect would amount to a loss of business. Competent management for
export marketing in India is required; this calls for a combination of skills,
including comprehension imagination and courage.

34
International Business

5.6 ENVIRONMENTAL FACTORS IN EXPORT MARKETING


limiting overall company goals Ecological Structure Political Uncontrollable Factors
and policy System Economic System Social Consumer (Demand)
Structure Cultural Environment Psychological Dims
Business Climate Economic Dims
Boundary conditions International Aspects Foreign Comparative forces market
Human Rt. sources Natural trade policy Tariffs quid etc. structure
resources Exchange rates Balance of
payments International trade
Agreements World market
structure
asdas
Export
International Marketing Marketing
Management Information Management
System Interdisciplinary
Tools
Export marketing management Concept theories
decision process P models
E
1. Understanding the Methods
international Techniques
9 10
2. Setting objectives From
S
3. Diagnosis-comparison with 8 1 E - Economics
normative model P – Psychology
E
4. Problems analysis 7 Marketing 2 S– Sociology
a) Fact findings
Manager SP– Social
6 3
b) Assumptions psychology
SP
5 4b 4a 4 CA– Cui
anthropology
PS
PL– Pol science
CA
M– Mathematics
5. Alternative course of
actions
6. Evaluation
7. Decision
8. Execution
9. Feedback system
10. Adjustment
International marketing
management information system
Export Marketing Strategy and Tactics

35
International Business

Controllable Factors
Market Market Product Channels of Price Promotion Promotion Marketing Export
segments product channels of price policy Personal selling customer and logistics marketing
planning distribution Advertising selling product transportation mix
Sales promotion service ware housing variables
inventory
Total Market Export Marketing Programme

Adopted from the Export Marketing Management concept by Winter & Others.
5.7 SUMMARY
Export marketing is developing and benefits obtained by quotas for imported
materials in exchange of proof of the export of finished goods. India has certain
weal chesses in this regard particularly on inflation, high prices and black markets.
The features are, export marketing must be orderly, must be methodical, technical
and adaptable. The basic functions are supervision of exports, adaptation of the
product for export, financing, credit and terms of payment, and after sales service.
It combats the environmental factors in this.
5.8 ASSIGNMENT QUESTIONS
1. What are the India’s weaknesses for export marketing?
2. What is export marketing?
3. State any four salient features of export marketing
4. Enumerate the important functions of export marketing
5. Describe the environmental factors in export marketing.
‰

36
International Business

LESSON - 6

BARRIERS TO INTERNATIONAL MARKETING


LESSON OBJECTIVE
™ To know the barriers to international marketing
STRUCTURE
6.1 Preamble
6.2 Barriers to International Marketing
6.3 Summary
6.4 Assignments Question
6.1 PREAMBLE
One of the basic factors that must be taken into account in international
marketing is the exporting country's foreign trade regulations. These may block or
hinder exports to all countries or to particular ones. Exporters moreover may be
required to follow elaborate and time-consuming procedures, including the
preparation of numerous documents. The immediate effect of such trade
regulations, whether in the form of increased customs tariffs or other import
charges is an increase in the price of imported goods in the market of the importing
country. The increase gives the domestic producers of the import competing
product a relative edge that may be sufficient to stimulate domestic sales or to
protect their share of the market. Trade restrictions also have direct advantages.
They reduce access to foreign markets, and thus affect the exporting country's
willingness to assure foreign suppliers access to its own market. The following
factors that limit market potential are the barriers to trade:
6.2 BARRIERS TO INTERNATIONAL MARKETING
Tariff Barriers Non-Tariff Barriers
a) Export Duties a) Prior Import Deposits
b) Import Duties b) Quantitative Restrictions (Quotas/Licensing)
c) Transit Duties c) Foreign Exchange Restrictions
d) Countervailing (subsidies) d) Exchange (Consular) Formalities Duties
e) Anti-Dumping Duties e) Technical and Administrative Regulations
f) Health & Safety Regulations
g) Government Procurements
h) State Trading
i) Preferential Arrangements
j) Canalisation of trade
k) Trading Blocks
l) Economic and Political Wars

37
International Business

Tariff Barriers
Protective Tariff: Tariff barriers refer to barriers to trade like taxes levied on
imports. They are imposed by an importing country in the form of customs duty.
Tariffs make the imported product costlier than the product available in the local
market. Sometimes the customs duty on a product is so steep that it is not
worthwhile to import it at all. The local industry manufacturing an equivalent
product is thus given protection against foreign competition.
Revenue Tariff
The main object of the revenue tariff is to obtain revenue for the public
treasury. Revenue Tariffs are generally kept low so as not to restrict imports
appreciably. India is a very good example of an importing country where customs
duty forms a significant part of the total revenue.
Ad Valorem and Specific Duties
Tariffs or duties may also be classified into ad valorem tariffs and special or
specific tariffs. A duty may be levied either according to the value of the commodity
or according to its weight or quantity. The former type of duty is known as an
ad valorem duty and the latter as a specific duty. An ad valorem duty is charged as
a fixed percentage of the value of the imported article. A specific duty is a fixed sum
of money charged upon each unit of the commodity imported. Sometimes the
specific and ad valorem duties are simultaneously levied on a commodity. A duty in
which both these forms of duties are combined is generally known as the
compound or mixed tariff.
Tariff barriers may be classified into five general classes according to the origin
and destination of the goods crossing the national boundary.
a) Export duties
b) Import duties
c) Transit duties
d) Anti-dumping duties: and
e) Countervailing duties
a) Export Duties
Export duties are generally levied for revenue. They are more popular in the
countries exporting primary products than in those exporting manufactured
products. Export is levied on the export of raw materials with the specific objective
of making these costlier for foreign manufacturers than for domestic
manufacturers. The mother country sometimes compels its colonies to levy export
duties to protect its domestic industry from the competition of the colonies. Export
duties have sometimes been employed to conceive exhaustible natural resources for
domestic industries. Certain countries levy export duties to collect funds for the
defraying the expenses of export promotion activities. Sometimes the duties are
levied to charge higher prices from foreigners for the commodities which are in
short supply.
38
International Business

b) Import Duties
One of the important purposes of import duties is to obtain revenue for the
public treasury. Tariffs are also very popular for protecting domestic industries
from foreign competition. The protection of domestic industries is very essential for
the development of a country. Domestic industries may also require protection
against the aggressive and unfair practices of foreign competitors. In recent years,
tariffs are often employed to restrict imports with a view to correct a disequilibrium
in the balance of payments.
In order to achieve uniformity amongst countries as to customs duties and
other levies, products have been grouped into various categories, depending upon
the material of which they are made. The nomenclature system has been worked
out by an international committee of exports under the aegis of the Customs
Cooperation Council. This classification of goods adopted by them came to be
known as the Brussels Tariff Nomenclature (8lN), which is today followed by a
number of countries when they impose customs duties on imported goods.
c) Transit Duties
Transit duties were very common during the period of mercantilism and in the
early nineteenth century. At that time, transportation was very slow and costly. The
use of the shortest route, therefore, was very important. Countries situated in a
favourable geographical position fully exploited their position and levied heavy
transit duties on the merchandise passing through their territories. Progress in the
field of transportation during the nineteenth century robbed transit duties of their
earlier profitability and decreased the incentive for their maintenance. Another
important factor which led to the elimination of transit duties is the desire among
nations for international economic co-operation. The burden of transit duties is
borne either by the consumers in the importing country or by the procedures in the
exporting country, depending upon the conditions of demand and supply in the two
countries. Transit duties, like other duties, have a tendency to restrict the volume
of world trade.
d) Anti-Dumping Duties
Dumping is the practice of selling goods abroad at a. price below their normal
price (or even below their marginal cost). The purpose of this may be to maintain a
stable or oligopolistic domestic market structure by disposing of temporary
surpluses abroad, or as a means of disrupting the domestic market of a foreign
competitor. Anti dumping duty is levied when the selling price of an imported
product is lower that the normally prevailing domestic price. To meet a situation of
this nature whenever it arises, most countries., under their own legislation, have
the power to impose anti-dumping duties on the ground of injury to their domestic
industries. Anti-dumping duties normally take the form of additional import duties
and charges.
e) Countervailing Duties
Countervailing duties are levied in the same way as anti-dumping duties, and
the explanation of their levy is generally the charge that imports from a specified

39
International Business

country is directly or indirectly subsidized. The amount of countervailing duty


normally corresponds to the amount of the subsidy given by the exporting country
to its exporters.
Non Tariff Barriers
A non-tariff barrier is any measure other than a tariff that raises an obstacle to
the free flow of goods in the overseas market. Non-tariff barriers are normally
erected in the form of prior import deposits. Import quota-licensing, foreign
exchange regulations exchange formalities, government procurements, state trading
health and safety measures. canalisation of trade preferential arrangements and
trading blocks, technical and administrative regulations economic and political
wars.
a) Prior Import Deposits
Some countries impose a condition that importers in their countries should
deposit money upto 100 percent of the value of their import in advance with any
specified authority normally their Central Bank. Such deposits are generally for a
specific period; and whenever such a policy is introduced by any country its
government ensures that the required amount has been deposited before the issue
of an import licence.
b) Quantitative Restrictions through Quota / Licence System
Quantitative restrictions are normally imposed in the form of quotas and
import licenses or a combination of both. Quotas are, generally either global,
bilateral or historical and are based on imports during the previous period. These
are often more selective than tariffs and tend to be adjusted more frequently. Under
this systems the importing country specifies the quantities of a commodity that
would be allowed to be imported from various countries. The quotas fixed normally
depend on the relationship of the importing country with the supplier of the
commodity.
c) Foreign Exchange Regulations
Exchange control methods have been widely used by a number of countries to
regulate imports and are usually adopted by most of the developing nations who
experience an unfavourable balance of payments. Under this scheme the importer
has to ensure that adequate foreign exchange is available for import of goods by
obtaining a clearance from the exchange control authorities prior to the concluding
of a contract with the supplier.
d) Consular Formalities
A number of importing countries demand those consular documents such as
certified invoices, import certificates, etc must necessarily accompany the shipping
documents. Sometimes they even insist that such consular documents should be
drawn in the languages of the importing countries. The fees payable for such
documentation are often quite high sometimes up to 3 per cent of the f.o.b. value of
a product. Heavy penalties are levied by importing countries if there are any errors
in documentation.

40
International Business

e) Technical and Administrative Regulations


These are in respect of physio-sanitary and veterinary regulations, technical
visas, and food and drugs regulations often in the language of the importing
country. Administrative Regulations take the shape of technical standards. e.g., of
electrical goods machinery, etc., and the countries practicing such regulations
insist that the same standards laid down by them should be strictly adhered to by
the exporters. In the case of pharmaceutical products the importing countries
normally specify the pharmacopic standards that should be satisfied before their
import is permitted. Such specifications exclude the import of commodities which
though of good quality do not conform to standards that have been laid down.
Often, documentation formalities relating to technical and administrative
regulations are difficult and time-consuming and even a minor customs authorities
of the importing country. These technical and administrative regulatory measures
impede the free flow of internal trade to a large extent.
f) Health and Safety Regulations
Many countries impose strict health and safety regulations on the import or
sale of products particularly food products. Regulations based on environmental
considerations based on environmental considerations are becoming increasingly
important. These regulations may relate to the raw materials from which a product
is made the conditions under which it is processed how it is packaged and labelled.
A failure to know about such regulations would exclude a supplier from the market.
A prospective exporter must find out this information before he decides to enter a
market.
g) Government Procurements
The purchase of plant machinery and equipment and other supplies and
services for infrastructural projects and other public utility schemes is normally
controlled by a public sector organisation. Under the government procurement
method tender notices are sometimes issued with a very short deadline for foreign
firms to submit their bids in time with a complete specification of the goods being
tendered for. It is always advisable for exporters, desirous of participating in
tenders for large value contracts invited by foreign governments to have their own
arrangements for getting advance information on such tenders.
h) State Trading
In centrally planned economies the foreign trade is as a matter of state policy.
nationalised. This is particularly so in developing economies. In the USSR and
other countries of Eastern Europe the export-import trade is a monopoly of their
governments. In East European countries. their trade policy is generally linked to
their national plans. Foreign trade business is conducted exclusively by specialised
foreign trade organizations, which buy and sell a specific range of products in
accordance with the targets set by the country's long-term and short-term
economic plans. The export-import business is generally carried on within ~e frame
work of bilateral agreements, setting out products and quantities to be exchanged
between the partners. India is a good example of a country where state trading is
41
International Business

practiced in a restricted way. Imports of bulk drugs into India are usually canalized
and distributed through the State Trading Corporation and the Indian Drugs and
Pharmaceutical Ltd. Both these organisation are state owned enterprises. Similarly,
the exports of such raw materials as Iron ore/except in Goa, are canalized through
another state-owned agency known as the Minerals and Metals Trading Corporation
(MMTC). These organisations regulate international trade in certain commodities.
6.3 SUMMARY
In international marketing, it is necessary to taken into consideration of
exporting country’s foreign trade regulations. And hence many barriers limit the
market potentialities in the form of tariff barriers – export and import duties, transit
duties, countervailing duties and antidumping duties and non-tariff barriers such
as prior import deposits, state trading, QRs, Health and safety regulations,
Preferential Arrangements, Trading Blocks, etc.
6.4 ASSIGNMENTS QUESTION
1. Discuss briefly the tariff and non-tariff barriers to international marketing
‰

42
International Business

LESSON – 7

FOREIGN EXCHANGE CONTROL


OBJECTIVES
™ To understand the meaning of foreign exchange control and objectives of
foreign exchange control
™ To know the methods of foreign exchange control
STRUCUTRE
7.1 Preamble
7.2 Objectives of Foreign Exchange Control
7.3 Methods of Foreign Exchange Control
7.4 Summary
7.5 Assignment Questions
7.1 PREAMBLE
Foreign Exchange Control refers to the control of transactions involving foreign
exchange by the government or a centra1ised agency. In a broad sense, any
stipulation or regulation which restricts the free play of forces in an exchange
market can be termed exercise of exchange control. The rate of exchange under
exchange control regime tends to be different from that would exist in the absence
of such control.
The origin of exchange control can be traced back to nineteen- thirties. After
the First World War, many countries of Europe found themselves with depleted gold
reserves and foreign exchange. They imposed payment restrictions to prevent
massive capital withdrawals and instill stability in the domestic economy. Since
then exchange control has been adopted by a large number of countries and for
different purposes.
At present almost all countries in the world have some form of exchange
control or the other. In some countries the control exists in its extreme form with
all its complexities. The control extends over both payment and receipts of foreign
exchange. All receipts are central1sed in a specified authority and all payments are
rationed by it. When some countries proclaim that they have abolished exchange
control, they only mean that control has been minimised. In such cases the
government may allow free market, but would intervene when it feels that the
situation in the market is going out of control. It may otherwise try to influence the
exchange rates indirectly through changes in interest rates. Thus, it is difficult to
conceive of an exchange market which is absolutely free from any sort of control.
7.2 OBJECTIVES OF FOREIGN EXCHANGE CONTROL
The purposes for which exchange control is imposed are many but important among
them are enumerated below:
i) Stability of Exchange rates
A constantly changing exchange rate may not be conducive to the economy
and the government may therefore adopt exchange control methods to stabilise the
exchange rate of the currency instead of leaving it to be determined by market

43
International Business

forces. The objective in pursuing this policy should be to prevent those fluctuations
of the free market rate that the purely speculative or temporary. The policy should
not interfere with changes in rates caused by real alterations in the respective
values of the currencies. But the difficulty lies in identifying the speculative and
temporary changes and isolates them from the fundamental changes.
ii) Over valuation of currency
The exchange control may aim at keeping the currency over valued. That is,
the currency is kept at a higher value in terms of foreign currency than that would
prevail if market forces were allowed to determine the rate. When the country is at
war, exports become difficult but the country has to import both raw materials and
finished goods. In such a situation, type right to purchase materials and finished
goods. Foreign exchange is confined to government agencies. The demand for
foreign currency is kept low and thus its price too. In otherworld, the exchange
value of the local currency is kept high so that the government can import its
requirements cheaply than would be possible otherwise.
Secondly, overvaluation may be used to repay the external debt cheaply in
terms of home currency. When the country is scheduled to make repayments of its
external borrowings and interest thereon on a large scale, if the currency of the
country is kept overvalued, the repayment would work out to be cheaper in terms of
local currency.
Thirdly, it may be used to contain inflation in a country depending heavily on
external trade. If the value of the currency falls, imports will become costlier and
exports will get windfall profits. The immediate effect of the situation is addition to
the inflation rate. The policy of the government, therefore, would be to prevent the
fall in value and keep it at an artificially higher level.
iii) Undervaluation of currency
The exchange control may be with a view to keep the currency under valued.
The effect and purpose of undervaluation of currency is opposite to that of
overvaluation of currency, when the currency is undervalued exports are cheaper
and imports become costlier. Thus, undervaluation of the currency leads to
increase in exports and reduction in imports and ultimately results in the
improvement of balance of payments of the country. The policy of undervaluation
may be helpful during depression when selling is difficult. Undervaluation of the
currency may help in the task by stimulating exports through lower prices.
iv) Balance of Payments Deficits
In a situation of worsening balance of payments, the government may like to
conserve the foreign exchange through payment restrictions or otherwise. Exchange
restrictions may be to prevent large-scale flight of capital from the country. The
erratic and uncontrolled movement of capital from the country. The erratic and
uncontrolled movement of capital will not only affect the balance of payments
position but also be disturbing to the domestic economy.

44
International Business

v) Reserve foreign exchange for essentials


Exchange control may be imposed to acquire foreign exchange to be utllised
for importing certain essential commodities from abroad. In times of war the
government may reserve foreign exchange to import essentials of war. During times
of peace, govt., may restrict payments to acquire sufficient foreign exchange to
service its external debt. This may be the case where the govt., is unable to find
sources of fresh debt or to renew the existing debts.
vi) Freeze foreign national assets
During war times, exchange control may be imposed to prevent utilisation of
the purchasing power in the country held by the residents of the enemy country or
a neutral country 80 that they may not be able to use the assets to help the enemy
country.
vii) Economic planning
For a proper execution of ~e economic plans exchange control helps to a great
extent by controlling the foreign exchange market encouraging exports and
restricting imports to essentials through the inflow of capital from abroad.
Viii) Develop bilateralism
Exchange control may be with a view to encourage trade with a particular
country or group of countries. This may be achieved by offering different types of
rates for different countries or for different commodities. Thus exchange control
may aim at developing discriminatory bilateralism.
ix) Encourage local industries
The government may desire to protect the local industries from competition
from abroad. Imports may be restricted 80 that the local industries are allowed to
grow. This paves the way for better utilisation of the resources of the country and
also conserves its foreign exchange reserves.
Thus exchange control is practiced for varied reasons. Each country may be
more than one reason among those listed above for its policies.
7.3 METHODS OF FOREIGN EXCHANGE CONTROL
Exchange control may take any of the following terms
1) Exchange intervention
2) Exchange restriction
a) Blocked accounts
b) Transfer moratoria
c) Multiple exchange rates
3) Exchange clearing arrangement
4) Indirect methods
a) Import restrictions and tariffs
b) Export subsidy
c) Interest rate changes

45
International Business

1) Exchange Intervention
Exchange intervention or official intervention refers to the buying and selling
of foreign exchange in the market by the government or its agency (Central bank)
with a view to influencing the exchange rate. In a free market the rate of exchange.
is determined by the forces of demand and supply. Official intervention is an
attempt to counter the effect of demand and supply of the currency and keep the
rate of exchange at a level desired by the government.
The intention of the government is to keep the exchange rate of the currency of
the country at a fixed level. Then the currency is, said to, be ‘pegged' at that level. If
the pegged rate is higher than the rate which would prevail in the free market, the
currency is said to be 'pegged up' or simply 'pegged'. During the war of 1914-18.,
the British Government 'pegged' the pound- sterling at $4.76. How great a degree of
overvaluation this entailed was shown in March 1919. When the 'peg" was
withdrawn and the pound fell within a year to 3.40. Intervention may also be to
keep the value of the currency down as compared" to the rate that would be
determined by market forces. In that case the currency is said to be 'pegged down'.
To quote an illustration, the rate of exchange between Newzealand pound and the
pound- starling was fixed in 1933 at & N Z.125 = $100 (or & N.Z 1=16 s. Sterling).
For the first few years after the rate was established the Newzealand pound would
almost certainly have been given a higher value in a free market; the action of the
Newzealand authorities was thus a form of 'pegging down'.
It should be understood that pegging up or pegging down of a, currency does
not mean causing a permanent change in the rate either upwards 'or downwards in
the market. It only means keeping the rate (artificially) at a particular level. The
pegged rate is something different from the rate "that would obtain in the market in
the absence of pegging operations.
When the exchange value of the domestic currency is pegged up, it means that
the currency value will fall if free market is allowed. To keep the value at the pegged
up value, the government should purchase it in large quantities. In other words, it
should sell foreign currency in large quantities in the market. This would increase
the demand for the currency in the market and prevent it from falling from the
pegged up level. To effectively carry out the operation, the government requires a
large reserve of foreign currency. In addition to the accumulated reserves, the
government may borrow externally. But except in times of emergency, governments
are not likely to be willing to borrow continuously in foreign centres in order to
support their currencies. Even if they do so, continuous borrowing would lower the
country's rating in the market and ultimately the source will dry up.
Intervention may be for 'pegging down' the currency or keeping its value lower
that the free market rate. When the rate of exchange of the domestic currency is
rising in the market the government may sell the currency in large quantities and
thus bring down its rate. Large reserves of domestic currency are required for
pegging down operations. As compared to pegging up, pegging down seems easier
because it is not difficult to have reserves of domestic currency. Though it is true,

46
International Business

pegging down is also not without limitations. Domestic resources can be raised by
taxation or public borrowing, both of which cannot go beyond a certain limit. The
other method is creation of more money by resorting to printing of currency. This is
an unlimited source but it has serious repercussions on the economy. Increased
money supply will lead to inflation in the country. The Inflation will cause a
permanent reduction in the value of the currency. It may be remembered that the
purpose of pegging down is to keep the rate of the currency at a lower level than the
free market level. It is not to lower the level of market rate itself.
As already defined, intervention means selling or buying of foreign exchange in
the market by the government or the Central bank. The purpose may be to 'peg up'
or 'peg down' the currency of the country. Interventioned not be for this purpose
along. Intervention may also be for the purpose of stablishing the exchange rate
and free it from short-term fluctuations. The government should be ready to
purchase and sell the currency to any extent at specified rates. The market rates
then tend to over around these official rates. The government should have large
reserves of 'both domestic currency and foreign currency to carry out the operation.
For the success of intervention two conditions are essential. The control of
foreign exchange transactions should be centralised with the government. All
proceeds of foreign exchange from exports and other transactions should be paid to
the government. Similarly, all requirements of foreign exchange for Imports and
other payments should be obtained from the government. Secondly, the government
should have sufficient reserves of foreign currency and domestic currency. In
practice there is a limit to both foreign and domestic resources and the possibility
of intervention is limited to this extent. The judicious policy that can be followed is
that of using intervention to avoid minor fluctuations in rates.
In India, exchange control is centralised with the Reserve 'Bank of India. Much
of the routine work is entrusted by it to authorised dealers. Thus the first condition
mentioned above Is fulfilled. The Reserve Bank sells and purchases from authorised
dealers without limit pound sterling and purchases US dollar, and Japanese yen.
The rates for 'pound-sterling in the market tends to be within the range of buying
and selling rates of the Reserve Bank. As far as other currencies which can be sold
to Reserve Bank, the market buying, rates are normally more favourable than the
Reserve Bank, the market buying rates are normally more favourable than the
Reserve Bank rates. The Reserve Bank seldom Intervenes In the market. The
Reserve Bank rates stabilise the market rates around them.
2) Exchange Restriction
Exchange restriction refers to the policy of the government whereby the supply
of domestic currency In the exchange market Is restricted. The exchange value of
the domestic currency is maintained by restricting its supply. Exchange
intervention tries to achieve the object of maintaining the currency high by the
government supplementing the demand for the currency in the market. This mean
the government should have sufficient foreign currency reserves to offer to the
market. This method was largely found insufficient where the magnitude of the

47
International Business

problem was large or where the government did not have sufficient foreign
exchange reserves. Exchange restriction achieves the same objective in an easier
way by simply restricting the supply of the domestic currency in the market.
Any method adopted by the government which has the effect of restricting the
supply of domestic currency in the market can be termed exchange restriction. But
in its strict application exchange restriction has the following main features; First
all trading in foreign exchange is centralised with the government or central
monetary authority. Secondly, public have to obtain poor permission of the
government to exchange national currency for foreign currency. It is also an offence
for anyone to enter into an exchange transaction except by permission and through
the agency of the government. Thirdly, all foreign exchange transactions are routed
through the government or the govt. agency.
Exchange restrictions in different countries take different forms. They may
control only capital transactions or they may control both capital and current
transactions. The important methods of exercising exchange restrictions are:
(1) blocked accounts (it) transfer moratoria and (ill) multiple exchange rates.
Blocked Accounts
Exchange restriction was first imposed in the central European Countries in
1931 to bong the supply of their currencies in the market in accordance with the
demand for them without a steep fall exchange rates. These countries had borrowed
heavily on short term on which the repayment of principal and interest was due at
any time. Repayment of these foreign currency loans would have flooded the market
with the local currencies and brought down their value sharply. This would have
reinforced itself prompting further outflow of capital from the country at a
diminished value of domestic currency bringing in its wake collapse of the economy.
The only thing that could be done in such cases was to impose a ban on the outflow
of capital. In some cases the debtor was made to pay the amount due but it was
kept in an account the central bank in the name of the foreign creditor. Thus the
system of blocked accounts was born.
Under this system all payments to a foreign country will not be made directly
but paid to the central bank of the country imposing the restriction. The Central
bank will keep the amount in an account with it in the name of the foreign creditor.
This amount is not available to the foreign creditor in the currency of his country
but can be used by him to make purchases from the country blocking the account.
This system is known as 'blocking of accounts' because the bank accounts and
other assets of the foreigners are denied conversion into their currencies.
The country which blocks the accounts of foreigners may allow the use of the
balance in the accounts within the country. The foreign creditor may thus make
some imports from the country blocking the accounts and make payment to the
local exporter from the balance in the account. Transfer from one blocked account
to another blocked account may be permitted. These relaxations may encourage
Illegal dealings in foreign exchange. For example foreign exporters may under
Invoice their consignments so that a lesser amount Is blocked. The difference may
48
International Business

be collected by them in local currency when they go to the country of the Importer.
When compensatory parents take place In this manner the government loses
foreign exchange to that extent should ordinarily have flow into its reserves.
The system of blocked accounts causes great hardships to the foreign creditors
who cannot use the amounts in any other currency for any purpose. Further
blocked accounts reduce International trade since other countries would not like to
export to the country and get their funds blocked. The blocking of accounts also
results in black marketing In foreign countries. The foreign creditor whose accounts
are blocked would like to sell It to others even at a lower rate.
b) Transfer moratoria
The effect of transfer moratoria is similar to that of blocked accounts. The
government puts a ban on all payments to outsiders, whether on current or capital
account. The local debtors are made to pay the amounts due to the foreign creditors
to the Central Bank of the country. The funds are released to the foreigners when
the balance of payments and reserve position of the country Improves.
c) Multiple exchange rates
When the system of blocked accounts was in vogue it was found that
foreigners whose funds were help up in such accounts were willing to sell these
balances at a discount in the unofficial markets rate than keeping their funds
blocked. The authorities then found that it would be advantageous for the country
to allow the transfer of funds at a discount. They began to charge two different
rates. Importers who wanted foreign currency had to purchase them at higher
value. Exporters who acquired the foreign currency had to sell It to the authorities
at a lower value fixed by the government. This gave way for the emergence of
multiple exchange rates.
Multiple exchange rates refer to the policy of employing different rates of
exchange for transactions involving different commodities and also for different
currencies. The aim is to encourage exports and discourage imports to the extent
possible. By quoting an unfavourable rate for imports, imports are discouraged.
When the government wants to restrict imports of a particular commodity a
different rate may be prescribed for imports of such a commodity. Thus multiple
exchange rates substitute trade control methods like import quantity control and
quota system and tries to achieve the same results by increasing the cost of
imports.
Different rates may be fixed for different currencies. For example, when £ the
dollar/sterling rate of exchange is $ 2 per £ 1, the Rupee rate may be £ fixed at
Rs.20' per 1 and Rs.7 per £ 1. The purpose may be to control direction of trade of
the country. In the present case rupee is overvalued in terms of dollar relative to
the pound -sterling. This may result in more imports from dollar countries and
more exports to sterling countries.

49
International Business

Another variation of multiple rates is adoption of different rates for commercial


and capital transactions. The aim is to prevent flight of capital from the country.
The advantage of multiple rates is that they encourage exports and discourage
imports and thus help improve the balance f payments position of the country.
However, it is a complex and confusing system. There is a tendency for the number
of rates to get multiplied. The rates are purely arbitrary and keep on changing. This
creates uncertainty. Further, multiple rates result in inefficient use of domestic
resources. It is discriminatory affecting only a few of the competitors. The multiple
rate system is disapproved by the IMF and its members are urged to adopt a single
rate of exchange.
3. Exchange Clearing Agreements
Exchange clearing agreement is a system of bilateral settlement of mutual
claims on international transactions. Under this agreement two countries engaged
in trade settle their dues through their respective central bank instead of allowing
direct payments between buyers and sellers. For example, let us assume that India
enters into an exchange clearing agreement with UK. Then the Reserve Bank of
India will open an account with itself in the name of Bank of England. All imports
into India for import from UK are required to pay the amount to the account of
Bank of England with the Reserve Bank. All exports to England are paid for by the
Reserve Bank from the account of Bank of England. Similarly, Bank of England
would open an account of Reserve Bank of India with it which would be fed with
imports into the UK from India and utilised for payments for experts from UK into
India. Thus no foreign exchange reserves and transfers are involved in the
settlement of transactions'. All that is required is the passing of information of the
transaction between the central banks of the two countries. The basic assumption
of the arrangement, is that the import and export between the' countries would
mutually' offset and ultimately there would be no need for any payments.
The operation of the clearing arrangement would involve the following steps:
Suppose an exporter from India exports goods to an importer in UK. The
Exporter sends the documents to the importer in UK. The importer makes payment
to Bank of England. For the Reserve Bank to make payment to the exporter in India
two conditions must be fulfilled. First, it should receive a notification from the Bank
of England that the importer has made payment there. Secondly, there should be
sufficient amount paid into the Reserve Bank by Indian importers for goods
imported from England. Until these conditions are fulfilled the exporter has to wait
to get payment.
Payment agreements
The hardship caused to exporters in the form of waiting period is removed by
substitution of exchange clearing agreement by payment agreement. Under the
payment agreement two countries establish mutual credit facilities. Under this
arrangement the payment to the exporter is made through specially opened non-
resident accounts for this purpose. For example, India has a payment agreement
50
International Business

with USSR. When the importer in USSR pays to his bank on realisation of the
import bill, the amount is sent to the exporter by means of an instrument drawn on
the USSR bank's account with an Indian bank, opened specially for routing these
transactions. The exporter gets payment immediately without the waiting period.
S1m1larly when an import is made into India from USSR, the payment may be
effected by issuing an instrument on the account maintained by the Indian bank
with a USSR bank for this purpose.
In contrast to exchange restrictions which tend to restrict international trade,
exchange clearing agreements (including payment agreements) encourage
international trade. The trade can take place without botheration of finding scarce
foreign exchange to finance them. Secondly, even countries which do not have
exchange reserves are enabled to import as the transactions do not pass through
exchange markets.
However, the system has many disadvantages. It may, be used by the
economically stronger country to exploit the weaker country. During war Germany
imported essential raw materials from Hungary and Rumania which had exchange
clearing agreements with it and later blocked the accounts. Hungary and Rumania
were thus forced to import certain unwanted items from Germany to utilise the
blocked funds.
Secondly, it leads to bilateral trade at the expense of multilateral trade. It
benefits the countries which are parties to the bilateral arrangements at the
expense of the countries which are not parties to such arrangements. Bilateral
trade diverts trade from natural channels into unnatural channels reducing the
benefit of international trade.
Thirdly, such arrangements result in the interference with the working of the
foreign exchange markets. A large-scale bilateral trade will reduce the transactions
in the market.
4. Indirect Methods
Among the indirect methods of exchange control import tariffs and quotas and
export subsidies fall under the category' of 'trade control'. They were outlined in the
previous chapter. The other method is the variation of interest rates. Interest rate
has an influence on the movement of capital and investments from other countries.
When larger inflow of capital is required the country may increase the interest
rates. But it will affect the domestic economy. These indirect methods are mostly
applied for purposes other than to influence the exchange rates. Their effect on
exchange rates is also not as effective as that of direct methods.
7.4 SUMMARY
Foreign exchange control refers to the control of transactions involving foreign
exchange by the government or a centralised agency. The main objectives – stability

51
International Business

of exchange undervaluation of currency, BOP deficits, Economic planning. Thus,


exchange control is followed for varied reasons. The methods of foreign exchange
control are – exchange intervention, exchange restriction, exchange clearing
arrangement and indirect methods.
7.5 ASSIGNMENT QUESTIONS
1. Define export marketing. State the features and functions of export
marketing.
2. Bring out the benefits that accrue to the exporter. What skills are required
for export marketing?
3. "In the international field, there are some policies and institutions which
developed countries use to regulate their; trade in such a manner that they
become indirectly, trade barriers" - Discuss.
4. What are the objectives of Exchange control? Explain the methods of
exchange control.
5. ‘Exchange control’ is one of the means for the attainment of national
economic objective. Discuss this statement in the context of Indian Exchange
Control.
‰

52
International Business

LESSON – 8

INTERNATIONAL ECONOMIC ORGANISATION AND FORUMS


OBJECTIVES
To understand the:
a. International Monetary Fund and its functions
b. International Bank for Reconstruction and Development and its functions
c. Asian Development Bank and its functions
d. Euro Dollar Market
e. Special Drawing Rights
f. International Liquidity
STRUCTURE
8.1 Preamble
8.2 International Monetary Fund (I.M.F)
8.3 The Early Years
8.4 The Debt Crisis
8.5 The Impending Challenge
8.6 IMF Chronology 1944-95
8.7 Summary
8.8 Assignment Questions
8.1PREAMBLE
Global development through global efforts has been hailed since the distant
past. International financial institutions like the World Bank (WB), International
Development Association (IDA), International Finance Corporation (IFC), Asian
Development Bank (ADB), World Trade Organisation (WTO), etc are the fruits of
global efforts directed at balanced development of nations. These institutions help
world countries, especially the third world nations to build up their economic,
social and environmental infrastructure, Social and so that economic,' social and
environmental developments can be achieved in these countries. These institutions
maintain and strengthen linkages between developed and developing world nations
by directing capital, technology and trade flows amongst them. Today global
development depends on global investments, technology and trade flows, which the
WB, IDA, etc facilitate to effect.
8.2 INTERNATIONAL MONETARY FUND (I.M.F)
Over its 50-year history, the IMF, while remaining as the watchdog of the
international monetary system has broadened the scope of its activities in response
to crisis and changes in the world economy. In recent years, it has introduced
several new programs that help developing and transition countries with
economical reforms.

53
International Business

The Bretton Woods Conference of 1944, a landmark in international economic


relations, laid the foundation for cooperation among nations in the solution of world
monetary problems. The 44 countries participating in the conference agreed to
establish two new multilateral institutions: the International Monetary Fund (lMF),
which would oversee a new international monetary system and serve as a forum for
discussion and resolution of issues affecting the system, and the International
Bank for 'Reconstruction and Development (lBRD) which would finance the
reconstruction of war-ravaged countries and foster economic growth in developing
countries.
The IMF's founders wanted to safeguard the global economy against the type of
devastating breakdown that had occurred in the 1930s. Their goal was an open and
stable monetarily system characterized of fixed exchange rates, and the elimination
of harmful restrictions and practices, especially exchange controls and competitive
currency devaluations.
During the first quarter-century of its existence, the IMF oversaw the "par
value system" that was designed to ensure exchange rate stability-countries
belonging to the IMF were required to define the value of their currencies in terms
of US dollars or gold and to get IMF approval before they changed the "par value" by
more than 10 per cent. When this system of fixed but adjustable exchange rates
was abandoned in the early 1970s in favour of floating exchange rate, friends and
critics alike questioned whether the IMF had a future. But the IMF soon found its
role expanding, not shrinking, in the wake of a. world economic crisis.
A quarter-century later, on the occasion of its fiftieth anniversary, the IMF is
once again at the centre of debate. It is clear that the need for the IMF is greater
than ever in today's complex global environment. It is also clear that the IMF has
an ability to respond quickly to changes in the world economy and to develop
innovative solutions to new problems; thanks to this adaptability. It continues to
playa leadership role in the international monetarily system.
8.3 THE EARLY YEARS
In addition to the establishment of the IMF and the IBRD, the Bretton Woods
system, particularly the par value system, is considered by many to be the greatest
achievement of the Bretton Woods Conference. Along with the General Agreement
on Tariffs and Trade (GATI), concluded in 1947, which has provided rules for
international trade the Bretton Woods system, despite its weaknesses, furnished
strong support for the long period of world economic growth that lasted from 1945
to 1971. The system, especially as implemented as by the IMF, encouraged the
industrial countries of Europe to adopt prudent macroeconomic policies, to achieve
realistic exchange rates, to use monetary policy as a tool of macroeconomic policy,
and to improve their payments positions by decreasing exchange and payments
restrictions. The European countries were thus able to lower their inflation rates
and reduce their balance of payments deficits. In addition to serving as a forum for

54
International Business

consultation and collaboration, the IMF helped countries correct short-term


balance of payments problems by lending them the foreign currencies they needed.
Increasing Its Financial Resources
During the 1960s, the IMF made two important changes in its 'operation.
First, to ensure that it would have enough cash on hand to meet its member's
borrowing needs in the event of a balance of payments crisis by one of the large
industrial countries, It introduced the General Arrangements to Borrow. These
enabled It to supplement Its financial resources the quota subscriptions of the ten
largest industrial countries (this has since increased to 12 countries). Second, in
response to threat of a shortage of international liquidity, it was empowered to
create the special drawing right, or SDR, a type of reserve asset that member
countries could add to their foreign currency and gold reserves and use for
payments requiring foreign exchange.
Lending to Development Countries
It was also during the 1960s that the IMF increased its attention to developing
countries. It introduced two lending mechanisms – the compensatory financing
facility and the buffer stock facility-designed primarily to help developing countries
deal with temporary declines in their export earnings stemming from fluctuations in
the prices of primary products.
Two more Decades of Change
With the collapse of the par value system in the 1970s, the IMF was forced to
adapt to a drastically changed environment. In view of the requirement of the
floating exchange rate system, it amended its Articles of Agreement extensively to
update its legal authority. Its new mandate gave it an intensified "surveillance" role-
it would monitor not only the exchange rate policies of members but also their
domestic economic policies affecting exchange rates. Two ministerial level
policyri1aking bodies were established the Interim committee and the Development
Committee- that would meet in a smaller forum and more frequently than the
Annual Meetings of the full Boards of Governors of the IMF and the World Bank
(the IBRD and the International Development Association), and make decisions
more quickly, Most important, the IMF introduced a new lending instrument, the
extended Fund facility, tailored to the medium term needs' of the developing
countries.
Lending Activities Increase
During the 1970s, sudden, steep increases in oil prices caused massive'
imbalances in external payments. Inflation also reached historic highs, and then,
as a serve worldwide recession followed, many countries found themselves
confronted with a hitherto unknown phenomenon; rising prices coexisting with
high unemployment. These were the prospect of exchange rate instability and
competitive devaluation-a prospect frighteningly reminiscent of the 1930s. To meet
these challenges, the IMF introduced additional new lending facilities that took into
account the need to focus on eradicating structural rigidities as well as short-term
macroeconomic imbalances.
55
International Business

Today, the IMF's loans support member countries' efforts to adopt appropriate
fiscal and monetary policies, correct distortions in price structures, achieve realistic
exchange rates, and take other measures to improve the efficiency of production.
These reforms are aimed at strengthening countries' prospects for economic growth.
As a growing number of countries seeking to strengthen their external payments
positions and domestic to strengthen economies realized the necessity of
undertaking macro-economic and structural adjustment programs in the 1980s
and 1990s. the IMF's lending activities continued to expand. For decencies, the IMF
had made financial resources available on a short-term basis to member countries.
These arrangements were not suited to low-income developing countries with
protracted balance of payments problems. However the IMF established the
structural adjustment facility in 1986 and the enhanced structural adjustment
facility in 1988, renewed the latter in 1994, and is now able to offer poorer
countries concessional loans to support medium-term macroeconomic and
adjustment programs.
8.4 THE DEBT CRISIS
The oil shocks of the 1970s, which forced many oil importing developing
countries to borrow heavily from commercial banks, and the higher interest rates
that resulted from the industrial countries' attempts to control inflation converged
to bring about the debt crisis of the 1980s. In the last quarter of 1982, in debeted
countries suddenly found themselves unable to service their external debt.
The crisis posed a serious threat to the international banking and financial
system. From the outset, the lMF was a major player in seeking solutions. At first,
the IMF and the industrial and developing countries believed the debt crisis would
be temporary; they assumed that the worldwide recession that had depressed
demand for exports from heavily indebted countries would not last. Economic
growth in the industrial countries was expected to resume within one or two years,
once inflation had been brought under control. It was assumed that economic
recovery in the industrial countries, combined with the correction of certain
problems in the indebted countries-excessive budgetary deficits, easy monetary
policies, and overvalued exchange rates-would restore high growth rates in the
indebted countries. Financial officials also believed that the large amounts of flight
capital that had left indebted countries would return after these countries had
realigned their policies, and that investment would then increase;. it was assumed
that commercial banks, then unable or unwitting to engage in substantial debt
relief or forgiveness, would continue to lend voluntarily to indebted countries.
The IMF responded to the crisis by working with all interested parties-debtor
and industrial countries, and official and private creditors-to find solutions on a
country-by-country basis. It helped design and implement adjustment programs
tailored to individual debtor countries. It provided financial resources to indebted
countries and factl1tated financial flows to them from governments, commercial
banks, and other international financial institutions. It worked with creditors and
debtors on the rescheduling of debt payments.

56
International Business

In the end assumptions that the debt crisis would be temporary proved to be
too optimistic-it lasted ten years. Countries began to experience "adjustment
fatigue" and the IMF came under attack for the adjustment programs it had
developed with indebted countries in return for financial support. IMF
"conditionality"-when using IMF resources to solve balance of payments problems,
countries are expected to pursue certain economic policies-was blamed when
standards of living already at subsistence levels in many countries fell even lower.
In 1989 because the success of stabilization policies was being undermined by
the size of the debt burden in many countries the debt strategy was modified to
accelerate debt reduction operations. A number of heavily indebted countries-
especially in Latin America but also in other regions-made debt-restructuring, debt-
conversion, and debt-reduction debt-arrangements with both official creditors and
commercial banks to alleviate their debt- service obligations. At the same time,
some countries began to reap the benefits of stabilization and structural
adjustment programs. In the 1990s, improvements have begun to be apparent,
especially in the Western Hemisphere, with growth rates rising for many countries;
a number of countries. However, particularly in sub-saharan Africa. still face very
difficult debt problems.
Economic In Transition
In the 1990s, the IMF is once more adapting its operations to important
changes in the international environment - namely the breakup of the former Soviet
Union and the attempts of the resulting states to make the difficult transition to
market economies. In 1991, at the Houston economic summit the heads of states of
the seven largest industrial countries- the Group of Seven-charged the IMF with
assisting the countries of the former Soviet Union with far-reaching economic
stabilization and reform measures. The IMF committed itself to channeling
significant amounts of financial assistance to these countries. In 1993, the JMF
established the temporary systemic transformation facility which was extended in
1994 to make financing available to the countries of the former Soviet Union as
they transform their centrally planned economies to market based systems.
In addition to supporting reforms with loans, the IMF is helping the countries
of the former Soviet Union achieve better macroeconomic management by training
government officials enhancing the quality of statistical data assisting with reforms,
of the tax system and government expenditure management designing social safety
nets and improving the operations of the central banking and financial closer to
home the IMF in conjunction with other international organizations established a
new institute in vienna.
Policy Analysis
In recognition of the complexity and Intractability of the problems faced by the
developing and transition economies the IMF has broadened its focus when
considering the economic policies of the countries it assists.
57
International Business

For example it emphasizes the importance of policy measures that will


promote sustainable quality growth even though these measures may take time to
bear fruit. It is also increasingly concerned with the effect the policy reforms
supported by its financing will have on poverty and Income distribution. as well as
with the impact adjustment and Income programs and economic policies will have
one the environment.
8.5 THE IMPENDING CHALLENGE
Despite the changes of the past 50 years the IMF retains its original and very
important role; it continues to oversee the International monetary system and to
monitor the world economy. Because, of growing economic Inter-dependence among
countries the IMF has even more relevance now than 50 years ago, but its job has
become much more difficult.
In part, this is because the Industrial nations have been pursuing that tend to
serve national interests; often at the expense of the International community, the
volatility of the principal currencies' exchange rates creates uncertainty that hurts
trade and Investment. The Industrial countries have also come to rely heavily on
monetary policy as a tool for macroeconomic management, and need to make
timelier adjustments to prevent the emergence of inflationary pressures: Because of
widespread large budget deficits, fiscal policy has become inflexible. overburdening
monetary policy. International liquidity from private sources now dwarfs official
liquidity. Nevertheless, the IMF has a unique surveillance role to play with respect
to the Industrial countries, encouraging them to adopt sound economic policies and
fostering a more orderly and stable exchange rate system.
Over the past few decades, the developing countries have become a new and
important force in the global economy. Many of them have been growing faster in
recent years than the Industrial countries; others, however, hobbled by their own
policies and the slow recovery of several industrial countries from the recession of
the early 1990s are seeing little growth. Although private capital flows to the
developing world have increased substantially, these flows have been highly
concentrated In Latin America and Asia. Surges in capital inflows have complicated
economic management in a number of developing countries forcing them to juggle
policies so as to minimize the inflationary effect of the flows and their impact on the
exchange rate. In some countries, these flows have masked low domestic savings
and unsustainably large current account imbalances. The dangers of dependence
on capital inflows were amply demonstrated by Mexico's recent 'economic crisis.
There is thus a continuing need for the IMF to provide both financial and
technical assistance to developing and transition economies in support of efforts to
liberalize prices and trade and exchange regimes, contain 1nflatioruuy pressures,
carry out structural reforms quickly, and establish cost-effective social safety nets
to protect the most vulnerable. And, while the strong growth of private capital flows
has led some observers to question the utility of the SDR the IMF’s special reserve
asset, the ability of developing countries to borrow on reasonable terms in
international capital markets 18 confined to a privileged few. In any case, in an

58
International Business

increasingly global economy and financial system, the question of a central reserve
asset issued by an international monetary authority is a pressing one.
An important recent development for the global economy was the conclusion of
the Uruguay Round of trade negotiations. In the open, more competitive
environment created by the Uruguay Round agreement, there will be a need for IMF
surveillance over exchange rate and macroeconomic policies, and the IMF w1llwork
withGA1Ts successor, the World Trade Organization, toward further trade
liberalization.
Present circumstances offer opportunities for greater cooperation among
nations. The IMF is now what it was first intended to be-truly universal
organization, with 179 members, almost all of the countries in the world. Once
again, as at Woods 50 years ago, with sufficient political will, nations could work
together to build a stable and open monetary system for the benefit of the entire
international community.
8.6 IMF CHRONOLOGY 1944-95
¾ 1944 Bretton Woods Conference, at the conclusion of which the Final Act
embodying the Articles of Agreement of the World Bank and the IMF is
signed.
¾ 1946 Camille Gutt is appointed IMF's Managing Director (June 1946-may,
195l).
‘ Fund's Initial quotas are $7.4 billion.
¾ 1951 Ivar Roath is appointed Managing Director (August 1951 August 1956).

1952 Procedures for annual consultations on exchange restrictions are


approved by the Executive Board.
‘ Procedures for' stand-by arrangements, drawings, and changes are
agreed.
¾ 1956 Jacobsson is appointed Managing Director (December 1956-May 1963).
¾ 1958 First general increase in quotas becomes effective, raising the total to$15
billion.
¾ 1962 General Arrangements to Borrow (GAB) are formed.
¾ 1963 Compensatory financing fac1l1ty is approved.
‘ Pierre-Paul: Schweitzer 'Is appointed Managing Director (September
1963 -August 1973).
¾ 1966 Fourth Quinquennial Review of Quotas is completed Increasing total to
$21.1 billion.
¾ 1969 Buffer Stock financing facility is establ1shed.
‘ First Amendment of the Articles of Agreement enters Into force,
creating the Special Drawing Account and the Special Drawing Right
59
International Business

(SDR).
¾ 1970 Fifth General Review of Quotas is completed, increasing total to about
SDR 28.9 billion, which was equivalent to $28.9 billion.
¾ 1971 Dollar convertibility into gold is suspended.
¾ 1972 Committee on Reform of the International Monetary System and Related
Issues (the Committee of Twenty) is establ1shed.
¾ 1973 H. Johannes Witteveen is appointed Managing Director (September 1973–
June 1978).
¾ 1974 Guidelines for the management of floating rates are established.

‘ First oil facility is established


‘ Extended Fund facility is establ1shed.
‘ Final Report and Outline of Reform of the Committee of Twenty is
transmitted to Board of Government at Annual Meetings.
‘ Interim Committee of the Board of Governors on the International
Monetary System (the Interim Committee) is established.
¾ 1975 Second. 011 fac1l1ty is established
¾ 1976 Sixth General Review of Quotas is completed Increasing total to SDR 39
billion which was equivalent to $44. Billion.
‘ Four-year gold sales program is announced.
‘ Trust Fund is establ1shed.
¾ 1977 Principles are approved for the guidance of members with respect of
exchange rate pol1icies.
‘ Supplementary financing fac1l1ty Is established.
¾ 1978 Second Amendment of the Articles of Agreement comes into effect.
‘ Jacques de Larosiere is appointed Managing Director (July 1978
December 1986).
‘ Seventh General Review of Quotas is completed, increasing the total
to SDR 58.6 billion which was equ.tva1ent to $ 73.4 billion.
¾ 1981 SDR is reconstituted as a basket of five major currencies.
‘ Enlarged access policy is adopted.
¾ 1982 Stand-by arrangements are negotiated for Mexico. Argentina and Brazilin
response to the international debt crises.
¾ 1983 Eighth General Review of Quotas is completed, increasing the total to
SDR 90 billion, which was equivalent to $96 billion.

60
International Business

‘ The GAB is revised and expanded.


¾ 1985 Arrears strategy is adopted, including declaring countries in arrears to
the IMF to be ineligible to use IMF resources.
¾ 1986 Structural adjustment fac1l1ty is established.
¾ 1987 Michel Camdessus is appointed Managing Director.
‘ Enhanced structural adjustment facility is established.
¾ 1988 Compensatory and contingency financing facility replaces the
compensatory financing fac1l1ty. as the contingency window is added.
¾ 1990 Ninth General Review of Quotas is completed, increasing the total to SDR
135. 2 billion, which was equivalent to $ 183.4 billion.
¾ 1992 Membership is approved for the Urssian federation and 13 of the 14 other
states of the former soviet Union.
‘ Third Amendment to the Articles of Agreement is adopted.
¾ 1993 Systematic transformation fac1l1ty is established.
¾ 1994 Fiftieth anniversary of the Bretton Woods Conference.
¾ 1995 Unprecedented large stand-by arrangement is negotiated for Mexico in
response to system crisis in emerging markets.
8.7 SUMMARY
It is necessary to understand about the international financial institutions like
WB, IMF, WTO and IFC. The focus of these bodies, to emphasizes the importance of
policy measures that will promote sustainable, quality growth, even though these
measures may take time. It is interesting to know the chronological issues of IMF
and other international financial institutions.
8.8 ASSIGNMENT QUESTIONS
1. Explain briefly the significant role of IMF in increasing its financial resources.
2. What is debt crisis?
3. Describe the impending challenges of economic growth for interdependence
among countries.
‰

61
International Business

LESSON – 9

WORLD BANK (IBRD)


OBJECTIVES
™ To understand the role and purposes of IBRD
™ To learn the guiding principles of IBRD, and
™ To know the lending operations of IBRD
STRUCTURE
9.1 Preamble
9.2 Purposes
9.3 Guiding Principles
9.4 Lending Operations
9.5 Summary
9.6 Assignment Questions
9.1 PREAMBLE
The International Bank for Reconstruction and Development (IBRD) , today
more popularly known as the World Bank, Is one of the 'Bretton Woods Twins' and
membership in the IMF is a principal condition for membership in the Bank.
9.2 PURPOSES
The purposes of the Bank, as laid down in its Articles of Agreement, are:
1. To assist in the reconstruction and development of the territories of the
members, by fac1l1tatlng the investment of capital for productive purposes,
including the restoration of economies destroyed .or disrupted by war, the
reconversion of productive fac1l1ties to peacetime needs and the encouragement of
the development of productive fac1l1t1es and resources in less developed countries.
2. To promote private foreign investment by means of guarantees or
participation of loans and other investment made by private investors: and when
private capital is not ava1labl~ on reasonable terms, to supplement private
investment by providing, on suitable conditions, finance for productive purposes
out of its own capital funds raised by it and its other resources.
3. To promote the long-term balanced growth of international. trade and the
maintenance of equ1l1brium in balance of payments, by encouraging
intemationa1investment for the development of the productive resources of
members, thereby assisting in raising productivity the standard of living and
conditions of lab labour in their territories.
9.3 GUIDING PRINCIPLES
In its lending operations, the Bank is guided by certain policies which have
been formulated on the basis of the Articles of Agreement.
Firstly, the Bank should assess properly the repayment prospect of the loans.
For this, it should consider the availability of natural resources and existing
productive p1ant capacity to explicit the resources and operate the plant and the
countries past debt record.

62
International Business

Secondly, the Bank should lend only for specific projects which are
economically and technically sound and of high priority nature. As a matter of
general policy, the Bank concentrates on lending for projects' 4estgned to
contribute directly to the productive Capacity and normally does not finance
projects of pr1mar1ly social character, such as education, housing etc. Most Bank
loans have been made for basic utilities such as a power and transports, which are
pre-requisites for economic development, besides, the Bank puts much emphasis
upon the proper management of the projects.
Thirdly, the Bank lends only to meet the foreign exchange content of any
project cost. It normally excepts the borrowing to mobilise its domestic resources.
Fourthly, the Bank does not expect the borrowing country to spend the loan in
a particular country; in fact it encourages the borrowers to procure machinery and
goods for Bank financed projects in the cheapest possible market consistent with
satisfactory performance.
Fifthly, it is the Bank's policy to maintain continuing relations with borrowers
so as to check the progress of the projects and to keep in touch with financial and
economic development in borrowing countries. 1bts also helps in solving any
problem which may arise in technical and adm1nistraUve field.
Fina1ly, the Bank indirectly places special importance on the promotion of
local private enterprise.
9.4 LENDING OPERATIONS
Only those countries that satisfy the 'eligibility norm' can get assistance from
the Bank. The eligibility norm for IRDB loan is a per capital GNP of $ 2,650 at '1980
prices. Over the years, a number of countries which were among the original
beneficiaries of IBRD loans ceased to be eligible for such assistance on the ground
that they had progressed far enough to make IBRD assistance unnecessary. Of
these, the latest to graduate out of IBRD's lending facilities were Greece, Israel,
Spain and Venezuela. "Graduation" from IBRD lending facility, according to a
recent decision of the Bank's board of directors, "Will normally occur within five
years after a country reaches the per capita GNP benchmark of $2,650 at 1980
prices; this period might be longer if the economic situation deteriorates during the
phase-out period".
Two Important factors which determine the pace of 'graduation' are (1) access
to capital markets on a reasonable terms, and (2) the extend of progress achieved in
establishing the key institution for economic and social development.
One of the principles governing this policy is that graduation should be seen
as a stage in the evolving of a relationship between the borrowing country and
IBRD. IBRD will continue to provide to those countries even after "graduation" and
such support might include assistance in project work and institution building,
review of economic policies, arrangements for private financing and continued
eligibility for lending by IFC.
During 1970s, the World Bank adjusted its lending operations and its role in
providing technical assistance to meet the evolving needs of its developing member
countries. Bank funds and technical assistance were increasingly channelled to the
poor countries. At the end of 1960s, nearly 60 per cent of Bank lending went to the
63
International Business

development of infrastructure, by the end of 1970s, with nearly half of the Bank
lending directed to sectors such as agriculture and rural development, education,
population, and nutrition, urbanisation, and small scale enterprises. 'Even
Infrastructure lending has changed, with, for example, emphasis on highway
maintenance and construction of rural roads and with the beginning of lending for
gas exploration and production.
Sometime ago, the Bank evolved a new type of lending, namely, structural
adjustment lending, to assist member in introducing important structural changes
in their economies and in carrying out different economic reforms. The structural
adjustment lending by the Bank is seen as a constructive response to the different
situations created for many developing countries by what looks like a lasting
deterioration in their terms of trade and the growing problems associated with the
recycling of OPEC surpluses.
Further, the Board of Directors of the Bank ascertained the strategies for
strengthening the Bank's progranunes.
Firstly, increased attention will be given to the impact of a country's sectoral
policy on productivity and living standards of the poor. This will be made an
important part of the Bank's policy dialogue with borrowers. The Bank will also
consider how burdens of structural adjustments are shared among various income
groups and how adverse effects on the poor, like' increased unemployment, h1gner
prices of basic goods or higher taxes ~ be mitigated.
Secondly, the Bank, will broaden its project work to consider poverty and
employment aspects in the traditional' sectors.
In addition to continued support for education, population and health
programmes, the Bank will intensify efforts to increase productivity, and
employment of the rural landless, urban jobless, adult illiterates and female headed
households.
9.5 SUMMARY
The IBRD known as World Bank, has the main purpose to assist in the
reconstruction, promote private foreign investment and balanced growth. The
guiding principles of IBRD – to assess the proper repayment prospect, lend only for
specific projects, lends only to meet the foreign exchange content. The lending
operations are made as per norms.
9.6 ASSIGNMENT QUESTIONS
1. What are prime purposes of IBRD?
2. Explain the guiding principles of IBRD?
3. State the IBRD’s procedural norms for lending loan?
‰

64
International Business

LESSON – 10

ASIAN DEVELOPMENT BANK (ADB)


OBJECTIVES
™ To learn the objects and functions of ADB
™ To know the membership, capital resources and organization
™ To have an idea of lending operations of the ADB, and
™ To understand the leading criticisms of the role and functioning of the ADB
STRUCTURE
10.1 Preamble
10.2 Objects
10.3 Functions
10.4 Membership, Capital Resources and Organisation
10.5 Lending Operations of the ADB
10.6 Criticism of the Role and Functioning of the ADB
10.7 Summary
10.8 Assignment Questions
10.1 PREAMBLE
The Asian Development Bank (ADB) is a regional finance institution set up in
December 1966 under the auspices of the United Nations Economic Commission
for Asia and the Far East (ECAFE). Head quarters of the Bank are at Manila.
Philippines.
10.2 OBJECTS
1. To promote investment in the ESCAP region of Public and Private capital for
development.
2. To utilize the available resources for financing development giving priority to
those regional and sub regional as well as national projects and programmes
which contribute more effectively to the anonymous economic growth of the
region as a whole.
3. To help regional member countries in the coordination of their plans and
policies for development with a view to actively better utilisation of resources.
4. To provide technical assistance for preparation and execution of development
projects and programmes including the formulation of specific project
proposals.
5. To cooperate with UN its organs and subsidiaries including in, particular the
ESCAP and the national entities concerned with investment of the
dev.e1opment funds in the region.
10.3 FUNCTIONS
a) Provision of Financial Assistance: The ADB Is empowered to provide
financial assistance in the form of guarantee and loans. Loans are provided by the
Bank out of its ordinary funds and special funds the former is popularly known as
"hard loan" and the latter "soft loan".
65
International Business

So far as the grant of financial assistance to various types of projects Is


concerned the character of the ADB does not impose any restrictions on It.
Similarly the minimum and maximum l1m1ts in respect of the loans which the
ADB is empowered to provide are left open.
Regarding the criteria for the grant of financial assistance, the approach of the
ADB is to evaluate the projects on merit. In evaluating the projects that it proposes
to finance the Bank has regard to aspects such as their economic, technical and
financial feasibility their effect on the general activity of the country concerned;
their contribution to the removal of economic bottlenecks and capacity of the
country to service additional debts.
b) Provision of Technical Assistance: Provision of the Technical Assistance
constitutes an integral function of the Bank. The Bank provides advisory services
from its headquarters. It can as well send its own experts or hired consultants on
short or long mission for project implementation or for setting up or reorganizing
some institutions. The Technical Assistance Special Fund was set up by the Bank
with a view to providing technical assistance on a large scale.
c) Other Functions: Other functions of the ADB pertain to the conduct of
surveys and research. The purpose of such surveying and research is to develop a
course of action for future and promote regional economic integration.
10.4 MEMBERSHIP, CAPITAL RESOURCES AND ORGANISATION
The membership of the ADB is open to all countries in Asia, but for procuring
additional and substantial financial and other resources, many developed countries
of other regions are also admitted as members and of the ADB.
By the end of June 1975, the ADB had 27 Asian members and 14 non-regional
members, thus making a total of 41 members.
The authorised capital (in terms of US dollars) of the ADB was 3366 millions
US dollars as on 31 Dec. 1974. The subscribed capital on that date was 2770
millions US dollars.
Besides subscribed capital, the ADB has also raised additional financial
resources through borrowings. By December 1973 the total amount of outstanding
borrowings by the ADB was 293 million US dollars, about 30% of this being
borrowings from Japan in yens.
At the time of the establishment of the ADB, member-countries were asked to
deposit only 50% of its subscribed capital in their national currencies. The Board of
Governors is free to call the remainder of the member-country's subscribed capital,
whenever the ADB needs additional funds for carrying on its lending activities.
Some of the important non-regional members of the ADB are: United States,
the United Kingdom, West Germany and Canada, Japan is the principal subscriber
to the ADB, apart from contributing substantial share capital of the ADB.

66
International Business

Out of the total voting power, 20% has been a) located among member
countries equally, whereas the remaining 80% has been allocated on the basis of
subscribed share capital by each member of ADB.
The management of the ADB is entrusted to the Board of Governors
constituted by representatives of the member-countries of the ADB. The Board of
Governors meets once a year, whereas for routine decision-making and carrying on
the ADB's lending and other operations, a ten-member Board of Directors has been
constituted.
In April 1974 there came to be established a fund known as the Asian
Development Fund. It is a multi-purpose fund, the proceeds of which are to be
utilised for providing concessional loans to the relatively poorer member countries
of the ADB. Ten member’s countries had subscribed 24.5 million US dollars to the
Asian Development Fund by December 1974.
10.5 LENDING OPERATIONS OF THE ADB
The ADB provides loans to its member-countries keeping in view the following consideration:
1. Larger portions of ADB loans should be given to relatively poorer among
developing countries in Asia:
2. The Government of the borrowing country has approved the loan by ADB
being given to the private or public sector enterprise:
3. The Chairman of ADB has received a detailed report of the project for which
the ADB is to provide loan:
4. The ADB while giving loan also takes into consideration prospectus of loans
which the applicant may receive from other than ADB source.
5. Generally the ADB loans are to be used within the markets of member-
countries for purchase of essential goods, etc: but the Board of Directors with
a two-third majority of allow the ADB loan to be used in markets of non-
member countries: and
6. The ADB will function strictly keeping in view the sound principles of
banking.
During 1968-73 the ADB approved loans totaling (in terms of US dollars) 1376
mi1l1on US dollars to 21 countries for 189 projects. Of these, industrial
development projects were given a quarter of the total loans: 24% of loans were
given for development of transport and communication projects: 26.5% for electrical
power projects: 12.5% for agricultural development projects: 11.2% for water
supply projects and 1 % for educational projects.
During 1974 the ADB sanctioned loans Worth (in terms of US dollars) 547.7
million of which 186.9 million were for industrial development projects: 134 million
for agricultural development projects: 76.55 mi1l1on for power projects: and 81.5
mi1l1on for transport and communication projects. There appeared evident shift in
the sartorial allocation of ADB's lending policy in 1974.

67
International Business

If the period of 1968-74 is considered, of the total loans approved, 17.5% were
given to South Korea: 12.5% to the Philippines: 10.63% to Malaysia; 9.4% to the
Republic of China: and 8.5% to Singapore. This means that more that 50% of the
total loans sanctioned were given during this period to East Asian Countries. India
did not ask for any loan during this period: but Bangladesh received 9.5% of the
total loans during this" period.
The ADB charges 8¼% interest on its loans. though at the time of its
establishment the rate of interest charged was 6.78% which was raised to 7½% in
May 1970 and to 8¼% in September 1974.
10.6 CRITICISM OF THE ROLE AND FUNCTIONING OF THE ADB
Following are the main points of criticism that are generally made in regard to the role and
functioning of the ADB:
1. Though the ADB is a financial institution concerned solely with development
problems of Asian countries, it is alleged that the role and working of the ADB is
greatly influenced by strategies and interest of the United States. This becomes
clear from the fact that majority of Asian countries that received financial
assistance from the ADB are allies of the United States (e.g. South Korea. the
Philippines, Singapore which have fairly developed economies). The borrowers of the
ADB have generally been supporters of the United States in international affairs. It
is for this reason that the Soviet Union has not become a member of the ADB.
2. It is alleged that the rate of interest charged by the ADB is high and the
proportion of concessional loans from the ADB has been generally low. And,
therefore, ADB has not been in a position to provide to substantial financial
assistance to poorer Asian developing countries which should have been the main
objective of the ADB and therefore, the LDCs from Asian region are forced to borrow
from some other international agencies than the ADB.
3. Generally. ADB provides 'tied loans' and compels borrowing countries to use
those loans only for specified projects. Naturally, this reduces scope or area for the
development of LDCs for which ADB was established in the first instance.
4. Generally, ADB loans were given to, private sector projects. The ADB has
shown very little interest in the development of public sector which has been
playing a major role in the development of LDCs for Asian countries.
There is thus need to re-examine the role and functioning of the ADB in the
light of the above criticism.
The Asian Development Bank and India: Recent Developments
It may be noted that India has started Developments. from the Asian
Development Bank (ADB) since 1986; India's borrowings from the ADB amounted
to 250 million US dollars in 1986; 377.6 million US dollars in 1987; and 493
million US dollars in 1988.

68
International Business

10.7 SUMMARY
ADB is a regional finance institution with certain objects – to promote
investment, to utilise the available resources, etc. The functions of ADB are
financial assistance and conduct of surveys and research. 27 Asian members and
14 non-regional members thus are making a total of 41 members. The ADB
provides loans to its member – countries by keeping certain considerations. The
main pitfalls concerning with development problems of Asian countries and
provides tied loans and given to private sector projects.
10.8 ASSIGNMENT QUESTIONS
1. What are the objects of ADB?
2. Explain briefly the prime functions of ADBI?
3. Briefly analyse the membership, capital resources and organization of ADBI?
4. Describe the lending operations of the ADBI?
5. Discuss the criticism of the role and functioning of the ADBI.
‰

69
International Business

LESSON –11

INTERNATIONAL MONETARY SYSTEM


OBJECTIVES
™ To know the meaning and scope of Euro dollar market
™ To learn the important features of the market
™ To explain the whether Euro dollar market is tonic or poison?
STRUCTURE
11.1 Preamble
11.2 Meaning and Scope
11.3 Important Features of The Market
11.4 Origin and Growth
11.4.1 Factors that Contributed to Growth
11.5 The Participants
11.6 Tonic or Poison?
11.6 Summary
11.7 Assignment Questions
11.1 PREAMBLE
The monetary system of the country cannot function in isolation. in the same
way that no man can live in isolationable there is a need for an international
monetary system which brings together the national monetary system and
facilitates their harmonious functioning. Such a system should:
a) facilitate international trade and capital movement by ensuring that
international payments can, be made easily;
b) provide for mechanism for adjustments of balance of payments fluctuations;
c) ensure stability of exchange rates among the currencies;
d) respect the individual national policies and not interfere with the domestic
affairs of the nations.
Different systems of monetary management have been tried over the years to
achieve the above objectives. Each system was evolved out of and was compatible
with the economic and political conditions that prevailed at that time. In the
beginning of the present century we had the gold standard was replaced by the
fixed parity system under International Monetary Fund. Which functioned well for
about 25 years. The early 1970s saw the collapse of the fixed rate regime giving way
to the present era of floating rates.
The Eurodollar Market
The growth of the Eurodollar market is one of the significant development in
the international economic sphere after the Second World War. But its Phenomenal
development, though poses problems for national monetary authorities and
international trade, transitional corporations and the economies of certain
countries. Recent1y, it has been proposed that India should evil itself of
Eurocurrency credit to accelerate her economic growth.
70
International Business

11.2 MEANING AND SCOPE


In a narrow sense, Eurodollars are financial assets and liabilities denominated
in US dollars but traded in Europe. True the US dollars still dominates the market
and most of the transactions are still conducted in the money markets of Europe
especially London. But, today, the scope of the market stretches far beyond Europe
in the sense that Eurodollars transactions are held also in money markets refers
than European and currencies other than the US dollar. Interpreted in a wider
sense, the Eurodollar market refers to transactions in a currency deposited outside
the country of its issue. “Thus, any currency internationally supplied and
demanded and in which a foreign bank is willing to accept liabilities and loan
assets is eligible to become a Eurocurrency", Interpreted this way, dollar deposits
with banks in Montreal. Toronto. Singapore. Beirut. etc., are Eurodollars; so are the
deposits denominated in European currencies in the money markets of the USA
and the above centres. It is evident, therefore, that the term Eurodollar is a
misnormer. "Foreign currency market” would be the appropriate term to describe
this expanding market. The term Eurodollar came to be used because the market
had its origin and earlier development with dollar transactions in the European
money markets. But despite the emergence of other currencies and the expansion
of the market to other areas, Europe and the dollar still hold the key to the market.
Today, the term Eurocurrency market is in popular use.
The Eurodollar market consists of the Asian do dollar market, the Riodollar
market, the Euro-yen market etc., as well as Euro-sterling, Euro-Swiss Frances,
Duro-French francs, Euro-Deutsche marks, and so on.
In short, in these markets, commercial banks accept interest- bearing deposits
denominated in a currency other than the currency of the country in which they
operate, and they re-lend these funds, either in the same currency or in the
currency of the country in which they operate, or the currency of a third country. In
Its Annual Report in 1966, Ute Bank for International Settlements (BIS) described
the Eurodollar phenomenon as "the acquisition of dollars by banks located outside
the United States, mostly through the taking of the deposits, but also to S9me
extent by swapping other currencies into dollars, and the relending of these dollars,
often after redepositing with other banks, to non-bank borrowers anywhere in the
world".
The currencies involved in the Eurodollar market are not in any way different
from the currencies deposited with banks in the respective home country. But that
Eurodollar is outside the orbit of monetary policy while the currency deposited with
banks in the respective home country is covered by the national monetary policy.

71
International Business

11.3 IMPORTANT FEATURES OF THE MARKET


The important characteristics of the Eurocurrency market are:
i) By its very nature, the' Eurodollar market is outside the direct control of any
national monetary policy. "It is aptly said that the dollar deposits in London are
outside United States' control because they are' in London and outside British
control because they are in dollar." The growth of the market owes a great deal to
the fact that it is outside the control of any national authority.
II) "It is a short-term money market
The deposits in the market range in maturity from one day to several months,
and interest is paid on all of them. Although some Eurodollar deposits have a
maturity of over one year. Eurodollar deposits are predominantly a short-term
instrument.
"The Eurodollar market is viewed in most discussions more as a credit market-
a market in dollar bank loans-and as an important accessory to the Europond
market" Eurodollar loans are employed for longer term loans.
Eurobonds developed out of the Eurodollar market to provide longer-term
loans that was usual with Eurodollars. These bonds are usually Issued by a
consortium of bank and issuing houses.
iii) It is a wholesale market
The Eurodollar market is a wholesale market in the sense that the Eurodollar
is a currency dealt only in large units. The size of an individual transaction is
usually $ 1 million.
iv) It is a resilient market
Its efficiency and competitiveness are reflected in its growth and expansion.
The resilience of the Eurodollar market is reflected in the responsiveness of the
supply of, and demand for, funds to changes in the interest rates and vice versa.
11.4 ORIGIN AND GROWTH
The origin of this market may be traced back to the 1920s, when United States
dollars were, deposited in Berlin and Vienna and were converted into local
currencies for lending purposes. However, the growth of the Eurodollar market
began to gain momentum only in the late 1950s. Since 1967, the growth of the
market has been very rapid. The flow of petrodollars has given it an added
momentum in the 1970s. The accelerated growth of the market is expected to
continue in the eighties.
The precise size of the Eurodollar market is unknown. However, estimates of
the BIS are acknowledged as the best source. Accordingly, its size grew from $ 2
billion in 1960 to $ 256.8 billion in 1969, $75.3 billion in 1970, $97.8 billion in
1971 and some $ 131.9 billion in 1972. By the end of 1970s, the volume of the
Euromarket was estimated at US $ 1.2 trillion gross and US $650 billion net, i.e.,
excluding inter-back positions. This was about eight times the size of the market in
1970. By mid-1984 the size of the market reached $ 2,325 billion. It has further
grown substantially over the years.

72
International Business

As Prof. Venkatagiri Gowda points out, the phenomenal development of the


Eurodollar market since the beginning of 1960s man also be viewed from the
standpoint of the Width, breadth and resiliency of the market accelerated after
1968, when the international gold and currency problem developed into a recurring
crisis every year, and the United States' balance of payments deficits supplied
additional dollars to the market, More and more participants were drawn into the
market because of its growing economic efficiency, competitiveness and the user
prospect of gain it confidently held out. Besides Central Banks and Financial
Intermediaries, Multinational Corporations. Middle Eastern Firms, developing
countries and communist countries entered the market as participants. The centre
of the Eurodollar market has spread .from the London and West European financial
centres to other less known places like the Bahamas. Singapore, the Lebanon and
Toronto. The depth of the market is reflected in the longer terms of loans and the
increased channels of obtaining them. Since the market is large, efficient and
highly competitive, it is h1gh1y sensitive too. This is reflected in the fluctuations of
interest rates, depending. on international supply and demand factors.
Factors That Contributed to Growth
The following are the important factors that have contributed to the growth of
the Eurodollar market at different stages and times.
i) The Suez Crisis
The restrictions placed upon sterling credit facilities for financing trade which
did not touch the British shores during the Suez Crisis in 1957 provided a stimulus
for the growth for the Eruodollar market. British banks, in search of an alternative
way of meeting the demand for credit from traders in this sphere, easily found a
good substitute in dollars. There was already available a pool of us dollars, held by
residents outside USA, ready for tapping.
ii) Relaxation of Exchange Controls and Resumptions of Currency convertibility
The general relaxation of exchange control, the stability in the exchange
market, and the resumption of currency convertibility in Western Europe in 1958
provided a fresh impetus to the growth of the Eurodollar market. In a convertible
currency system some countries are, as a rule, in surplus and others are in deficit.
The money market in the surplus country being liquid, short-term funds flow to the
Euromarket, attracted by the higher rate of interest. On the other hand credit flows
from the Euromarket to deficit countries where the money market is tight. The
relaxation of exchange controls not only enabled the holders of dollar "claims to
retain them rather than surrounding the might God" called demand for US dollars
as they could be freely converted into domestic currency to finance domestic
economic activity.
iii) The Political Factor
The cold war between the United States and Communist countries also
contributed to the growth of the Euromarket. Because of the fear of blocking or
seizure of deposits by the USA in the event of hostilities, the Russian and East

73
International Business

European banks, especially British and French, rather than with banks in the
United States.
iv) Balance of Payments Deficits of the USA
The large and persistent deficit in the balance of payments of the USA meant
an increasing flow of the US dollar to those countries which had a surplus with the
USA. The USA has had a deficit in international payments in every year since 1950,
except in 1957. Since 1958, the deficits have assumed alarming proportions. This
was one of the most important factors responsible for the rapid growth of the
Eurodollar market.
v) Banking Regulation
Some of the regulation of the Federal Reserve system especially Regulation "Q",
which fixed the minimum rate of interest payable by the banks in the USA and the
prohibition of payment of Interest on deposits for less than 30 days, very
significantly contributed to the rapid growth of the Eurodollar market. Although
Eurodollar rates had their ups and downs, they were all the time-except for brief
periods In 1958 for three months deposits-appreciably higher than the deposits for
less than 30 days. Further, "Selective Controls in the United States, such as
Interest equalisation and the voluntary restrictions on lending and investing abroad
by United States corporations and banks, have made the market a longer than it
otherwise would have been. Without these controls, much of the market's activity
would instead be carried on In the New York money market."
vi) Innovative Banking
The advent of innovating banking, spearheaded by the American banks In
Europe and the willingness of the banks in the market to operate on a narrow
spread also encouraged the growth of the Euromarket.
vii) Supply of Petro-Dollars
The flow of petro-dollars, facilitated by the tremendous Increase in OPEC's oil
revenue following the frequent hikes in oil prices since 1973, has been a significant
factor in the growth of the Eurodollar market In the last one decade.
'There is a wide array of reasons pointing to a continued high demand for Euro
credit. In order to cover these extensive credit needs, Euro-banks will however,
require an increasing flow of deposits. One source that may well quash forth in the
coming years would be the 'surplus oil Income of OPEC oil members."
11.5 THE PARTICIPANTS
The participants in Eurocurrency business include governments (including
those of Communist countries). International Organisatlons, Central Banks,
Commercial Banks, Corporations, especial1y Multinational Corporations, Traders,
Individuals etc.
Supply and Demand
The supply of and demand for funds In the Eurocurrency market comes from
the above participants. The central banks of various countries are very important

74
International Business

suppliers. The bulk of central government funds are channelled through the BIS in
Basle. The enormously revenue of OPEC countries has become an Important source
of the flow of funds to the Eurodollars market. Multinational corporations and
traders, too, place their surplus funds in the market to obtain short-term gains.
Governments have emerged as significant borrowers in the Eurocurrency
market. The frequent hike in oil prices and consequent increases in the current
account deficits of many countries compel them to increase in their borrowings.
The oil price rises have also affected Eastern Europe's state-controlled economies,
aggravating the already high imbalance in their commercial relations with the rest
of the world. In the context of this increasing problem, "when the sums which many
countries have borrowed on the Euromarkets fall due, in most instances it is likely
to be the cause that new loans, or extensions of the existing ones, have to be
negotiated to cover them".
Commercial banks in need of additional funds for lending purposes may
borrow from the Euromarkets and relent it. At the end of the financial year, they
sometimes resort to borrowing for "window dressing purposes." Business
corporations, especially multinationals, and traders borrow from the market for
their short-term requirements.
11.6 TONIC OR POISON?
The advantages of, and the dangers associated with, the Eurocurrency market
have given rise to the doubt whether it is a welcome tonic or a slow poison
ctrcu1ating in the international system.
The growth of the Euromarket has considerably helped to alleviate the
international liquidity problem, provided credit to finance the balance of payments
deficits, enabled exporters and importers to obtain easy credit, helped to meet the
short-term credit requirements of Business Corporation and provided better
opportunities for the investments of short-term funds. It has provided a market for
profitable investment of funds by central banks. The supply of funds by the
Euromarket has enabled commercial banks in some countries to expand domestic
credit creation and helped "window dressing." Eurocurrency has helped to
accelerate the economic development of certain countries, including South Korea,
Brazil, Taiwan and Mexico.
However, the growth of this market bas given rise to some serious problem,
especially in the sphere of monetary stability, "Central banks and governments
have been uneasy about the Eurodollar, market ever since It became visible in
1958. Its explosive growth baffles them: they know that something is going on, but
they are seldom sure what It is. They do know that one of its attractions for the
participants is that tile Eurodollar market provides opportunities for avoiding many

75
International Business

of the regulations and restrictions that they by to enforce on national money


markets."
11.7 SUMMARY
Despite the many advantages of the Eurodollar as a 'vehicle currency' for world
trade and as a source of international liquidity, there remains the unsettling
prospect of a machine, controlled by no one, that can add to the world's money
supply by crediting dollars." In this connection, Milton Friendman has said; "the
Eurodollar market has almost surely raised the world's nominal money supply
(Expressed in dollar equivalents) and has thus made the world price level
(expressed in doll8r equivalents) higher than it would otherwise be."
11.8 ASSIGNMENT QUESTIONS
1. Give the meaning and scope of Euro dollar market?
2. What are the important features of the Euro dollar market?
3. Who are the participants in Euro dollar market?
4. Explain the origin and growth of Euro dollar market?
5. “Is a Tonic or Poison.” In this light of discussion, analyse the pros and cons
of Euro dollar market?
‰

76
International Business

LESSON -12

INTERNATIONAL LIQUIDITY
OBJECTIVES
™ To Study the Sources of International Liquidity and Role of IMF
™ To Know the Criticism of Liquidity
™ To Identify the Concept and Uses of SDR, and Valuation and Allocation of
SDRs.
STRUCTURE
12.1 Preamble
12.2 Sources of Liquidity
12.3 Adequacy of Liquidity
12.4 IMF and International Liquidity
12.5 Criticism
12.6 Other Sources of Liquidity
12.7 Use of SDRs
12.8 Prescribed Holders of Sdrs
12.9 Valuation of SDR
12.10 Allocations of SDRs
12.11 SDR as a unit of Account
12.12 SDR as a Currency PEG
12.13 Summary
12.14 Assignment Questions
12.1 PREAMBLE
International liquidity refers to the resources that are available to monetary
authorities of countries for the purpose of meeting balance of payments deficits.
Countries, like companies and individuals, need a sufficient supply of liquidity if
they are to conduct their affairs in an orderly and planned way. The topic of
international liquidity assumed greater significance because of the fact that during
the past three decades the growth in the international reserves did not keep pace
with the increase in the volume of international trade. Too little liquidity will impede
the global growth of trade and a. surfeit of it will fuel inflation. Hence the need for a
long term strategy for estimating the liquidity needs of the world economy and
arranging for its provisions at Just adequate levels.
Here it would be pertinent to differentiate between international reserves and
international liquidity. International reserves have been defined as those assets of
monetary authorities that can be used, directly or through assured convertibility
into other assets, when a country's external payments are in deficit. Convertionally,
official holdings of gold, convertible foreign exchange, reserves position in the IMF
and special drawings rights are included under reserves.
International liquidity is a wider concept than International reserves. It
includes not only reserves of a country but also Items such as its ability to borrow

77
International Business

the foreign exchange holdings of its commercial banks, the willingness of foreigners
to hold its currency in the event of payments deficit, and the extent to which
increases in interest rates or changes in the term structure of interest rates would
encourage a capital inflow without having undesired domestic repercussions. This
comprehensive definition of international liquidity though theoretically sound is
difficult to assess in practice.
12.2 SOURCES OF UQUIDIIY
International liquidity has been defined as the resources available to individual
countries to meet their balance of payments deficits. Such resources cover a wide
spectrum differing in their nature and case of access to the countries monetary
authorities. Broadly, they can be classified into two categories; (i) owned resources
and (ii) borrowing facilities.
(i) Owned resources include officia1 holdings of gold, holdings of reserve
currencies and reserve position in IMF. The reserve position in IMF represents the
country’s reserve trench with IMF. The owned resources of the country are surely
and easily available to it and hence are highly dependable. They are under the
country's own control and provide a firm basis for domestic policy management
than do credit facl1ttles.
(ii) Borrowing facilities include access to IMF credit, Inter· governmental swaps
and bilateral credit arrangements. A new source of liquidity has been the
international capital worthiness of the country the credit facilities that could be
availed of from international banks can also be counted as a source of liquidity.
The problem with the borrowing facilities is the difficulty is assessing their
availability. Low conditionality credit facilities of IMF and borrowing facilities with
other countries on a mutual basis can' easily be included as sources of liquidity.
But it is not the case with conditional credit facilities from IMF and commercial
credit. In the case of 'commercial credits the further difficulty is the estimation of
the quantum of its availability which cannot be easily done. However, at least
conceptually as we have already defined liquidity should include all these sources.
12.3 ADEQUACY OF LIQUIDITY
One measure of judging the adequacy of international liquidity is the
proportion of official reserves to imports. In absolute terms official holdings of
reserve awaits. viz., gold, SDRs, reserves position in IMF and foreign exchange,
have shown increase over the years. From about SDR 55 billion in 1955, such
assets went up to SDR 667 billion as at the end of 1981. Though this seems
impressive the growth in reserves has in fact lagged far behind the increase in
imports. This is borne out by the fact that the ratio of official reserves to imports
registered a decline from 37% in 1966 to about 24% in 1981.
A more serious problem, that is affecting especially the developing countries, is
the mal-distribution of official reserves. The "fall in the level of reserves in relation
to imports is steeper in the case of developing countries. Whenever there were
efforts at increasing the liquidity, because the basis for allocation was such, the
increase had benefited some specific group other than the developing countries.
78
International Business

The fifties and sixties saw concentration of reserves with the developed and
industrialised countries. Thus throughout, the developing countries had been at a
disadvantage. These countries have been facing balance of payments problems on a
continuous basis.
Thus the efforts should not only be to increase the stock of liquid assets, but
also to see that they are equitably distributed so that they are available to those
countries which need them.
The primary sources of liquidity are IMF, international capital markets and
international banks.
12.4 IMF AND INTERNATIONAL LIQUIDITY
The IMF is alive to the problem of shortage of international liquidity. Within
the framework provided by its Articles, it is making all efforts to increasing the
supply of international liquidity. The measures-taken in this direction are; (a)
increase in quotas. (b) allocation of SDRs. and (c) introduction of new lending
facilities and expansion of existing facilities.
12.5 CRITICISM
a) IMF Quotas
The IMF quota increase has lagged behind with the increase in world trade. As
a consequence, over the years, the IMF quotas have declined relative to world trade.
From about 16% of world Imports in 1945, the IMF quotas fen about 10% in 1970
and further to 4% in 1983. This is partly due to inhibitions nurtured in increasing
the quotas at a faster rate. The Eighth Review of Quotas yielded an increase of
47.5% as against an increase of 100 to 125% considered necessary by Technical
Studies conducted on the eve of the Review.
The other disturbing factor is that the distribution of quotas between
developed and developing countries are not satisfactory. The basis of allocation of
quotas largely reflects the situation immediately after the Second World War. Even
after the lapse of a period of more than four decades, the basis of allocation has not
changed to any substantial extent. Adding to its already learning towards developed
countries, the adjustments made during the Eighth Review of Quotas have hit hard
the developing countries.
A suggestion made to make the quotas system more effective is that its review
should be more frequent, say, every three years instead of five years. Its increase
should be made automatic at some pre-agreed rate related to the growth of world
trade. The system of distribution among members also needs a thorough review.
b) Special Drawing Rights
Contrary to expectations, the share of the SDRs In the official reserves has
been showing a declining trend. The decline is from little over 4.1% at the end of
1973 to less than 3% by 1983.
Pleadings by developing countries for a large-scale increase in SDR allocation
have been turned down largely due to opposition by developed countries. The
contention of the developed countries opposing the increase is that it would lead to

79
International Business

inflation. The developing countries point out that the argument is ill-founded.
Report by a Commonwealth Study Group opines that "at present there is
insignificant prospect of further SDR allocations creating danger of accelerating
world inflation. For example, an allocation of SDR 10 billion could add no more
than 1/100 of one per cent of global aggregate demand, an amount also most
unlikely, even if it were substantially larger to stipulate inflationary expectations
significantly." Another report, by a Group of Experts set up by the Chairperson of
the Non-Aligned Movement, puts forward the same argument more vehemently.
"It is paradoxical that major developed countries express apprehensions about
the inflationary Impact of relatively small amounts of SDRs while the principal
reserve currency country seems little concerned about the inflationary impact of its
own large budget deficit or about the skewed and haphazard creation of liquidity its
large current account deficits bring about.”
The Group of Experts is also critical about the allocation of SDRs on the basis
of IMF quota. Such allocation leads to the major share of SDR allocation going to
surplus countries which have no need for extra liquidity. 'The result of this is that a
preponderant part of the SDRs created and frozen and the effective SDR allocation
"is reduced to a fraction of what had been calculated as necessary from
consideration of global liquidity. This could be resolved either scaling up the total
allocation so that the portion which is likely to be used corresponds to the need for
global liquidity which would result in an unnecessarily high allocation of SDRs - or
in distributing them in such a way that the bulk of SDRs go to deficit countries in
need of liquidity. In this distribution, the needs of the least developed countries
need would special attention.
(c) General Arrangements to Borrow
The condition that IMF can make use of the funds under GAB to finance a non
participant only in case the situation threatens the stability of the international
monetary system puts a serve restraint on the use of funds making it
discriminatory in the sense that it is available to a few members and not to others.
GAB is at the most a poor substitute for quota increase. If they have to serve a
useful purpose, like other resources borrowed by IMF from its members, they
should be available to all members on equal terms as normal supplement to IMF
resources.
(d) Lending facilities
As compared with the conditional lendings, the unconditional lendings are
limited. While there is a general agreement on the need for certain conditionalities
to go with the facilities, the dispute is over the nature of the conditions attached to
IMF loans. Since there is no single solution to problems faced by deficit countries,
the conditions cannot be rigid and same for every case. Therefore, the IMF's
guidelines on conditionality are sufficiently general to leave room for substantial
discretion in individual lending circumstances.
The criticism levelled against the conditionalities attached to IMF loans is that
they are based on short-term consideration and are too rigid on monetary and fiscal
80
International Business

targets to be achieved by the borrowing country. The developing countries, lacking


infrastructure, cannot bring about the changes in a short period. 'Tight
performance targets led to the cancellation of IMF arrangements totaling SDR 4.1
billion in 1982, resulting in a significant decline in net IMF loan commitments
under standby and extended arrangements- from SDR 2.1 billion in 1981 to SDR
2.4 billion in 1982- in the midst of major global recession." There is therefore, a
need alter the stringency of conditionality of IMF lending 'in accordance with the
requirement of the borrowing country's economy.
A retrograde step taken by IMF is the reduction in the access limits under the
enlarged Access Policy. The policy adopted in 1981 allowed a member to draw up to
150% of its quota annually. In 1983, this limit was reduced to 102% generally and
125% in case of countries facing severe the quotas leaving the developing countries
no better than their position prior to quota Increase.
Some suggestions have been made to make the compensating Financing
Facility more meaningful: (a) CFF drawings should be related to the externally
created balance of payments deficiencies rather than to the quota-related maxima
stipulations. (b) The conditionalities attached to CFF drawings should be mellowed
down. (c) Repayment should be allowed for longer periods. Since the problems faced
by the borrowing country are due to factors beyond its control, the repayment
should also be phased in responses to its changing external fortunes.
The above account of IMF's role in providing International liquidity is not to be
little in its contribution. It is true that the difficulties faced by the deficit countries
would have been worse in the absence of timely action taken by IMF instituting
special facilities at appropriate times thus calming down the turbulence caused by
factors such as oil crisis. One only hopes that it is able to function more freely than
It does at present, without having to bow down unduly to the wishes of the
Industrialised countries.
12.6 OTHER SOURCES OF UQUIDITY
World Bank and its affiliates along with other development banks provide the
rest of the official international liquidity. These institutions are studied in a
separate chapter. By far the most important source of liquidity for the developing
countries, exceeding the official sources, has been the International capital
markets.
SDR
The Special Drawing Right (SDR) is an international reserve asset created by
the Fund, taking into account of the global need to supplement existing reserves
and it represents a major innovation of the IMF to help alleviate the problem of
international liquidity. It is the declared intention of member countries that the
SDR should eventually become the principal reserve asset in the international
monetary system.
The IMF has two accounts of operation. First, there is General Account of the
Fund through which all its business in national currencies is conducted. This
reflects the currency holdings coming from its members. Since, the Fund's
81
International Business

Inception, the Quota Contributions and the Purchase and Sale of these Currencies
are under the Arrangements in Force. Second, there is the Special Drawing Account
through which all operations and transactions in SDRs are conducted. The SDR is
essentially only an entry in this account at the Fund. Moreover, it is an entry
which. may be held only by (a) national monetary authorities (who must be
members of the Fund) and (b) by the General Account of the Fund to which
participant countries are permitted to transfer SDRs for certain spec1ftedpurposes,
for example, to pay charges levied by the Fund or to repay drawings from the
General Account. It is apparent, then, that the SDR is really created in the sense
that it is defined equivalent in foreign exchange from other members, and that it
discharges specified obligations of members towards the Fund's General Account.
Every member of the IMF has the right to become a participant of the SDR
facility, but every member is not obliged to join the facility. Obviously, only
members of the IMF can participate in SDR facility.
The Special Drawing Right, as mentioned above, is only a book entry in the
"Special Drawing Account" of the IMF. The allocation of SDR takes the form of a
credit entry in the name of the participating countries in the Special Drawing
Account. The total SDR created by, the IMF are allocated to the participating
countries in proportion to their quotas in the IMF.
The allocation of SDR to a participant does not involve any payment by it to
the IMF. The recipient of SDRs also does not have to give any collateral security to
the IMF. SDRs allocated and credited to a participant's account are owned by it and
they can be freely used by the said country for meeting payments deficits. One
distinct characteristic of SDR is its unconditional use. A participant using SDRs is
not called upon to adopt any particular economic policy or seek the prior approval
of the IMF.
The possession of SDRs in its account entitled a participating country to an
equivalent amount in the currency of other participating countries. The foreign
exchange so obtained can be freely used for meeting payments deficits.
12.7 USE OF SDRs
Participating countries may use the SDRs unconditionally, transferring them
in the books of the Fund to another participant (chosen by the Fund), who will be
required to supply its own or another currency in exchange. To provide against
mal-distribution of the SDRs such as would occur if SDRs are drained away from
the deficit to the surplus, countries, members are required to hold, on the average
of a five year period, Drawing Rights to the amount of at least 30% of the average of
their net cumulative allocations over that period.
Members with a balance of payments need may use SDRs to acquire foreign
exchange in a transaction with designation - that is, where another member,
designated by the Fund, provides currency 'in exchange for SDRs. The Fund
designates members to provide currency in exchange for SDRs on the basis of the
strength of their balance of payments and reserve positions.

82
International Business

However, a member's obligation to provide currency does not extend beyond


the point at which its holdings are three times its total allocations.
Fund may also use SDRs in a, variety of voluntary transactions and operations by agreement
among themselves and with, prescribed holders:
i) To obtain currency in transactions by agreement with other members, without
any requirement of balance of payments need. Any currency may be
exchanged for SDRs. provided that the transaction is made at the "equal value"
exchange rate against the SDR determined by the Fund, in turn derived from
the representative exchange rate for that currency against its intervention
currency.
ii) In swap arrangements, in which a member may transfer SDRs to another
member in exchange for an equivalent amount of currency or another
monetary assets other than gold, with an agreement to reverse the exchange at
a specified future date and at an exchange rate agreed to by the participants.
iii) In forward operations, in which members can buy or sell SDRs for delivery at a
future date against currency or another monetary asset, other than gold, at an
exchange rate agreed to by the members.
iv) To make loans of SDRs, at Interest rate and maturities agreed to by the
parties. Repayment of loans and payment of interest may be made with SDRs.
v) To settle financial obligations.
vi) As security for the performance of financial obligations, in either of two ways:
(1) members may pledge SDRs which can be earmarked for the duration of the
pledge by being recorded in a special register kept by the Fund, or
(2) members can agree that SDRs would be transferred as security for the
performance of an obligation and that the SDRs would be returned to the
transferor when its obligation under the agreement had been fulfilled,
vii) In donations (grants)
12.8 PRESCRIBED HOLDERS OF SDRs
The fund has the authority to extend the range of official holders of SDRs
beyond its member countI1es and the Fund's General Resources Account, it has
prescribed, as on July 31, 1984, the following 14 organizations as prescribed
holders; the Andean Reserve Fund, Bogota; the Arab Monetary Fund, Abu Dhabi;
the Astan Development Bank, Manila: the Bank for International Settlements,
Basle; the Bank of Central African States, Yaounde; the Central Bank of West
African States. Dakar; the East African Development Bank, Kampala; the Eastern
Caribbean Central Bank, St. Kitts; the International Bank for Reconstruction and
Development and the International Development Association. Washington; the
International Fund of Agricultural Development, Rome: the Islamic Development
Bank, Jordan; the Nordic Investment Bank Helsinki; and the Swiss National Bank,
Zurich, Each of these institutions can acquire and use SDRs in transactions and
operations with each other and with any of the Fund's 147 member countries.
PrescI1bed holders have the same degree of the freedom as Fund members to but
and sell SDRs both sport and forward: to borrow, loan, or pledge SDRs; to use
83
International Business

SDRs in swaps and in settlement of financial obligations; or to make donations


(grants) with SDRs.
12.9 VALUATION OF SDR
When the first allocation of SDR was made on 1.1.1970, the SDR was valued
at par value of the US dollar: Thus on January 1970 SDR 1 = $1. And the value of
SDR against other currencies was the same as the exchange rate of these
currencies against the US $.
The system of determining the rate of SDRs against each other currencies
through the exchange rate of the US $ came under serve criticism with the decision
of the United States in August 1971 to revoke the convertibility of the dollar and the
subsequent wide spread floating of major currencies. Therefore, on 1st July 1974
the Fund put into operation a new SDR valuation technique known as the
"standard basket valuation." Under the new system of valuation, SDRs were
valuation, in terms of 16 currencies which were assigned specific weights. The
currencies included in the basket belonged to the countries whose share in the
world exports of goods and services averaged more than one per cent, This system
of determination of the SDR value in terms of the US dollar as the sum of the dollar
values, based on mark exchange rates of specified quantum of 16 currencies
continued until December 31, 1980.
In begtnn1ng January I, 1981, the value of SDR in terms of the US dollar is
determined as the sum of the dollar values based on market exchange rates, of
specified quantities of 5 currencies - Deutsche Mark, French Franc, Japanese Yen,
Pound Sterling US dollar.
The currencies in the basket are assigned certain weights which broadly reflect
the relative importance of the currencies in trade and payments, based on the value
of the exports of goods and services of the member countries issuing these
currencies and the balances of these currencies held as reserves by members of the
fund over a specified period.
The value of the SDR in terms of any currency other than the US dollar is derived
from that currency's exchange rate against the US dollar and the US dollar value of the
SDR An exception is the Iranian Rial, the value of which is officially expressed directly
in terms of rials per SDR As on June 30. 1982. SDR 1 = US $ 1.09: SDR 1 = Rs. 10.37.
As on June 30, 1992. SDR 1= TIS $ 1.43 SDR 1 = Rs. 37.05.
12.10 ALLOCANTIONS OF SDRs
The IMF allocates SDRs to its members in proportion to their quotas at the
time of allocation. In deciding' on the timing and amount of SDR allocations the
fund considers whether there exists a global need to supplement existing reserve
assets and it takes into account the objectives of the Fund's Articles of Agreement,
which call upon the members to collaborate with each other and with the fund
with, a view to make the SDR the principal reserve asset of the international
monetary system.
The first allocation of the SDRs totaling SDRs 9.3 billion, were made in the
years 1970-72. The fund has allocated a total of SDR 21.4 billion in six allocations
and holdings of SDRs by member countI1es amounted to some 4 per cent of total
non-gold reserves at the end of ApI1l1984.
84
International Business

12.11 SDR AS A UNIT.OF ACCOUNT


The SDR is the unit of account for fund transactions, and it is finding
increasing acceptance as a unit of account (or as the basis for unit of account) for
private contracts and international and regional organisation. The use of SDR as a
unit of account is explained, in part, by the fact that the value of the SDR tends to
be more stable than that of any single currency in the basket, since it is a weighted
average of the exchange rates of the five major currencies in which the prices of
goods and services in international trade are denominated.
Since the reduction in the number of currencies in the valuation basket from
16 to 5 in January 1981, there has been growing interest in private financial
obligations denominated in SDRs (private SDRs). However, the activity in private
SDRs seems to have diminished recently, reflecting the continued strength of the
US dollar in 1983 and 1984.
12.12 SDR AS A CURRENCY PEG
Some member countI1es of the IMF have pegged their currencies to the SDR.
The value of the member's currency under such arrangements is fixed in terms of
the SDR and then set in terms of other currencies by reference to the SDR value of
the other currencies as published by the Fund.
12.13 SUMMARY
International Liquidity is a wider concept than international reserves. It means
resources available to individual countries to meet their balance of payments
deficits. In this context, various issues are considered such as sources of liquidity,
adequacy, IMF role and criticisms. The SDRs role and uses, valuation and
allocation of SDRs are highly related, in international liquidity.
12.14 ASSIGNMENT QUESTIONS
1. Critically assess the role of IMF and its functioning.
2. Explain the purposes, guiding principles and lending operations of World
Bank.
3. "The basic objective behind the establishment of the ADB is to promote
economic development of and mutual co-operation among the countries of
Asia" – Discuss.
4. Describe the features of Euro-dollar market and the factors contributing to
its growth.
5. Elucidate the role of IMF in ensuring international liquidity.
6. What is SDR? Would you recommend that Rupee should be linked to SDR?
‰

85
International Business

LESSON – 13

ANALYSIS OF INDIA'S EXPORTS TREND IN FOREIGN TRADE


OBJECTIVES
¾ To analyse India's exports trend in foreign trade
¾ To examine the export promotion activities
¾ To explain the state trading agencies
¾ To understand meaning and importance of international marketing
¾ To examine export finance and credit facilities
¾ To evaluate the role of export credit guarantee corporation in foreign trade
¾ To analyse export promotion measures
STRUCTURE
13.1 Preamble
13.2 Export Promotion
13.3 Export Promotion Activities
13.4 Forms of Export Promotion Export Catalogues
13.5 Export Advertising
13.6 Import Substitution
13.7 State Trading
13.8 Main State Trading Corporations
13.9 Rationale of State Trading
13.10 Role of State in Exports in Different Economics
13.20 State Trading Corporation of India (STC):
13.21 Summary
13.22 Assignment Questions
13.1 PREAMBLE
The unit deals with the analysis of recent trends in foreign trade. In order to
boost exports to different countries; export promotion is necessary. State trading is
made through such agencies as state trading corporation and minerals and metals
trading corporation etc. International marketing may be defined as marketing
carried on across national boundaries. Export finance and credit are essential for
foreign trade. The role of the Export Credit Guarantee Corporation and export
promotion measures are also dealt in this unit.
The structure of India's foreign trade is typical of an underdeveloped economy
as a major share of its exports is accounted for by consumer items, raw materials
and agricultural products; Its imports are generally and agricultural goods for the
consumers in India. India’s exports include tea, coffee, rice, spices, meat and meat
products, tobacco, cashew kernels, oil cakes, sugar and molasses, marine products,
ores and minerals, leather and leather goods, gems and jewellery, engineering
goods, electronics and computer software, handicrafts. While India's imports
include crude oil and petroleum products, fertilizers, edible oils, iron and steel,

86
International Business

non-ferrous metals, pearls, precious stones, capital goods, chemicals and chemical
materials.
Foreign trade includes exports and imports. If the exports are higher than the
imports, the balance is called favourable trade balance. On the other hand, if the
values of imports are more than the value of exports, the balance is called
unfavourable trade balance. In these situations Government approaches the
international agencies for loans to meet the trade deficit. The following table shows
the recent trends in foreign trade
Table
India's Foreign Trade
Value in crores (rupees)
Year Imports Balance of Trade
1979-80 6418 9143 - 2725
1980-81 6711 12549 - 5838
1981-82 7806 13608 - 5802
1982-83 8908 14356 - 5448
1983-84 9872 15763 - 5891
1984-85 11297 16485 - 5188
1985-86 10895 – –
1986-87 12452 20096 - 7644
1987-88 15674 22244 - 6570
1988-89 20231 28235 - 8004
1989-90 27681 35416 - 7735
1990-91 32553 43193 -10640
1991-92 – – –
1992-93 53351 – –
1993-94 69688 – –
Source: Ministry of Commerce, Department of Commerce, Government of India Annual reports
1991-92: Centre for Monitoring, Indian Economy, 1994.

The above table shows that there is an increase every year in Imports and
exports. But the rate of increase in Imports is higher than exports. As a result of
this, there is a trade deficit. This yawning trade deficit has forced the government to
approach the Aid India consortium members including the World Bank. These
agencies provided loans to India to the tune of Rs.2472 crores in 1982-83 and
Rs.1356 crores in 1983-84.

87
International Business

Table
India’s export to Countries during 1993-94
Value in lakhs
Country Rs.
Africa 2,34,361
Egypt 34,834
Nigeria 32,934
Mauritius 24,589
America 12,60,437
USA 11,27,771
Canada 64,201
Brazil 16,652
Asia 10,94,599
Japan 4,18,425
Hongkong 56,693
Singapore 1,68,373
East Europe 1,46,844
Russia 72,806
Ukraine 26,131
Czech Republic 8,385
West Europe 22,32,975
Germany 4,99,220
UK 4,33,675
Belgium 5,55,987
Middle East 14,91,173
UAE 2,85,851
Saudi Arabia 4,47,196
Iran 1,06,128
Oceania 2,07,265
Australia 1,84,009
Newzealand 20,918
Papua N GNA 1,160
Source: Centre for Monitoring Indian Economy May 1994. Top three countries from each
continent only
India's goods have been exported to different countries in various continents
like Africa, America, Asia, Europe (East and West), etc. During 1993-94, the highest
values of goods have been exported to the countries like USA, Canada and Brazil.
India exports to more than 100 countries in the world.

88
International Business

13.2 EXPORT PROMOTION


Promotion activities are the marketing and merchandising functions which
assist in the increase of sales. International promotion extends beyond advertising
to many other promotional tools. The trade fair has assumed increasing importance
as a specialised international market which facilitates the meeting between
informed buyers and sellers.
Trade Development Authority (TDA) was established in 1970. It is an export
promotion institution setup in order
i) To identify and nurture specific export products with long range growth
prospects.
ii) To identify and cultivate specific buyers in selected overseas markets which
have increasing trade potential
iii) To bring about durable merchandising contacts between selected Indian
suppliers and overseas buyers.
iv) To provide package of services to execute such contracts.
13.3 EXPORT PROMOTION ACTIVITIES
TDA carries out the following activities:
Buyer-seller meets
Trade Fairs and Exhibitions
Research and analysis activities
(a) Short terms forecast of India's exports
(b) Supply studies/in country studies
(c) Seminars/Training programmes
(d) Foreign product catalogues
(e) Dissemination of trade information
(f) Hand books/Market intelligence reports, importers' directory.
13.4 FORMS OF EXPORT PROMOTION EXPORT CATALOGUES
Like every catalogue for home trade, the export catalogue is the ever present
silent, accurate salesman. It is erroneous to think of an export catalogue merely as
a condensed card index of products and prices. It must be considered as an active,
vital, sales-making force in the export business.
The objectives of export catalogue are listed below:
i) It should invite perusal
ii) It should express and impress the personality of the Indian exporter
iii) It should carry domestic goodwill into the world markets
iv) It should simplify purchase procedures
v) It must create the desire to purchase
vi) It should speak louder than the salesman
The export catalogue should be a separate, different and distinct catalogue
from the domestic catalogue and should not be merely a domestic catalogue printed
in a foreign language.
89
International Business

Domestic trade terms and reference to methods and practices peculiar to India
should be carefully and rigidly avoided, and words and phrases with doubtful or
double meanings should be eliminated. The writer of an export catalogue must
know the product fully and vtsual1se its use in foreign markets and the
arrangements used in its sales abroad. If any new words or phrases are used, their
meaning must be made clear.
Accuracy in an expert catalogue is much appreciated and is very, important.
The following points must be borne in mind while preparing an export catalogue:
i) The export catalogue should be so constructed that through its use alone
the buyer in foreign market may adjust his buying to his capacity to sell or
his capacity to pay.
ii) Every point of importance should be emphasized, e.g., a product saves
time, temper and money, and will sell on sight for these reasons.
iii) Each item should be analysed to determine its best export selling points.
iv) It should state facts-neither exaggerates nor understands them.
v) It should make it easy for the foreign dealer to place an order.
A loose-leaf type of export catalogue is recommended. It should not be too
large or bulky. An attractive set-up of the catalogue should be an important
consideration.
House Magazine
While a few manufacturers publish highly creditable house magazines for the
special use of the export trade, there' is, in general, more commonly neglected sales
aid in the entire field of export marketing.
The following suggestions, if kept in mind while publishing a house magazine,
would really help as an effective export sales aid:
i) Incorporate illustrations in the house magazines so that they are
interesting and need not be translated:
ii) The typography should be excellent and easily readable.
iii) Do not criticize one area or distribution in a direct way.
iv) Tie in new products at every reasonable point but not in a strictly selling
style.
v) Write about those things which normally a salesman cannot say: and
vi) Last, but not the least, always keep in mind that customer house organ
should be edited for the reader. Whether the customer is actual or
prospective, he is the person at whom all export salesmanship is directed.
13.5 EXPORT ADVERTISING
The function of advertising in export trade is precisely the same as its function
in domestic trade. Advertising may be used as a means of creating dealer demand,
dealer preference, or consumer demand or acceptance. It may be used to prepare
the way for the salesman to enable him to make a greater volume of sales than
would otherwise be possible. Advertising may be used like-wise to help move the
90
International Business

products from the dealer's shelves. Naturally many problems confront the
manufacturer-exporter who undertakes to advertise his products in foreign markets
- the formulation of an advertising policy, the estimates of appropriations, the
selection of media and the preparation of advertisements.
The formulation of Policy depends largely upon the opinion of the export
manager as to the, efficacy of advertising a particular product in a given market.
The appropriations to be made for foreign advertising depend of course, upon the
general financial budget and the amount which can be allocated to the development
of foreign sales. Foreign advertising campaigns may be planned for as wide a range
of objectives as in domestic selling. The variation from modest initial
advertisements to world-wide campaigns offers the possibility of meeting any set of
conditions imposed by the character of the products, the size of concern or other
factors. Keeping in mind the differences in purchasing power, purchasing habits,
and methods of thought, the same principles apply to the preparation of foreign
advertising as to those of domestic advertising. However, that does not mean that
an advertisement which ranked high in selling power in India would so rank in the
USA. In illustration and wording, the appeal must be consistent with the customs
and habits of the country in which the advertising is used. Selling, resorts to
advertising to stimulate demand. Advertising methods help the exporter to present
facts to the foreign buyer. Advertising in foreign countries fails because, at times, it
does not recognize merchandising and marketing functions in a foreign .country; it
fails to maintain more than a tenuous relationship with the economics of the
product and it falls short of perfection in its technique. The problem of advertising
in foreign markets is the problem of adapting Indian advertising to conditions that
are different. Conditions are highly variable in different markets. and each market
must be considered, to a large degree. as a separate and a distinct unit. Indian
advertising practices may be 25 years behind American standards.
The use of available media, the size of the column, and the use of colour are
the technical details of foreign advertising. In every essential respect-method,
appeal continuity, coverage, relation to merchandising and marketing, employment
of research, principles of getting attention, use of a sound layout and good art -
advertising is the same the world over because people in every land respond to the
same general kind of' stimuli and react to the same visual appeals and to the same
economic motives.
The problem of advertising in foreign markets, therefore, is not the problem of
the creation of new and different advertising but the problem of adoption of
domestic advertising to conditions found in overseas markets. Export advertising
expenditures are growing rapidly as products compete for world market share. A
large number of international marketing segments cross many national boundaries.
The growth in expenditure is also occurring due to the availability, increasing
capacity, and diversity of media vehicles.
The problem to be solved by export marketers is whether to follow an
international advertising strategy of standardization or to adapt advertising to
91
International Business

satisfy the needs of local foreign markets. The principal reasons for employing
standardized advertising are cost savings and a reduction of message confusion in
areas where their is media overlap or country-to-country consumer mobility.
According to an estimate. German 1V broadcasts are received by forty percent of
Dutch homes with 1V sets. Also, Paris Match has a circulation of 85.000 in
Belgium, 26,000 in Switzerland, and substantial readership in Luxembourg and
other countries of West Europe. The risk of confusion that may result from reaching
such audiences with different brand names and advertising appeals has led to the
standardization approach which does not sacrifice local adaptability. Examples are
the Esso 'Tiger in your Tank' campaign and the Playtex brassieres ads which
feature the same stop-action photographic demonstrations of the product strength.
Exports w1l1 plan more and more, global brands. 1V and communications
generally will reach further across the world, and standardization is bound to grow.
The choice being exercised today by many exporters is between prototypes
versus, pattern advertising. To a major extent, the choice is product dependent.
This involves consideration of the needs satisfied by the product. In deciding on
export advertising strategy, two further main factors have to be thought through.
These factors are interactive. One is the position of the product in its life cycle in
different foreign markets. The second is the role and responsibility of export
advertising in the marketing mix abroad. Some large exporters have developed a
benchmark strategy which involves similar advertising themes and basic copy
across multiple markets. In most cases, these multiple markets span the advanced
industrialized countries, including Japan.
Exporters can either adopt the same promotion strategy they used In the home
market or change it for each local market.
Consider the message. The exporters can change the message, at three
different levels.
(a) The exporters can use one message around the world by varying only the
language, name, and colours.
(b) The next possibility is to use the same theme globally.
(c) Finally, some exporters encourage their advertising agencies to make a full
adaptation of theme and execution to local market.
The use of media also requires international adaptation because media
availability varies from country to country. Commercial radio or TV is not even
available in some Scandinavian countries and Middle Eastern countries. In
Germany, advertisers have access to commercial TV only during a few
preannounced short time blocks, none of which interrupt the program. As a result,
viewer ship of these commercial time blocks is low. Yet companies complain that
they must buy time months in advance and have little control over when their ads
will broadcast. Certain countries add restrictions as to what can be advertised,
often not allowing cigarette or alcoholic beverage advertising on TV. The rapid
growth of VCR usage in Europe has cut further into the size of TV audiences.

92
International Business

Another medium, magazines, varies in its effectiveness: magazines play a major role
in Italy and a minor one in Austria. Newspapers have a national reach in the United
Kingdom. but the advertiser can buy local newspaper coverage in Spain.
Management of the export advertising function encompasses the setting of
objectives: the process for the formulation of strategy: implementation of the
strategy: choice of advertising agency.
13.6 IMPORT SUBSTITUTION
Besides the export drive, the Government has reiterated its efforts towards
import substitution and import saving measures. Increase in the qual1ty and
quantity of production, upgradation of technology and modernization of production
techniques, if all these would be implemented in the right spirit, in the right
manner and at the right time, import substitution is bound to follow sooner than
expected.
Import substitution may be defined as the substitution of domestic source of
supply for foreign source of supply.
It is clear from this definition that import substitution implies:
1. development or creation of new source of supply or productive capacity if
there is no domestic supply:
2. expansion of the domestic production / supply if the domestic supply is
insufficient: and
3. protection of domestic industries from foreign competition if competitive
disadvantage of the domestic industries, especially the intent ones, is
encouraging the foreign source of supply.
Import substitution is one of the important planks of the commercial-economic
policy of the developing countries. The foreign exchange scarcity created by the
import-export gap prompt these countries to emphasize on the import substitution
in a bid to reduce the import, requirements and thereby to narrow down or remove
the trade deficit.
Import substitution assumed importance in the Indian economic development
policy since the Second Five Year Plan. The large- scale imports necessitated by the
development requirements of the nation gave rise to what may be called
development disequilibrium in the balance of payments. Export promotion and
import substitution are the two important measures to narrow down and ultimately
to wipe' 'out the balance of payments deficit.
Industries and other sectors with potential for import substitution have been
given high importance in our development programmes. At the beginning of the
planning era, India was relying very heavily on the foreign sources of supply for her
requirements of capital goods and a number of basic and other important inputs. In
the last three decades, considerable import substitution has taken place in many
important areas like capital goods, cement, organic chemicals, pharmaceuticals,
dye stuffs etc. Today imports account for only less than 10 percent of the total
supply in many vital sectors.
93
International Business

India's foreign trade gap is very wide. In every year of the Sixth Plan (1980-85),
the trade deficit was well over Rs.5.000 crores. This situation calls for further
efforts aimed at export promotion and import substitution. There are a number of
vital sectors with good scope for more import substitution. Though primarily an
agricultural country, India is not yet self- sufficient in case of essential consumer
items like food grains and edible oils. Items like cement, aluminum, steel and
certain other products which are well within the productive apparatus of the
country account for a significant part of our import bill. At the beginning of the
Second Plan, in 1955-56, imports accounted for about 40 per cent of the total
supply of nitrogenous fertilisers. 10.00 per cent of phosphatic fertilisers and 100
per cent of potassic fertilisers. In 1979-80, imports accounted for 37 per cent.
24 per cent and l00 per cent of the total supplies of the nitrogenous, phosphatic
and potassic fertilisers respectively.
Our import bill for crude oil and petroleum products has been quite
substantial. Hence import substitution in this sector is of paramount importance to
reduce the balance of payments deficit. No wonder' the Government is making
concentrated efforts to step up the domestic oil production.
In short, a rapid increase in the domestic production of petroleum. Fertilizers,
cement, steel, food grains, vegetable oil, etc. is essential to contain growth of
imports within reasonable limits.
A number of measures like those mentioned below have been suggested to
accelerate the pace of import substitution in areas where the country has
comparative reasonable span of time:
1. Issue of licences/letters of intent for products not manufactured in the
country should be given on a first-come-first-served basis. Foreign
collaboration should be freely allowed:
2. A scheme of Import substitution allowance be introduced on the lines of cash
incentives for exports:
3. A concessional rate of interest is another way by which Import substitution
can be given priority. The same result can also be achieved by adopting
differential tax rates:
4. Reduction in the Import duty on the capital equipment to be installed:
5. Reduction in the customs duty and excise duties on raw materials to be used
by such units for a specific period:
6. Liberal Issue of Import licences for capital goods, raw materials, etc:
7. Concessional tariff for power, fuel, etc.
8. Concessions in income tax, sales tax, etc., for a specific period: and
9. Additional depreciation.
Certain suggestions like allowing foreign collaboration freely w1ll not be quite
acceptable without judging the merit of the case including the need for foreign

94
International Business

collaboration, the nature of collaboration, Ute type of technology etc. However,


some of the other suggestions deserve serious consideration.
13.7 STATE TRADING
State trading is ultimate Government involvement in trade. There is no precise
definition of state trading. It means Government Involvement in foreign trade either
directly or through Government owned organisations either in place of or in
addition to private traders. Thus, the Government may be the sole proprietor of
foreign trade or it may share the foreign trade alongside the private traders. In
short, the state trading includes control and ownership of foreign trade in the
hands of the Government.
13.8 MAIN STATE TRADING CORPORATIONS
The following major state trading organisations in India are in operation
i) The State Trading Corporation (STC) of India Ltd.
ii) The Projects and Equipment Corporation of India Ltd. (PEC), a wholly
owned subsidiary of STC.
iii) The Cashew Corporation of India Ltd. (CCI), a wholly owned subsidiary of
STC.
iv) The Handicrafts and Handlooms Export Corporation of India Ltd. (HHEC),
a wholly owned subsidiary of STC.
v) The Minerals and Metal Trading Corporation of India Ltd. (MMTC).
vi) The Mica Trading Corporation of India Ltd. (MITCO); a wholly owned
subsidiary of MMTC.
vii) The Tea Trading Corporation of India (TTCI).
13.9 RATIONALE OF STATE TRADING
Why the state interference in foreign trade is important and necessary
requires analysis. There are a number of reasons for the state to resort to state
trading. A few are as follows:
13.10 ROLE OF STATE IN EXPORTS IN DIFFERENT ECONOMICS
(1) In centrally planned economics, the foreign trade is nationalised as a
matter of policy. In order to operate the mechanism of central plani11ng, foreign
trade must be in the hands of the Government otherwise the mechanism will fail. In
the developed, free enterprise economics, State trading is sometimes practiced as a
source of revenue. That is why, it is found that trade in products like alcohol and
tobacco is subject to monopoly. In some case, state trading is necessary for
country's health and security and therefore, foreign trade of drugs and
ammunitions is managed through state bodies. State trading sometimes is
undertaken to arrest the rising trend in prices mainly of agricultural products.
In developing countries too, state trading is resorted for varied reasons - (a)
The development of private sector is in its infancy and, therefore, state bodies
actively participate in international commerce and protect the national interest (b)
Where private sector has adequate trading expertise, they are solely motivated by
95
International Business

profit consideration. In such cases, state takes the responsibility of promoting


exports of new items and cultivate new export markets even by sustaining short
term losses or by assisting the private sector financially because state has the
developmental role in the national economy. (c) The Government bodies in
developing countries are in a better position to negotiate with the .Government
bodies mainly in centrally planned economies.
(2) Canalisation of imports: Imports are canalised through state bodies due to
certain other important reasons -
(a) Advantages of bulk buying: The state is attracted by the advantages of bulk
-buying. There are three main elements of attraction (i) Bulk buyer is in a better
position to get higher discount and favourable trading terms. (ii) Since, the bulk
purchaser can hold the price line by controlling the supply of the commodities.
State trading can impose a check on the private sector enterprises to increase the
prices arbitrarily (iii) Since the international markets of many importable items are
monopolistic, state trading will give rise to countervailing power which may mitigate
to some extent the ill-effects of the monopolistic market structure.
(b) Mopping up of excess profits: In a situation where demand for imported
materials exceeds the supply of imports the prices of that imported item is bound to
increase and, therefore, the premium (profit) will be greater. The higher is the
demand the higher is the premium. If private importers are allowed imports of such
items the premium will go to them. The other side of the coin is that the cost of
production of commodities using that imported material will go up. Both these
problems will be solved by state trading because (I) The premium will accrue to the
Government organisations because they will have the monopoly right to Import the
goods (Ii) the Government can distribute the Item to the production unit that use It
as raw material on the price at which It is purchased by the state organisations or
it can order to release the goods in the domestic market at par.
(c) Maintenance of internal distribution: If foreign exchange availability poses
no problem and the Import trade is completely free internal distribution of imported
items at fair and equitable prices will not create any problems. But, since such
conditions do not prevail in developing countries, sporadic scarcity of imported
items will occur. To avoid these problems, the state may take over the imports of
essential items, so that private importer may not exploit the domestic market. The
Government will plan the import operation in such a way that a steady inflow may
be maintained. This will have a check on fluctuating prices.
(3) Political reasons: There are certain political reasons behind state trading. In
order to achieve its pol1t1cal motives, the government of the country has
discretionary powers to determine the size, direction and time of imports and
exports. It may ban imports from or exports to a particular country or group of
countries provided it is a powerful country to affect the economy of other country or
countries. Recently the U.S.A. has banned its trade with Libya. Thus foreign trade
is and can be used as a weapon against other countries to achieve its politica1
motives.

96
International Business

(4) Foreign exchange crisis: Developing countries face the problems of foreign
exchange. Their imports are much higher than the exports resulting in an adverse
balance of trade. They can not afford unrestricted imports because of exchange
crisis. Such countries plan their international trade in line with the availability of
foreign exchange. State trading is one of the solutions of foreign exchange crisis
because the government can arrange the deficit through loans from foreign
countries or by deferring the payments. In post second war period, the exchange
crisis was the main reason for the development of state trading.
Thus, the state trading is necessary to achieve the following objectives:-
i) to achieve Its political objectives;
ii) to boost Its export trade;
iii) to enlarge the base for domestic planning programmes, by purchasing
products to fill a gap in the plans and by controlling outside economic
forces that may affect these plans;
iv) to improve the country's balance of payment situation:
v) to control foreign exchange;
vi) to maintain national security and defence by furthering military
preparedness and by preventing potential enemies from receiving strategic
materials;
vii) to acquire specific products, either because they can be obtained at lower
cost or because they are in short supply in home market.
viii) to advance domestic interests by improving bargaining power in trade or
by protecting trade against foreign competition.
13.20 STATE TRADING CORPORATION OF INDIA (STC):
On the recommendations of the Deshmukh Committee chaired by Dr. P.S.
Deshmukh and the review committee, headed by Shri S.V. Krishnamurti Rao, the
Government accepted the proposal for establishing the State Trading Corporation, a
registered body under Indian Companies Act.
Establishment
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
Projects and Equipment Corporation of India Ltd., 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.

97
International Business

Management
The State Trading Corporation is a registered company under Indian
Companies Act and managed by a Board of Directors including both executives and
non-executive directors. It is headed by a chairman.
Objects of the STC
The main objects of the STC for which it was established, as given in its
Memorandum of Association are as follows:
i) To organise 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.
ii) 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 rationalising distribution.
iii) To generally implement such special arrangement for imports/exports,
internal trade and/or distribution of particular commodities as the Union
Government may specify in the public interest.
iv) To arrest the decl1n1ng trend in exports or to boost export by introducing new
products in new markets.
v) To assist small exporters in their export trade.
vi) To assist small exporters in their export trade.
vii) To assist export-oriented organisations in their export and financial and
organisational activities.
1. Turnover
The total turnover of STC amounted to Rs. 1756 crores in 1990-91 as
compared to Rs. 1855 crores in 1989-90. STC's exports during 1990-91 amounted
Rs. 369 crores as compared to Rs. 752 crores during 1989-90. The following table
illustrates STC's performance during 1989-90 and 1990"91.
Rs. in crores
Exports 1989-90 1990-91
Canalised 135 113
Non-Canalised 262 273
Counter trade 341 83
Off-shore 14 –
Imports
Canalised 1045 1309
Non-canalised 25 23
Domestic 33 55
Total 1855 1756

98
International Business

Source: Ministry of Commerce, Dept. of Commerce, Government of India,


Annual Report, 1991-92.
2. Products
It deals in nearly 300 commodities including agricultural and consumer items
and items of construction materials, software, miscellaneous engineering items,
fresh and processed foods, leather and, leather products, meat and marine
products. The major imports of STC are edible oils, cement, and explosive natural
rubber, standard and glazed newsprint. Its trade is stretched over 84 countries.
3. Progress in other fields
The STC has taken various steps in different fields. These are
a) It has diversified its product range and continued to add new items to its
export basket like orthopedic shoes, sports shoe uppers, compressors. H.D.
PiPe etc.
b) 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.
c) It has established 100 per cent export-oriented production units mainly
with foreign collaboration and equity participation and 100 percent buy-
back arrangements.
d) It has developed a reliable supply base for production of quality good in
association with the state undertakings, cooperative organisations and
others in selected and identified sectors. If necessary, STC shall undertake
investments for development of such production base.
e) It has taken steps for improvement in quality, grading, packing etc.
f) The S.T.C. 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.
g) The original Idea of Its setting up was to develop' foreign trade with socialist
countries. It, therefore, has improved relation with countries of socialist
block but at the same time, its operations are wider with non-communist
countries.
h) The S.T.C. marketing expertise has been of particular advantage to small
industries because they are unable to participate in foreign trade without
S.T.C. support.
Weaknesses
There are certain inherent weaknesses of the STC, pointed out in a study
conducted by the Indian Institute of Management, Ahmedabad:
(i) Though the objectives of the STC were quite clear and well defined. It has
not taken any major entrepreneurial decision of its own so far.

99
International Business

(ii) There seems to be no guidelines for the choice of new products to be


exported and new markets to sell its products.
(iii) 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.
(iv) Much of the expertise is in operation as an agent, in processing indents
and tenders and transportation and disb1bution, not in merchandising,
procurement and marketing.
(v) The setback in the exports of noncanalised 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 important are:
i) It is guided by bureaucrats who lack business experience and initiative,
Businessmen with practical knowledge should replace them.
ii) The interlocking of the activities of the Government of India and the STC
makes possible the concealment of inefficiency under inb1cate official
procedures. There" Is an urgent need of coordinating the trade of private
traders and the STC.
iii) Moreover, the STC offices abroad have not been in a position" to create an
impact.
13.21 SUMMARY
On the whole, the STC has developed a sound infrastructure for development
of exports through Its 14 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 canalising agency but
should also make efforts to create an Image of an effective trading house on the
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 objective of boosting exports.
13.22 ASSIGNMENT QUESTIONS
1. Critically evaluate the India’s export trend in Foreign Trade.
2. What are the export promotion activities?
3. Explain the role of state trading agencies.
4. Briefly analyse importance of international marketing.
5. Examine the significance of export finance and credit facilities.
6. What are the weaknesses of STC?
‰

100
International Business

LESSON -14

EXPORT FINANCE AND CREDIT


OBJECTIVES
™ To know the meaning and role of export finance and credit
™ To have an idea about short, medium and long term sources of finance
™ To learn the export credit and finance system in India
™ To study about the preshipment and post-shipment finance
™ To know the role of MMTC and international marketing
STRUCTURE
14.1 Preamble
14.2 Short Term Sources of Finance
14.3 Medium and Long Term Sources of Finance
14.4 Export Credit and Finance System in India
14.5 Pre-shipment Finance or Packing Credit
14.6 Poll-shipment Credit
14.7 Finance TOR Exports on Deterred Payment Terms
14.8 Security TOR Deterred Credit could be provided by
14.9 The Minerals & Metals Trading Corporation of India Ltd. (MMTC)
14.10 Activities of MMTC: The Following are the Activities of MMTC:
14.11 International Marketing
14.11 Scope of International Marketing
14.12 International Marketing Vs Domestic Marketing
14.13 Summary
14.14 Assignment Questions
14.1 PREAMBLE
Finance is the nerve centre of all business activities. In export trade also, it
plays an important role rather difficult one. In export, there are a host of
Governmental, banking and export insurance regulations that one should strictly
adhere to It requires rather serious attention because any carelessness will mean a
loss of foreign exchange, apart from the other consequences.
Export financing starts as soon as the exporter gets an order to export and it
has been accepted by him and ends at points when the goods are cleared and the
amount is received. Financing of exports is a specialised business demanding the
operations of institutions that are engaged in it and have special skills in handling
the intricacies of foreign exchange transactions, a network of contracts abroad and
a willingness to assure the risks peculiarly attached to it. It is, therefore, necessary
for the success of export trade that good financing arrangement should be made
available to exporters from the beginning to the end of the export trade.
In export trade financing the main difficulty is that the buyer and the seller are
far away and do not know each other. It depends on how the contract between two
parties is made. The contract must define the terms of payments whether the
101
International Business

exporter allows credit or not. The exporter must be careful in allowing credit. But
sometimes providing credit facilities is necessary to get the business, otherwise
there is a fear of losing the valuable foreign exchange for the country and good
buyers abroad. The way out may be to borrow money from a bank or any other
financial institution to finance such credit.
The areas where finance would be essentially needed and arranged, after one
obtains an order are - (a) Procuring raw materials and component to manufacture
the product. (b) Refinancing facilities so as to get the proceeds of bills after the
shipment.(c) Availability of funds until the export benefit are realized, and
(d) Refinance facilities for long term credits offered for the export of products.
]n India, the schemes of export financing available to an exporter are
reasonably liberal. There are many financial institutions including recently set up. .
Export Import Bank, that under take the risks, attached to the export financing.
An exporter needs finances for his pre-shipment and post-shipment
requirements. Mainly pre-shipment requirements are short term requirements
where period of credit normally does not exceed 180 days. The post-shipment credit
needs may be short term, medium term and long term. A credit extended beyond
180 days and upto 5 years is referred as medium term.
14.2 SHORT TERM SOURCES OF FINANCE
The following are the short-term sources of finance in export trade:
1) By importer
In certain cases the importer finances the exporter by. ~ sending the amount
required to meet the preshipment credit in advance which can be adjusted against
the import price of the goods. The importer may insist upon the letter of credit
instead of cash. In either case, the effect is the same, the importer has financed the
transaction.
2) By exporter
When the exporter puts up his own capital or diverts his business funds
towards export business, and execute, the export order without the help of
borrowed funds, it is said that the exporter has financed, the exports. The exporter
may either have an open account with the importer, if they are known and their
relations are well maintained or send the documents against payment or against
acceptance after shipping the goods. If documents are against payment, the
exporter gets the payment within a reasonable time and if the documents are
against acceptance, he can discount the acceptance from his banker as soon as he
gets it from the buyer after acceptance. In this way, the exporter finances his short
term needs himself.
This method is most unusual because comparatively few manufacturers and
professional exporters either have their own capital or wish to employ it in this
manner. The reason behind it is that the rate of interest charged by the bank on
export credit or fee for negotiating drafts is quite low and no wiseman will invest his
own capital in this "manner.
102
International Business

3) By the export Middleman


The export middlemen particularly the export merchant, or export commission
house finances export shipment. For this purpose, the manufacturers pay a fee for
the services rendered by such middlemen. The fee is usually high. Credit risks
which are not ordinarily acceptable to banks, are granted by such middlemen.
Usually, the middlemen turn around and refinance their own drafts through a
bank.
4) By factors
Factoring houses generally finance the export, trade by discounting the bills of
the exporters. They charge discount or commission for their services. They also
undertake the responsib1l1ty of any risk in the discounting of bills and therefore,
they offer a good insurance cover for the losses. This method is useful to those
exporters whose working capital is limited. The factoring houses serve as a
mercantile and banking house which finances manufacturers, exporters,
commission houses and selling agents through the discounting of receivable.
5) By banks
Banks also provide short term finances to the exporters and render valuable
services in the international trade. The service in financing the export credit
generally offered by a bank are-
Bank opens documentary credit account in favour of the exporter at the request
of the importer,' and issues letter of credit to the exporter. It makes the
payment to the exporter on receiving the documents of the goods imported.
The bank in the exporter's country collects the necessary amount from the
importer's bank against letter of credit or against documents of payment on
behalf of the exporter.
The bank generally finances the exporter by discounting the documentary drafts
as accepted by the importer.
Bank also provides pre-shipment credits through loans, cash credits and
overdrafts for exporter's short term needs which are in turn, refinanced by the
R.B.I. in India.
In India, commercial banks finance the most part of exporter's short term
needs.
14.3 MEDIUM AND LONG TERM SOURCES OF FINANCE
By medium term finance means, finance for a period exceeding 180 days but
not exceeding 5 years. This type of credit is provided for in the case of durable
consumer goods and light capital goods. The long term finances are provided for a
period exceeding 5 years and are normally provided for the sale of heavy capital
goods, complete plants and turnkey projects.
There are two types of medium and long term credit widely known as,
(1) Buyer's credit, and (2) Suppliers credit.

103
International Business

(1) Buyer's credit


It is a means of financing an export transaction involving capital goods and
equipment of large value or complete turnkey projects on long term credit. A bank
or other financial institution extends the credit facility to the buyer in the supplier's
country so that, the overseas buyer may be in a position to pay cash for the goods
imported. The credit, facility so extended is guaranteed by the buyer's bank or often
extended to buyer's bank itself for the specific purpose in view. Two points are
important in this connection: (i) If the supplier executes the contract under the
terms of contract of sale, he will get the money. (ii) It involves no transfer of funds
from one country to another. There is as such no financial involvement for the
seller.
(2) Supplier's Credit
Under this credit the exporter or supplier offers credit to the overseas in
importer against the reciprocal credits, from the commercial banks which, in turn,
get refinance from the EXIM Bank in India.
The sources of medium and long term finances are:
(A) Commercial banks
Commercial banks also provide the medium and long-term loans but
invariably they offer only short-term loans for exports. When commercial banks
extend the short-term and long-term loan facilities to exporters, they get refinance
from the specialized financial institutions as from EXIM Bank in India.
(B) Export Import Bank
In some countries, export import banks have been established to finance the
medium and long-term export credit needs. Such banks have been set up in U.S.A.
in 1943 and in Japan in 1950. The Indian Government has also established the
Export-Import Bank (EXIM Bank) on 1st January 1982 as a public sector financial
institution. It provides medium and long term loans for exports directly and
indirectly to exporters.
(C) International financial institutions
Many international banks and financial institutions have extended long term
credit facilities to many countries especially under developed countries to expand
their industrial base so that those countries may contribute to world trade. Such
institutions are World Bank, International Finance Corporations, and Asian
Development Bank etc.
(D) Private export finance companies
In order to boost the export trade, a number of private finance companies have
spread up in many countries. They offer medium and long-term loans for export
purposes under their own term and conditions agreed upon between the two parties
of the finance contract.
Thus medium and long term finances are generally extended by banks and
specialised financial institutions.

104
International Business

14.4 EXPORT CREDIT AND FINANCE SYSTEM IN INDIA


In India, the licensed commercial banks generally extend short term credit
facilities at preshipment and postshipment stages to the exporters. Banks generally
enjoy certain benefits for advancing loans to exporters.
These benefits are
i) They enjoy an interest subsidy of 1 3/4 percent or refinance from the
Reserve Bank of India or the Export-Import Bank.
ii) Guarantees are provided by the ECGC, where a substantial part of risk is
covered by the ECGC.
The commercial banks are also authorised to extend medium term and long
term credit upto Rs.l crore and they get refinance from the EXIM Bank of India.
Such loans can be given only to export Indian capital goods or turnkey projects.
Long term and medium term loans above Rs.l crore are directly provided by the
Exim Bank after conducting appraisal assessing the nature of export, economic
status of buyer and the importing country, the period of repayment and the credit
risks involved. Again the projects' commercial viability, capabilities of Indian
exporter, soundness of importer are also considered.
The Exim Bank of India directly extends term credit facilities to exporters
under its various schemes and it indirectly provides finances to exporters by
refinancing the bills already discounted by the commercial banks. The term finance
is generally provided to exporters mainly to provide term credit to overseas buyer
for the export of capital goods and consultancy service.
The Reserve Bank of India does not contribute directly in financing the Export
trade but it formulates different policies which help the exporters in getting
financial facilities from the commercial banks and financial institutions. It can
direct the banks and Exim Bank to extend export credits for some particular
purpose or at concessional rates or on liberal terms. The R.B.I. has formulated a
number of policies such as Export Bill Scheme. Rupee Export Bill Scheme. Export
Interest Subsidy Scheme etc.
The ECGC is another institution which facilitates commercial banks to extend
credits to exporters by providing various types of covers for the risks (caused by any
political or economic reason) involved in export trade. The ECGC also guarantees
credits extended by banks to exporters.
Thus in India, commercial banks have played an important role in financing
the export trade. Other institutions except the Exim Bank which provides only term
credit to exporters in specific conditions do not extend credit directly to exporters.
Export Credit
After the shipment is made, exporter sometimes will have to give credit to the
importer for an agreed period and he has to wait for the value till the expiry of the
credit period. Even if, no credit is allowed to importer, the capital of the exporter is
blocked till the documents reach the importer, he makes the payment and the
amount is collected by the exporter's bank.

105
International Business

Thus post shipment credit is required by the exporter during the intervening
period between the shipment of goods and the receipt of payment therefore. Thus in
nut shell, an exporter needs credit or financial support at two stages-(i) At
preshipment stage, and (it) At post shipment stage.
14.5 PRE-SHIPMENT FINANCE OR PACKING CREDIT
Pre-shipment finance (packing credit) is needed by the exporter for his working
capital requirements between the time of the receipt of order from an overseas
buyer and the time of shipment to arrange for production procurement of goods.
The preshipment finance is required for short term period ranging between 90 days
to 180 days. Pre-shipment finance is of particular importance to small scale
manufacturers and exporters who are short of finance to meet the necessary
expenditure involved in the production of goods for export.
Pre-shipment credit is normally provided by the commercial banks. the bank
while advancing credit for this purpose, normally take the following factors into
consideration--
(a) honesty, integrity and capital of the exporter, (b) exporter's experience in
the trade, (c) security or guarantee offered, (d) the margin and the rate of interest,
(e) bank's experiences about the exporter. (f) standing of the foreign buyer,
The bank generally asks for the security in the-following forms:
i) Letter of credit received against the contract,
ii) Confirmed order as evidence of having received an exporter order,
iii) Relevant policy issued by the Export Credit and Guarantee Corporation,
iv) Personal bond in case the party is known to the banker.
If the exporter has to supply the goods to an export house, the manufacturer
exporter should have to furnish a letter from the export house containing (I) the
obligation of supplier, and (ii) a certificate of export house that it is not itself
claiming the pre-shipment credit.
Amount of credit and rate of interest The amount of loan depends upon the
f.o.b. value of goods and incentives thereof such as cash compensatory and Duty
drawback etc. and generally conforms to the norm set up by the ECGC under the
Export production Finance Guarantee; Scheme i.e., 50 per cent over and above the
f.o.b. value of goods subject to a maximum of 100% of the domestic cost of the
export product.
Pre-shipment Credit may be in the form of loan, Cash Credit and Overdraft
and the amount provided normally covers to following costs:- .
a) cost of purchase or production,
b) cost of packing including special packing for export.
c) Internal transport cost
d) port, customs and shipping agent's charges,
e) cost of special inspection or tests required by the importer,

106
International Business

f) export duty or tax.


The packing credit period ranges from 90 days to 180 days depending upon
the period which would enable the manufacturer to produce the goods or produce
the goods for export. In case of specified goods (where capital goods are involved),
the period may be extended for a further period of 45 days with the permission of
Reserve Bank of India.
The rate of interest charged at concessional rate for pre-shipment credit is 12
percent for the normal period (180 days in case of carpets, medium and heavy
industry goods and construction contracts and 90 days for others) and for extended
period the rate would be 14.5%)
Revolving credit: If an exporter is well known to the bank and the bank is fully
satisfied with his past performance, it usually grants revolving pre-shipment credit
in connection with successive deliveries. This implies the automatic grant of the
successive loan as soon as the previous loan is repaid subject to the production of
export documents required. Packing credit is adjusted out of post shipment credit
sanctioned by the bank.
Pre-shipment credit may be provided under a letter of credit with a red clause
where advance is granted at the instance and therefore. on the responsibility of the
foreign bank establishing the credit.
In case, the goods are to be procured from a manufacturer or supplier, the
bank may open a letter of credit in favour of supplier(s) under what is known ‘back
to back letter of credit'. This procedure is generally applied by export houses. In
case of consignment sales, banks usually establish a post-shipment credit account
which is adjusted when the goods are sold abroad or the sale proceeds received.
14.6 POLL-SHIPMENT CREDIT
Post-shipment finance requirement relates to exporter needs after the goods
are shipped till the actual payment therefore is received. Post-shipment credits are
also made available by the commercial banks against the security of approved
shipping documents tendered against letter of credit or otherwise. It is also
provided at concessional rates.
The banks normally finance the post shipment credit in one of the following ways:
i) negotiating the export bills under letter of credit,
ii) discounting of bills drawn against shipment of goods-- is usually done under
limits sanctioned to. different customers, on the basis of their credit
worthiness, and
iii) advancing credit against bills under collection.
Banks usually charge a commission according to the rates prescribed by the
Foreign Exchange Dealers' Association. The rate of interest charged is 12 per cent
upto 120 days and at rates prescribed, by the Reserve Bank of India thereafter.
Repayment of loan starts when the payment from abroad is realised in
conformity with the terms of sale. It may take more time when the sale is done on

107
International Business

credit or against documents against acceptance. However, the policy of ECGC


covers against such risks.
Types of post-shipment credit: Post shipment credit may ~e of three types:
(1) Short term: The short term loans are usually for a period of 6 months and
provided by commercial banks.
(2) Medium term: Loans generally offered for a period beyond 6 months and
upto five years may be termed as medium term loans. Such loans are also provided
by the commercial banks in collaboration with the Export Import Bank. Medium
term finance is provided for in case of durable consumer goods and light capital
goods.
(3) Long term: Loans for a period beyond five years may be classified as . long
term loans. They are provided in case of export of capital goods and . , turnkey
projects.
Banks enjoy certain benefits for advancing loans to exporters. These benefits are:
(a) An interest subsidy of I 1/2 per cent or refinance of credit by the export
Import Bank or the Reserve Bank of India.
(b) Guarantees for loans advanced are provided by the Export Credit and
Guarantee .Corporation: In such case ECGC covers substantial part of the risks
involved. .
14.7 FINANCE TOR EXPORTS ON DETERRED PAYMENT TERMS
Our exchange control regulations stipulate that payment for export should be
received in India within six months from the date of shipment. In the case of
Pakistan and Afghanistan, payment should be received within three months.
Contracts for exports goods against payment to be received fully or partly after the
expiry of the stipulated period for the realisation of export proceeds, treated as
deferred payment export contract. Extension of loan term export credit has become
an accepted export market started and therefore provision has been made for the
extension of medium and long term credit to finance the sale of Indian capital goods
related services. Any such contract in which payment is received after six month
period. a specific permission should be obtained from Exchange Control
Department. The rate of interest charged for .such advances is 9 percent.
Any loan upto Rs.l crore for financing exports of capital goods is decided by the
commercial bank which can be refinanced by the Export Import. Bank where the
contract exceeds Rs.l crore, the Exim Bank conduct, export credit appraisal
assessing the nature of export, economic status of buyer and the importing
country, the period of repayment and the credit risks involved. The various criteria
adopted for evaluation of projects are:
(a) whether the project is justified on commercial grounds.
(b) Whether the Indian exporter is capable of executing the contract.
(c) Whether the foreign buyer can make the payment according to the payment
schedule as proposed, and

108
International Business

(d) Whether the project (proposed) is economically viable.


The maximum limit of loan has not been fixed for such credit.
4.8 SECURITY TOR DETERRED CREDIT COULD BE PROVIDED BY
(i) letter of credit. (ii) Promotes executed by government buyers or public sector
undertakings. (iii) acceptable bank guarantees. (iv) Bills duly accepted by banks.
and (v) any other security considered adequate.
Thus export credits at pre-shipment and post-shipment stages are provided
mainly by commercial banks. Ex1m Bank also finances long term projects requiring
Rs.l crore or more.
14.9 THE MINERALS & METALS TRADING CORPORATION 01 INDIA LTD. (MMTC)
MMTC was set up by the Government as a canalising agency for export and
import of minerals metals and fertilizers. The corporation has been rendering this
service to the utmost satisfaction of customers. In addition to this, with a view to
generate foreign exchange to bridge the widening trade gap, the corporation started
channelising its organisational and marketing acumen for development of exports
in non-canalised areas.
MMTC's total turnover during 1990-91 stood at Rs.5623 crores and the export
turnover at Rs.1324.9 crores. The table below indicates the overall performance of
MMTC
(Rs. in crores)
1988-89 1989-90 1990-91
Exports
Canalised 477.8 623.1 629.7
Non-canalised 394.7 525.2 695.2
Total Exports 872.5 1148.3 1324.9
Imports
Canalised 2930.4 3814.9 4069.8
Non-canalised 41.0 99.7 195.8
Total Imports 2971.4 3914.6 4265.6
Domestic Trade 36.1 34.4 32.5
Total Turnover 3880.0 5097.3 5623.0

Source: Ministry of Commerce. Department of Commerce, Annual Report 1991-92


MMTC Is a state-owned enterprise rendering an important service of finding
markets for India's exports and meeting India's requirements of essential goods. To
fulfill this objective. MMTC carries out a wide range of activities. They include
international marketing. trade finance. Distribution, infrastructure development
and joint collaborations with other important manufacturing companies to set up
projects in India and Abroad.

109
International Business

14.10 ACTIVITIES OF MMTC: The Following are the Activities of MMTC:


i) Exports of primary and manufactured products
ii) Import of industrial commodities
iii) Trade and counter trade
iv) Agents and representatives for domestic producers
v) Domestic trade in bulk raw material
vi) Providing trade services
vii) Investments in joint ventures
Exports: MMTC exports the following canalised items:
i) Iron ore
ii) Manganese ore
iii) Chrome ore
iv) Coal
v) Bauxite
MMTc also exports the following non-canalised items:
i) Barytes and other minerals
ii) Diamonds, Gems and Jewellery
iii) Industrial products/projects abroad.
iv) Agro products
v) Counter trade
Imports: MMTC imports the following canalised items:
i) Non-ferrous metals
ii) Industrial raw materials
iii) Steel
iv) Fertilizer Raw Materials, intermediates and finished fertilizers.
MMTC also imports the following non-canalised items:
i) Rough diamonds
ii) Gems and stones
iii) Copper cathodes.
14.11 INTERNATIONAL MARKETING:
Marketing activities carried on by a marketer in more than one nation may be
termed, as international marketing. International marketing may be designed as
marketing carried on across national boundaries. It is the performance of business
activities that direct the flow of goods and services to consumers in more than one
nation. In this way marketing activities ie., buying, selling, transportation, storage
and warehousing, financing, risk bearing, pricing, standardizing, advertising and
sales promotion etc, when performed in a foreign market across the national
border, may be called international marketing. International marketing is the

110
International Business

multinational process of planning and executing the conception, pricing, promotion


and distribution of ideas, goods, and services to create exchanges that satisfy
individual and organisational objectives. International marketing must be
distinguished from international trade. International trade is concerned with the
flow of goods and capital across national borders. The focus of the analysis is on
commercial and monetary conditions that effect balance of payment and resource
transfers. The study of international marketing on the other hand, is more
concerned with the micro level of the market and uses the company as a unit of
analysis. The focus of the analysis is on how and why a product. succeeds or fails
abroad and how marketing efforts affect the outcome.
14.12 SCOPE OF INTERNATIONAL MARKETNG
The scope of International marketing essentially includes exporting of goods
and services in foreign markets. The exporter performs various, activities, other
than exporting the goods and services. These activities are:
(I) Establishing a branch In foreign market for processing, packaging or
assembling the goods according to the needs of the markets. Sometimes completes
manufacturing is carried out by the branch through direct Investments.
(II) Joint ventures and collaborations: International marketing includes joint
ventures and collaboration in foreign countries with some foreign firms for
manufacturing and/or marketing the product. Under these arrangements, the
company works in collaboration with the foreign firm In order to exploit the foreign
markets.
(iii) Licensing Arrangements: The company, under the system, establishes
licensing arrangements with the foreign term whereby foreign' enterprises granted
the right to use the exporting company's know-how, viz, patents, process or trade'
marks according to the terms, of arrangement with or without financial Investment.
(iv) Consultancy services: Offering consultancy services are also covered In
International marketing scope. The export company offers consultancy services by
undertaking turnkey projects In foreign countries. For this purpose, the exporting
company sends its consultants and experts to foreign countries that guide and
direct the manufacturing activities on the spot.
(v) Technical and Managerial know-how: The scope of International 'marketing
also. Includes the technical and managerial know-how provided by' the exporting
company to the Importing company. .The technicians and managerial personnel of
the exporting company guide and train the technicians and managers. of the
importing company.
14.13 INTERNATIONAL MARKETING VS DOMESTIC MARKETING
Marketing can be conceived as an integral part of two processes, i.e., technical
and social. So far as technical aspect is concerned, international and domestic
marketing are identical. Technical aspect includes nonhuman factors in marketing
such as product, price, brand, packaging. Warehousing, costs, etc. and the basic
principles regarding these variables have universal applicability. The social aspect
111
International Business

on the other hand, is unique in any given stratum as it involves human elements
namely, the behavioural pattern of the consumers and the characteristics of the
society such as customs, attitudes, values etc. Thus, international marketing is
identical to the domestic marketing as far as technical aspect is concerned but
international marketing, to the extent it is visualised as a social process, differs
from domestic marketing.
14.14 SUMMARY
Export finance starts when exports of goods are cleared and the amount is
received. It may be short, medium and long term sources of finance. The export
pattern is pre shipment finance and post shipment finance. The international
marketing has its main role and differentiates from domestic marketing.
14.15 ASSIGNMENT QUESTIONS
1. What is export financing?
2. What are short term sources of finance?
3. Describe the medium and log term sources of finance?
4. What do meant by international marketing?
5. Explain the scope of international marketing?
6. Differentiate; international marketing and domestic marketing.
‰

112
International Business

LESSON - 15

IMPORTANCE OF INTERNATIONAL MARKETING


OBJECTIVES
™ To study in detail about the importance of international marketing
™ To learn the role of Export credit guarantee corporation (ECGC)
™ To know the role of export promotion measures
™ To identify the significance of agricultural and processed food product exports
development authority
™ To explain the meaning and activities of Trade Development Authority (TDA)
STRUCTURE
15.1 Preamble
15.2 (A) Importance of Export Marketing in The National Economy
15.3 (B) Importance of Export Marketing From the Point of View of
Individual Firm
15.4 (C) Importance from Other Viewpoints
15.5 International Marketing Vs Export Marketing
15.6 Role of Export Credit Guarantee Corporation (ECGC)
15.7 Export Promotion Measures
15.8 Export Promotion Councils
15.9 Agricultural and Processed Food Product Exports Development
Authority
15.10 Service Institutions
15.12 Trade Development Authority
15.13 Summary
15.14 Assignment Questions
15.1 PREAMBLE
Foreign trade or exports make a significant and necessary contribution to the
economy and the country's development and particularly in underdeveloped
countries. It provides a sound base for the country's economy. The rapid progress
of underdeveloped countries in the Industrial field is ma1nlydue to their exports.
15.2 (A) IMPORTANCE OT EXPORT MARKETING IN THE NATIONAL ECONOMY
From the point of view of national economy, the importance of export
marketing can be understood under the following heads--
i) To meet imports of industrial needs
No country today can survive in isolation. The developing countries need
imports of capital equipments, raw materials of critical nature, technical know-how
for building the industrial base in the country with a view to rapid industrialisation
and developing the necessary infrastructure. The share of oil imports in the total
import of the underdeveloped countries is much higher and its imports cannot be
avoided as it is required as a means of energy to run the industries.

113
International Business

The only option to avoid the situation is to establish the export oriented
industries and to increase the existing installed capacity of units producing goods
for export markets, Industries should also be given stimulus to util1se their
.unutil1sed capacity and export the surplus production. Thus export is a must for
meeting the import requirements of a country because by exporting the surplus or
additional production, a country can also earn valuable foreign exchange that is
necessary to meet the import bill.
Moreover, if a country fails in meeting the import bill by exporting the goods
and services from the other country, the difference is trade deficit which cannot be
said to be a pleasant situation. Thus, positive measures, and encouragement for
the steady and substantial increase in the export trade is necessary to balance the
imports.
In this way, export should be increased steadily and substantially especially by
an underdeveloped country where trade deficit has become a regular feature.
ii) Debt Servicing
Almost all underdeveloped countries, including India, have been receiving
external aid over the years for their industrial development. The natural
consequence of aid has been the need for debt servicing i.e. arrangement of foreign
exchange every year equal to the installment and interest assumed thereon as per
terms of the aid or loan.
Hence, it is necessary to aim at sufficient export earnings to cover both
imports and debt servicing, This will lead to the availability of higher amount of
foreign aid for development and consequently higher amount for debt servicing.
iii) Rapid economic growth
An, expanding export trade can be a dynamic factor in a country's
development process. However, one has to plan imaginatively in increasing the
production of exportable surpluses. The country should have to util1se domestic
resources and to' provide technological Improvement and Improved production at
lower costs. For this purpose Industrial development is Inevitable which is not
possible without making exports. Export and economic development of a country
are inter-related without exports economic development of higher order cannot be
imagined. In a study on 'The relation of exports and economic growth” conducted
for a group of 50 countries by R.F. Emery, it was found that a higher rate of
economic growth. The study also revealed that a significant correlation exists
between exports and GNP and that real GNP percapita recorded an increase of 1 %
for every 2% rise in exports to grow economically should take serious view for
creating exportable surpluses '(surpluses after meeting domestic demands). In the
best interest of the economy and exports, emphasis should be on increasing the
overall production and expanding the export of non-traditional products. This will
lead to -
i) Earning of more valuable foreign exchange which can be judiciously
allocated for the import of necessary plants, machinery and equipment for
the development of industries in the country In order of preference as spelt
114
International Business

out in the development plans of the country. The foreign exchange can be
used for the import of agricultural implements and fertil1sers to raise the
production of agricultural produce and that can provide a base for many
agriculture based industries. New agricultural produce can be grown to
establish new Industries that may provide import substitution and may
save necessary foreign exchange.
ii) 'Spin off benefits for the domestic consumer by exposing the Industry to
international markets and making, it more competitive as well as
conscious of costs and equality.
iii) Mitigate unemployment in labour-intensive Industries.
iv) Established new and new Industrial units for contributing towards export
after making their domestic demand, sometimes. 100% export-oriented
units are established.
v) Full utilisation of idle resources.
Thus, export marketing is really a dynamic force in the development of a
country.
iv) Profitable use of natural resources
Natural resources are valuable assets of a country which should be exploited
ideally, keeping the Interest of the country in mind. This can be well done by export
marketing. Earning from exports can be utilised in establishing Industrial unit
based on different natural resources available in the country by making the
necessary of plant and machinery for the purpose, Moreover, necessary equipments
can be imported for the exploitation of natural resources such as digging machines
to be used in oil .exploration etc. In this way, an increase in the conservation of
natural resources and their profitable use in the industry will reduce imports of a
country.
v) Facing Competition successfully
In a thrust to export more, the Government of the country, announces several
concessions and incentive plants. Domestic producer in order to avail these
concessions, concentrates his mind towards the improvement of quality of goods
produced and reducing the cost of production so as to face the acute competitive
situation in the foreign markets by making intensive use of latest technology, As
because he is already marketing the goods in the domestic market, the advantage of
other quality at reduced price is also made available to the domestic customers and
face competition successfully in the local market. Moreover, better quality and
lower prices improve the image of the producer as well as the country in minds of
foreign customers.
vi) Increase in Employment Opportunities
In an effort to increase the export, many export oriented industrial units are
established, on the one hand, and the existing units produce more to get exportable
surplus, on the other hand. This generates new opportunities for employment and
increases the existing level of employment. In underdeveloped countries,

115
International Business

particularly in India, the problem of the employment and underemployment is very


serious that can be solved to some extent by increasing the level of export.
Moreover, new markets are surveyed exporting the goods and so many other
persons are also engaged directly or indirectly in the export trade. Employment
opportunities can also be explored by entering new areas for exports.
vii) Role of exports in national income
Export play an important role in the national income of the country and it can
be increased to a sizable extent through organised export marketing. Shares of
export income in the national income of some countries are Hungary 43%,
Netherland 42%, Japan 11%, Canada 21%, Belgium 42%, West Germany 19%, and
England 17%. This shows' the contribution of exports in the national income of the
country.
viii) Increase in the Standard of Living
Export marketing improves the standard of living of the country men in the
following ways:
i) The imports of necessary items for consumption can be made which may
help to improve the standard of living of the people. Such imports can be
managed out of foreign exchange fund earned from exports.
ii) Exports increase the employment opportunities which in turn increase the
purchasing power of the peoples by which they can purchase more for this
consumption.
iii) Exports are responsible for the rapid industrialisation of the country. New
items are produced for consumption in the domestic market, It increase
the level of standard of living.
iv) In order to face the competition in the international market. The producers
improve the quality of the product by applying the latest technology.
Moreover cost of production is also reduced because of large-scale
production and use of improved technology. In this way people gets better
quality products at cheaper rates. It helps to improve the standard of
living of the people.
15.3 (B) IMPORTANCE OF EXPORT MARKETING FROM THE POINT OF VIEW OF
INDIVIDUAL FIRM
Business and industrial firms are also benefited from the export trade. Due to
these benefits they are motivated to export. The following are some benefits from
exports to the individual firm.
(I) Insufficiency of domestic demand: If the domestic demand for the product is
not sufficient to consume the production the firm may take a decision to enter the
foreign market. In this way it can equalise the production and the demand.
(2) To utilise installed capacity: If the installed capacity of the firm is much
more than the level of demand of the product in the domestic market it can enter
the international market and utilise its unutilised installed capacity. In this way, it
can export the surplus production.

116
International Business

(3) Legal Restrictions: sometimes the Government of a country imposes certain


restrictions on the growth and expansion of certain firms or on the production and
distribution of certain social objectives such firms or producers of such
commodities then sell their production in export market. As a part of its import
policy, Government of the country may impose certain export obligations on the
industries and, therefore, they will have to export their production to meet the
obligation.
(4) Relative profitability: The export trade is more attractive for its higher rate of
profitability. The rate of profitability is also increased by export assistance
measures offered by the Government of the country. The higher profitability rate
also, gives extra strength to the firm for its competitive position in the domestic
market.
(5) Less business risk: A diversified export business helps the exporting firm in
mitigating the risk of sharp fluctuations in the business activity of the firm.
Downward trend in one market may be partly or fully counterbalanced in other
markets.
(6) Increased Productivity: Due to certain social and technological
developments, the industrial production has increased to a great extent. The
production, therefore, will be higher at a cheaper rate. The surplus production can,
therefore be exported. The company can, now, spend more money on research and
developmental activities.
(7) Social responsibility: In order to meet the social responsibility, some
business firms take the decision to contribute to the national by exporting their
products. They are committed to exports.
(8) Technological improvements: Technological improvements also attract the
business firm to enter foreign markets. It introduces new products with latest
technological improvements and faces the competition successfully in the overseas
markets.
(9) Product obsolescence: If a product becomes obsolete in domestic market it
may be in demand in foreign markets. "The firm has to make a survey for
introducing the product in those markets.
The importance of export marketing from the point ofvtewof.ind1v1dual firm
has already been discussed in detail. They have been discussed in brief here only
for the sake of continuity.
15.4 (C) IMPORTANCE FROM OTHER VIEWPOINTS
The importance of export marketing can also be viewed from some other angles -
(1) INTERNATIONAL COLLABORATION: Export marketing results in
international collaboration. Developed countries fix their import quotas for different
countries and for different commodities. A country can export various commodities
to these developed countries to the extent of its quota. In order to settle certain
common issues some countries from a group or a common platform to discuss

117
International Business

various issues concerning their international trade and take decision jointly. OPEC
and EEC are such groups. In this way, international trade leads to international
collaboration.
(2) CLOSE CULTURAL RELATIONS: International trade brings various
countries closer. Better trade relations are established among the countries.
Government and non-Government trade commission or trade representations visit
other countries from time to time. The local representatives and other related
persons came into contract with foreign representatives and come to know their
habits and customs. Apart from this, exporting firms open their selling deposits,
agencies or manufacturing units abroad. Their employees also come into contract
with the persons of the countries of their posting. In this way closer cultural
relations among various countries develop.
(3) HELP IN POLITICAL PEACE: The economic relations between two countries
help to improve their political relations. Various countries having different political
ideologies import or export their products. The USSR imports food grains from
America, though they have a different rather opposite, political ideology. Thus, to
some extent, international trade helps maintaining political peace in the world.
To sum up, it is now undisputable that export trade contributes to the
national economy, national exchequer, and individual exporting firms and
maintains international economic, cultural and political relations among various
countries. Countries have come closer on account of international marketing. In
modern world export marketing is 'an inevitable part of business activity of a
country.
15.5 INTERNATIONAL MARKETING Vs EXPORT MARKETING
Generally the two terms 'international marketing' and 'export marketing' are
taken synonymously, and are used interchangeably. Though differentiation between
these two terms is not so easy, however, the following points of difference may be
noted--
(1) SCOPE: The scope of international marketing includes inter alias, the
following activities (a) setting' up of a branch abroad for processing, packaging,
assembly or even undertaking direct manufacturing through direct investment; (b)
entering into licensing arrangement; (c) setting up of Joint ventures and
'collaborations in the foreign markets; (d) offering turnkey projects and consultancy
services. Furthermore, international marketing involves research into the needs of
the foreign markets and evolving suitable marketing strategies to meet them.
On the contrary, the scope of foreign marketing is very limited and it includes
only the activity of exporting goods and services to the foreign country and related
matters thereto. A manufacturer tries to sell his surplus production in foreign
markets' as and when the demand for it arises either directly or through some
agency. He does not make any attempt to have an insight into the potential of
foreign markets by conducting research nor does he attempt to differentiate his
marketing mix to match such needs.

118
International Business

(2) APPROACH: The other point of difference between export marketing and
international marketing is that of approach towards the firm's orientation. In the
case of export marketing, the firm is ethno centric or home oriented and produces
and sells goods to foreign buyers visiting home country or to an importer in the
host country or to an export house for being sold in the foreign market. The
philosophy here in exporting the goods by, the firm is either (a) to counter domestic
competition' and export the surplus product or (b) to avail of the incentives
provided by the home Government. Most of present day multinationals like Philips,
IBM, Unilever etc., started their international operation mainly because of
compulsion of their domestic market conditions, i.e., intensive competition and
their small size. On the other hand most of the Indian firms which attracted
towards international operations started exporting mainly to avail Government
incentives. However, as the foreign marketing deepens and involves and or all of the
above listed alternatives, the firm majors into international marketing.
In case of international marketing, the firm's approach in exporting the goods
and services is not to avail the Government incentives or to counter the domestic
market conditions i.e., intensive competition or the small size. Here the approach in
entering the international markets is to explore the marketing opportunities in the
host country or countries and therefore the exporting firm's actions are governed
mainly by the host country's environment. It now aims at countering Government
and competitive pressures in the host country. Also at this stage the firm
undertakes, as mentioned above, international market research identifies consumer
preferences in the host country and develops an appropriate marketing mix.
However, here too, the centre of reference remains the parent firm and its
headquarters.
Thus, to conclude, international marketing approach presupposes serious
marketing involvement of a firm in its foreign markets, whereas export marketing
approach, prima-facie, is an opportunistic approach. The involvement of a firm in
its overseas operations in this case is at best casual as explained above.
15.6 ROLE OF EXPORT CREDIT GUARANTEE CORPORATION (ECGC)
The risk element in the export business is greater than the risk involved in
domestic trade because the two parties of the export contract belong to different
countries. The export contract involves a number of complications– economic, legal,
political and social. For minimising the risk element in export business and to
facilitate the flow of finance from banks and other institutions to exporters there is
an Export Credit Guarantee Corporation (ECGC)
The ECGC was established in 1954 and the Export Risk Insurance
Corporation (ERIC) was merged in it. The corporation is under the administrative
control of the Ministry of Commerce. Its Head Office is in Bombay and regional
offices are at Calcutta, Madras, Delhi and Bombay. 'It is wholly owned by the
Government of India and works on 'no profit no loss' basis.
Functions of the corporation: The main functions of the corporation are--

119
International Business

1. By issuing suitable polices. 'It insures orders against the attendant risks of
export operations.
2. It provides financial guarantees to ~ and exporters for export against deferred
credit payment terms.
3. Any other activity assigned to It by Ute Government of India from time to
time.
Insurance policies issued by ECGC: The ECGC has issued the following two types of
policies–
(1) Standard policies, and (2) Special policies
(1) Standard Policies
Standard policies are issued by the ECGC to exporters to protect them against
the risks of international trading especially those relating to losses in exports on
deferred terms of payment.
There are three types of standard policies–
a. Specific shipment policy (Political risk): This policy covers the risks caused
by the political reasons such as importers government action to block or
delay payment, war revolution or civil disturbance, cancellation of import
licence, demurrage or addition handling charges due to delay, and any
other causes of loss occurring outside India.
b. Specific shipment policy (Comprehensive risks): Such policy covers both the
political and commercial risks involved in export transactions. The policy
covers the commercial risks caused to the exporter by the insolvency of the
buyer, delay in payments for more than 4 months, non-acceptance of goods
not due to exporter's default.
c. Contract Policy: Contract Policy covers the additional risks due Jo
cancellation of export licence or imposition of new export restrictions in
India. The above two specific policies cover risks from the time the goods
are shipped but the contract policy covers the risks from the date of
contract.
The extent of coverage of financial losses (on account of political or commercial
risks) under the ECGC standard policy is 90% of the losses.
(2) Special Policies
Special policies, besides the risks covered under standard policies, are issued
by the ECGC to cover the risks as desired by the exporters to meet their needs in
export transactions.
To suit the various needs of the exporters, the ECGC has devised the following policies–
a. Construction works policy covers the risks of non-payment of contract price
to the contractor by the foreign contractee.
b. Policy for consignment export covers the loss on consignment transaction.
c. Services policy covers the risks of non-payment for services rendered
abroad. Policy covers only technical and professional services.
120
International Business

d. Manufacturer's credit insurance policy covers 80% of the risk due to default
on insolvency on the part of the exporter.
e. Exporter's credit insurance policy. This policy covers 50% of losses arising
out of default or insolvency of manufacturers.
f. Market development policies cover losses on market development on 50:50
basis if market surveys are done by an independent agency.
Financial Guarantees
ECGC provides financial guarantee to the banks advancing credits to exporters. Some
of the guarantees offered by the ECGC are –
i) Packing Credit Guarantee or Pre:-shipment Guarantee
ii) Post-shipment Export Credit Guarantee.
iii) Export Finance Guarantee
iv) Export Production Finance Guarantee
v) Export Performance Guarantee
vi) Transfer Guarantee.
Apart from the above, the ECGC in the last few years has brought forward
many progressive schemes and policies to encourage exports and cover the risks of
exporters and the financial institutions. The new schemes introduced in 1980 are
to cover risks against exchange fluctuations at the bid/ contract stage and in
respect of deferred receivables including constructions, contracts, turnkey projects
and buyer's credits.
In this way, the ECGC covers a wide range of risk including political and
financial risk and is serving to the cause of national economy.
15.7 EXPORT PROMOTION MEASURES
The Government has, over the years, been undertaking several export
promotion measures aimed at encouraging a rapid growth in exports in order to
earn the much needed foreign exchange for financing the import of essential inputs
required for the economic development of the country. These measures encompass
a wide spectrum of policies and programmes including financial. Fiscal, industrial,
trade and exchange rate management on one hand and development of institutional
frame work for export promotion, removal of bottlenecks and streamlining of
policies and procedures etc. on the other.
The following are the institutional infrastructure for export promotion.
Institutional Infrastructure
An exporter needs guidance and assistance at different stages of his export
effort. For this purpose, the Government of India has set up several institutions
whose main functions are to help an exporter in his work. It would be advisable for
an exporter to acquaint himself with these institutions and the nature of help that
they can render to him so that they can initially contact them and have a clear
picture of what help he can expect from organised sources in his export effort.

121
International Business

Institutions engaged in export efforts fall into six distinct tiers. At the top is the
department of commerce of the Ministry of commerce. This is the main organisation
to formulate and guide India's trade policy. At the second tier, there are deliberative
and consultative organisations to ensure that export problems are comprehensively
dealt with after mutual discussions between the Government and the industry. At
the third tier are the commodity specific organisations which deal with problems
relating to individual commodities and/or groups of commodities. The fourth tier
consists of service institutions which facilitate and assist the exporters ~ expand
their operations and reach out more effectively to' the world markets. The fifth tier
consists of Government trading organizations specifically set up to handle
export/import, of specified commodities and to supplement the efforts of the private
enterprise in the field of export promotion and import management. Agencies for
export promotion at the state level constitute the sixth tier.
The Department of Commerce is the primary Government agency responsible
for evolving and directing foreign trade policy and programmes. including
commercial relations with other countries. State trading, various trade promotional
measures and development and regulation of certain export oriented industries.
Apart from the Finance and Administrative Divisions, the principal functional
divisions of the Department of Commerce are Economic Division. Trade Policy
Division, Foreign Trade Territorial Division, Export Products Division. Export
Services D1v1sion and Export Industries Division.
The main task of the Trade Policy Division is to keep abreast of the
developments in the international organisations like UNCTAD, GATT, the Economic
Commission for Europe, Africa, Latin America and Asia and Far East (ESCAP). It is
also responsible for India's relations with the European Economic Community.
European Free Trade Association, Latin American Free Trade Area, other regional
groupings and commonwealth. It also looks after the general1sed system of
preferences and non tariff barriers.
The Foreign Trade Territorial Division is entrusted with the work relating to
the development of Trade with different countries and regions of the world. This
Division also handles matters pertaining to State trading and barter deals.
organisation of trade fairs and exhibitions, commercial publicity abroad, etc. It also
maintains contacts with Indian Trade Missions abroad and attends to the
connected administrative work including the protocol functions.
The Export Products Division pays attention to the problems connected with
production, generation of surplus and development of markets for the various
products under its Jurisdiction. These products include, inter alia, plantations,
marine products, chemicals, plastics, leather and leather goods, sports goods,
films, steel metals, engineering products, minerals and ores, coal, petroleum
products, mica, salt, etc. Although in administrative terms the responsibility for
these products remains with the Ministries concerned, this Division keeps itself in
close touch with them to ensure that production is sufficient to realise the full
export potential besides meeting the home consumption. This Division is also
122
International Business

responsible for the working of export organisations and corporations dealing with
the above commodities and products.
The Export Industries Division is responsible for development and regulation
of rubber, tobacco and cardamom. The Division is also responsible for handling
export promotion activities relating to textiles, woolens, handlooms, readymade
garments, silk and cellulosic fibres, Jute and Jute products, handicrafts, coir and
coir products.
The Export Services Division deals with the problems of export assistance
including import repleshment licensing, cash assistance, export credit, export
houses Marketing Development Assistance and grants there from transport, free
trade zones, dry ports, quality control and pre-shipment Inspection. Joint ventures
abroad and capacity creation in export oriented industries including assistance to
Import capital goods and essential raw materials.
The Economic Division, headed by the Economic Adviser, is responsible for the
formation of export strategies, export planning, periodic appraisal and review of
policies as also for maintaining coordination and constant contacts with the other
Divisions as well as with various organisations which have been set up under the
Commerce Department to assist the export drive. This Division also monitors work
relating to technical assistance, management services for export and overseas
Investments by Indian entrepreneurs.
For the execution of export and import policies formulated by the Ministry,
there is an Import Export Trade Control Organisation headed by the chief controller
of Imports and exports. Its supporting offices are located at Import port towns and
commercial centres of the country, namely, Agartala, Ahmedabad, Amristar,
Bangalore, Bombay, Calcutta, Cuttack, Chandigarh, Ernakulam, Gauhati.
Hyderabad, Jalpur, Kanada, Kanpur, Madras, New Delhi, Panjlm, Patna,
Pondicherry, Rajkot, Shillong, Srinagar and Vishakapatnam.
Consultative and Deliberative Bodies
The various consultative and deliberative bodies have been set up to ensure
that the collective advice of the commercial Interests Is available to the Government
of India for framing and formulating export promotion and import policies and for
successful implementation thereof.
Central Advisory Council on Trade: The council was constituted with effect from
Feb. 15, 1978 by merging the Board of Trade and the Advisory Council on Trade. It
was reconstituted in July 1983. The council consists of 28 members including
representatives from different trade organisations. Reserve Bank of India, Export
Import Bank, Federation of Indian Export Organisations, member of parliament and
Individuals with business standing and expertise in the field of commerce. The
council has powers to co-opt additional members. The members of the council hold
office for 2 years. The council which ordinarily meets twice a year, advices the
Government on matters relating to (i) export and import policy and programmes, (ii)

123
International Business

the operation of export and import controls (iii) organisation and development of
commercial services and (iv) organisation and expansion of export production.
The Council is presided over by the Commerce Minister and in his ,. absence
by the Minister of State for Commerce.
Zonal Export and Import Advisory Committee
There are four such committees, one each for the Western, Eastern, Southern
and Northern Zones. These were set up in July 1968 (i) to consider difficulties faced
in the operation of prevailing import and export policies and procedures and to
suggest measures for improvement in disbursement of cash assistance, (ii) to
consider difficulties in the matter of customs clearance, shipping, credit, insurance
and export inspection and to suggest measures for improvement therein and (iii) to
suggest improvements in the methods of working and public relations of the Import
and Export Trade Control Organisation and other Government Departments
concerned with trade and industry.
Commodity Organisations
A number of organisations have been established in the country with the
objective of promoting and strengthening commodity specialisation. More important
among item are the Export Promotion Councils and the Commodity Boards.
15.8 EXPORT PROMOTION COUNCILS
There are 19 Export Promotion Councils covering the following products:
apparel, basic chemicals, pharmaceuticals and cosmetics, chemicals and allied
products, carpet, cashew, cotton textiles, engineering, gem and jewellery,
handicrafts, handlooms, leather, overseas construction, plastics and linoleums,
shellac, silk, silk and rayon textiles, spices. Sports goods and woolens. These
councils are non profit-making limited companies registered under the Companies
Act. The Ministry of Commerce provides necessary assistance in relation to their
programmes.
These councils advise the government regarding current developments in the
export sector and measures necessary to facilitate future growth in exports, assist
manufacturers and exporters to overcome the various constraints and extend to
them the full range of services for the development of markets overseas. The
councils also perform certain "regulatory functions as they have the power to de-
register errant or defaulting exporters.
An idea of the functions of the Export Promotion Councils can be had from
some of the important activities of the Engineering Export Promotion Council as
mentioned below:
1. to appraise the Government of the exporter's problems;
2. to keep its members posted with regard to trade enquiries and opportunities;
3. to help in exploration of overseas markets" and identification of items with
export potential;
4. to render assistance on specific problems confronting individual exporters;

124
International Business

5. to help resolve amicably disputes between exporters and importers of Indian


engineering goods; and
6. to offer various facilities to engineering exporters in line with other exporting
countries.
The service provided by the Engineering Export Promotion Council relate to;
1. help in arranging supply of indigenous and imported raw materials;
2. Compilation and dissemination of statistical information on export of
engineering goods from India, data on imports in different countries, import
policy, tariffs, competitive prices, etc.
3. securing assistance from the Marketing development Asistance;
4. extending help in shipping and transport problems and securing, shipping
freight concessions;
5. coordinating with Export Inspection Council on quality control and
preshipment inspection;
6. offering advice on finance, banking, insurance and joint ventures;
7. facilitating speedy disposal of export assistance applications;
8. giving assistance in conforming to customs formalities;
9. promoting participation in overseas trade fairs and exhibition as also
launching joint foreign publicity scheme;
10. establishing contacts with overseas buyers and project authorities
11. providing publicity back-up; and
12. assisting small-scale units in exporting their products.
Other services rendered by the Engineering Export promotion council to the overseas
buyers include the following:
1. locating right suppliers who can deliver the right goods. prices and on time;
2. providing credibility reports on the supplier's status. technical components
and capacity to supply;
3. arranging suitable alliance between the buyer and the supplier;
4. organising programmes for businessmen visiting India on buying or
exploratory missions;
5. assisting in resolving trade disputes; and
6. helping in establishing tie-ups in third country exports.
The Council also conducts market surveys, assists in product development,
sponsors trade delegations and guides newcomers in the export trade. The council
has established a number of overseas offices abroad.
Outside India, the activities of the council are primarily geared to the
projection of proper industrial image of the country as also to the publicity of the
engineering goods with the export potential.
Commodity Boards
125
International Business

There are 8 statutory Boards for the following commodities; handicrafts, silk:
powerloom, coffee, coir, rubber, tea, tobacco and cardamom. The Commodity
Boards deal with the entire range of problems of production, development,
marketing, etc. In respect of the commodities concerned, they act themselves as if
they were the Export Promotion Councils. Some of these Boards have opened their
branch offices in foreign countries in order to promote the consumption of the
commodities under their jurisdiction. For example, the Tea Board has set up
various promotional units in foreign countries with a view to organislng generic
promotion programmes. Similarly, some other boards have taken promotional
measures by opening foreign offices abroad, participating in trade fairs and
exhibitions, conducting market surveys, sponsoring trade delegations, etc.
Marine Products Export Development Authority
The Marine Product Export Development Authority replaced the Marine
Product Export Promotion Council and started functioning in September 1972. The
Authority serves the seafood industry right from fishing to processing, packagmg,
storing, transporting and marketing to the different markets all over the world. The
Authority Is entrusted with the task of ensuring a healthy growth of the Industry
through judicious regulation, conservation and control. Importers and exporters
can obtain any Information relating to the markets and the products from the
Marine Products Export Development Authority.
The Specific functions of the authority are:
(a) Development of off-shore and deep-sea fishing in all its aspects and
conservation and management of off-shore and deep-sea fisheries;
(b) Registration of fishing vessels, processing plants, storage premises and
conveyances relating to the products Industry and exports with a view to promote a
healthy development;
(c) Laying down standards and specifications for marine products for purposes
of export and to Introduce comprehensive in-plant Inspection system to maintain a
high quality of the products;
(d) Rendering financial or other assistance and to act as an agency for
extension of relief and subsidy as may be entrusted by the Government;
(e) Rendering other types of assistance and service to the industry in relation
to market intelligence, export, promotion, trade enquiries and import of certain
essential items required In small quantities for the industry;
(f) Regulation of export of marine products;
(g) Improve the marketing of marine products overseas by providing market
intelligence, market promotion activities, information on the types of products in
demand in different countries, nature of processing for specific types of
requirements, etc.
(h) Arrange for training in different aspects connected with export with special
reference to fishing, processing and marketing: and
(i) Such other measures that will be of importance to the export industry.

126
International Business

MPEDA's service extended to foreign buyers range from spotting the right
packers and exporters and in ensuring that the products are delivered in the
overseas markets on time and in prime condition.
To ensure better coordination and to offer prompt and effective service to the
industry, MPEDA has opened regional offices in major seafood processing and
export centres and a trade promotion office at New Delhi. It has got a foreign office
at Tokyo and plans to set up similar offices in other major markets.
15.9 AGRICULTURAL AND PROCESSED FOOD PRODUCT EXPORTS DEVELOPMENT
AUTHORITY
With a view to increase the exports from agricultural sector, the Processed
Food Export Promotion Council has been upgraded as Agricultural & Processed
Food Products Export Development Authority (APEDA). It will coordinate its
activities with national bodies like Horticulture Board and State Governments for
generating production for exports and with research institutes for development of
value added products. It would also undertake quality certification and unify the
existing inspection and quality control for products such as meat and meat
products.
The products covered by the Authority are:
1. Fruits, vegetables and their products
2. Meat and meat products
3. Poultry and poultry products
4. Dairy products
5. Confectionery, biscuits and bakery products
6. Honey, Jaggery and sugar products
7. Cocoa and its products, Chocolates of all kinds
8. AIhoholic and non-alchoholic beverages
9. Cereal products
10. Cashewnuts, groundnuts, peanuts and Walnuts
11. Pickles, chutneys and papads
12. Guava gum
13. Horticulture and floriculture products
14. Herbal and medicinal plants
The functions of APEDA are:
a) the development of industries relating to the above products, for export by
way of providing financial assistance or otherwise for undertaking surveys
and feasibility studies, participation in the equity capital through joint
ventures and other relief’s and subsidy schemes;
b) the registration of persons as exporters of the products concerned on
payment of such fees as may be prescribed;

127
International Business

c) the fixing of standards and specifications for these products for the
purposes of export;
d) the carrying out of inspection of meat and meat products in any slaughter
house, processing land, storage premises, conveyances or other places
where such products are kept or handled for the purpose of ensuring the
quality of such products;
e) the improving of packaging of these products;
f) the improving of the marketing of these products outside India;
g) the promotion of export-oriented production and development of these
products;
h) the collection of statistics from the owners of factories or establishments
engaged in the production, processing, packaging, marketing or export of
these products or from such other persons as may be prescribed on any
matter relating to these products, and the publication of the statistics so
collected, or of any portions thereof or extracts there from; and
i) the training in various aspects of the industries connected with these
products.
Supplementing the commodity organisations are the offices of the Textile
Commissioner and the Jute Commissioner. The Textile Commissioner is concerned
with the development and regulation of all textile industries other than jute and
coir. It is also responsible for the development of the textile machinery industry.
The Jute commissioner is concerned with the development of jute industry and the
jute mill machinery industry.
15.10 SERVICE INSTITUTIONS
A number of institutions and organisations have been established to meet the
requirements of industry and trade. The fields in which these institutions have
been active include development of export management personnel, market
research, export credit insurance, export publicity, organisation of trade fairs and
exhibitions. collection and dissemination of market information, preshipment
inspection and quality control, development in packaging, etc. A brief review of the
activities and functions of some of these institutions is given below:
15.11 INDIAN INSTITUTE OF FOREIGN TRADE
Some of the principal activities of the Institute are the following:
1. It provides training of a high standard, short-term and long term, for
executives and personnel employed in trade and industry, export houses, export.
organisations, government departments, government trading corporations and
Indian embassies and consulates abroad, for developing specialisation in the
techniques, methods and procedures of international trade.
2. It sponsors candidates selected from industry and trade, export houses,
government departments, trading corporations, etc., for higher training abroad in
export management' and export techniques and for acquiring firsthand knowledge

128
International Business

of the techniques and procedures adopted by advanced countries in export


marketing.
3. It plans, organises, undertakes, sponsors and commissions marketing
research and area surveys in foreign countries in accordance with a planned
programme in order to ascertain the characteristics of the overseas markets and
consumer preferences, assesses the current and potential demand for Indian
Products, and determines the scope and the techniques to be adopted for an
increased absorption of Indian products in these countries. It also undertakes
commodity studies within the country with a view to locating new products or
developing new uses of existing products with export potential and drawing up
long-term plans for their development, processing and export.
4. The Institute undertakes and sponsors practical as well as fundamental
research on various problems of international trade. Besides its own research
programmes, the Institute undertakes research into problems referred to' it by
industry and trade and the government.
5. It provides consultancy to business firms in matters relating to foreign
trade.
6. The Institute disseminated information through its quarterly Journal
"Foreign Trade Review" and reports on various products and market studies
undertaken by it. Its monthly 'Foreign Trade Bulletin' seeks to disseminate
information on new decisions and developments affecting India's foreign trade.
15.12 TRADE DEVELOPMENT AUTHORITY
The TDA was set up by the Government of India in 1970 for providing package
assistance to enterprises at the micro-level after identifying the potential of their
products and their requirements of assistance.
It undertakes selective export development of industrial products with both
short-term and long-term prospects of growth to selected markets. In the discharge
of this function, the TDA identifies technically competent and commercially viable
production Units, particularly in the small and medium sector, assists in the
expansion of export-oriented production facilities in the selected products and
areas, undertakes product development/adaptation and helps in raising the
technological level of selected Industrial exports. The units, products and markets
are chosen by the TDA after collecting and processing all relevant information
(commercial, trade and production) and after a careful research and analysis of the
factors relevant to a sustained build-up of exports, with minimal deployment of
scarce resources. It arranges commercial contacts between selected Indian units
and potential foreign buyers of standing and repute and facilitates conclusion of
contracts with the objective of long-term exports.
Once the export contract is concluded, the TDA provides a package of services
fa1l1ng within and outside Government's Jurisdiction. e.g., production Inputs,
especially Industrial raw materials and balancing equipment, piloting through
production control systems (industrial and capital, goods licensing etc.) financial

129
International Business

credits, marketing and merchandising and other aids, TDA's micro-level approach
distinguishes it from other export promotion organisation.
A special function of the TDA is to attract International subcontracting of
engineering and other components from India and promotion of export-oriented
Joint ventures in the country In conjunction with the Indian Investment Centre.
Initially, the TDA confined its activities to a limited number of products. But it
has now taken up a number of new items. At present the products taken up by the
TDA are:
Engineering
¾ Electronic equipment and components
¾ Sewing machines and components
¾ Bicycles and components
¾ Automobile ancillaries
¾ Industrial fasteners
¾ Ferrous castings and forgings for industrial application
¾ Small tools and hand tools
¾ Garden tools
¾ Instruments for industrial
¾ Laboratory
¾ hospital and educational use
¾ Diesel engines and parts
¾ Storage and dry cell batteries
¾ Builder's hardware
¾ Fencing components
¾ Scooters and mopeds
¾ Mechanical. handling equipment
¾ Telecommunication equipment
¾ Pumps and centrifuges
¾ Tubes, pipes of iron and steel
¾ Heating and cooling equipment
¾ Domestic electrical appliances and accessories
Non-Engineering
¾ Readymade garments and knitwear
¾ Home furnishing and made-ups. including carpets and carpeting
¾ Leather goods. including garments
¾ Sports goods. sporting accessories and camping equipment
¾ Wooden furniture
¾ Garden furniture
130
International Business

¾ Household ware including kitchenware


¾ Stainless steel cutlery
¾ Processed fruits. juices and vegetable. Products
¾ Thermoplastic and thermosetting plastic goods
¾ Gloves
¾ Basketry
¾ Agarbathies (perfumed incense sticks)
Initially the TDA concentrated on Japan, the USA and the European Countries
but now it has extended its activities to Canada, Australia, New Zealand, Asian,
Hong Kong, South Korea, Saudi Arabia, Iran, Kuwait and Iraq.
The TDA undertakes its responsibilities either directly or farms them out to
other competent export promotion agencies, as may be appropriate to each product
area. It does not extend such services to exporters as can be obtained from existing
export promotion organisations effectively. It, however, utilises such organisations
in giving to its clients the total package of services they require for their export
programmes in a well coordinated movement aimed at optimising the total export
promotion effort of the country.
TDA provides a comprehensive range of services to the overseas buyers. It
informs and advises them of product availability, price structure, and reliable
sources of supply, delivery schedules, quality control status, and special
information that an overseas buyer may need. And all the services provided by IDA
to the overseas buyers are free.
In recent years, TDA has organised a number of buyer-seller meets involving
exclusive exhibition of Indian Products. These meets have received very good
response from the visitors. Many export promotion councils have also participated
in these meets. India promotion campaigns in collaboration with Department Stores
abroad have also become a regular feature of TDA's programme. TDA has also been
organising contact promotion programmes for the purpose of establishing contacts
with new buyers and booking trial orders.
The TDA organises, coordinates, and assists in undertaking market research
and analysis. It has also undertaken a number of study tours. It has also arranged
for participation of its clients in product specific specialized trade fairs. TDA also
invites many buying delegations to visit India.
TDA also disseminates market intelligence and trade information through a
weekly trade intelligence bulletin which contains information on important
contacts, import regulations and tariffs, GSP, trade fairs and exhibitions, names
and addresses of overseas importers, distributors and agents and on import
procedures abroad.
To discharge these functions, the TDA has the following divisions;
1) Information Division,' (2) Research and Analysts Division, and 3) Merchandising
Division. It has set up overseas offices at Frankfurt, Montrlal. New York, Stockholm
and Tokyo.

131
International Business

15.13 SUMMARY
It is necessary to make a significant by contributing to the economy and the
country’s development for developed countries. In this context, the importance of
international marketing is essential. They are – to meet imports of industrial needs,
debt servicing, rapid economic growth, facing competition, increase in the standard
of living and employment opportunities. The importance of export marketing in view
of individual – utilise installed capacity, relative profitability, less business risk,
increased productivity, etc. The international marketing varies in regards with
export marketing in scope and approach. The export contract involves a number of
complications, for this to smooth the flow of finance, the ECGC emerged. Finally,
the role of Trade Development Authority has taken up products from Engineering
and Non-Engineering areas. It has many divisions such as information division,
Research and Analysis Division, and merchandising Division. It also set up
overseas offices at Frankfurt, New York and Tokyo.
15.14 ASSIGNMENT QUESTIONS
1. Discuss briefly the importance of international marketing?
2. Explain the role of ECGC and various insurance policies issued by ECGC.
3. Enumerate the different export promotion measures.
4. State the functions of export promotion councils.
5. What are the principal activities of Indian Institute of Foreign Trade?
6. Discuss briefly the role and major functions of TDA?
‰

132
International Business

LESSON – 16

EXPORT CREDIT GUARANTEE CORPORATION


LESSON OBJECTIVES
1. To understand the role of Export-Import Bank, Export Inspection Council,
Indian Institute of Packaging, Indian Council of Arbitration and Trade Fair
Authority.
2. To know the functions of Directorate General of Shipping.
3. To learn the Fiscal and Financial Measures given by Export Promotion
Councils.
4. To assess the Industrial Policy of 1991, 100% EOU and EPZs.
STRUCTURE
16.1 Preamble
16.2 Export-Import Bank
16.3 Export Inspection Council
16.4 Indian Institute of Packaging
16.5 Indian Council of Arbitration
16.6 Federation of Indian Export Organisations
16.7 Trade Fair Authority of India
16.8 Department of Commercial Intelligence and Statistics
16.9 Directorate General of Shipping
16.10 Freight Investigation Bureau
16.11 All India Shippers Council
16.12 Export Promotion Measures
16.13 Industrial Policy 1991
16.14 100% Export Oriented Units ii Export Processing Zones
16.15 Summary
16.16 Assignment Questions
16.1 PREAMBLE
For minimising the risk element in export business and to facilitate the flow of
finance from the banks to exporters, there is an Export Credit Guarantee
Corporation. In addition to the normal risk policies; the corporation assists the
exporters through special schemes such as packing credit guarantee. It is wholly
owned by the Government of India and works on 'no profit no loss' basis. To suit
the varying needs of the exporters, the Corporation provides different types of
covers which may be divided into the following broad groups:
(1) Standard policies issued to exporters to protect them against the I1sk of
trading with overseas buyers on credit terms;
(2) Financial guarantees issued to banks against the I1sks involved in
providing credit to exporters; and
(3) Special policies.

133
International Business

Under its policies intended to protect the exporters against overseas credit,
I1sks, ECGC bears the main brunt of the I1sk and pays the exporter 90 percent of
his loss on account of 'commercial' risks and 'political' risks. The functions and
policies of the corporation are discussed in greater detail later in the book.
16.2 EXPORT-IMPORT BANK
Export-Import Bank was established on January I, 1982 for the purpose of
financing, facilitating and promoting foreign trade of India. It extends finance to
exporters of capital and manufactured goods, exporters of software’s and
consultancy services and to overseas joint ventures and turnkey/construction
projects abroad. The Bank is the pI1nc1pal financial institution in India for
coordinating the work of institutions engaged in financing export and import trade.
16.3 EXPORT INSPECTION COUNCIL
In consonance with the need for constant improvement in the quality of Indian
manufactures and products, and for lending confidence to the importers abroad In
respect of the quality of Indian exports, the Government has enacted the Quality
Control and Pre-shipment Inspection Act. Eighty-eight per cent of export
commodities coveI1ng 915 items have already been brought within the purview of
this Act and are subject to compulsory pre-shipment inspection. It is envisaged that
barring a few items, all the commodities with in the near future be covered by
quality control and compulsory pre-shipment inspection. The Export Inspection
Council established under the Act administers the various schemes of quality
control and pre-shipment inspection. The council is also charges with the
responsibility of establishing laboratories and test houses through the country for
the provision of inspection facilities in regard to the commodities thus notified. It
has established inspection agencies under which the network of quality inspection
officials operate in various parts of the country.
Textiles committee, Bombay, is responsible for quality control of textiles, yam
and textile machinery. .
The Act is being revised to provide for more stringent punishment to defaulting
exporters.
16.4 INDIAN INSTITUTE 01 PACKAGING
It is absolutely necessary that the packaging standards of Indian products
should match the standards required by the sophisticated markets and effectively
compete with the packaged products emanating from the developed countries.
Likewise, it is very important that the materials and devices used in packaging of
the products should be such that they ensure safe transit of the export goods.
Considering the existing deficiencies in the standard of packing for the safe transit,
Government of India, in collaboration with the industry, has set up the Indian
Institute of Packaging (lIP).
The main aims of the Institute are:
i) to undertake research on raw materials for the packaging industry,

134
International Business

ii) to keep India in step with international developments in the field of


packaging
iii) to organise training programmes on packaging technology.
iv) to stimulate consciousness of the need for good packaging, and
v) to organize consultancy services for the industry.
Its activities include effecting improvements in packaging standards and
rendering testing facilities in respect of packages.
16.5 INDIAN COUNCIL OF ARBITRATION
The Indian Council of Arbitration was set up in 1965 as the apex arbitration
body by the Government for promoting and encouraging amicable settlement of
foreign trade disputes with a view to generating goodwill in. the field of foreign
trade. The council's objectives include (a) propagation and popularisation of the
idea of commercial arbitration of disputes in international trade through its
constituent members, (c) maintenance of panels of persons to act as arbitrators,
and (d) collaboration with international organisations and arbitral bodies in matters
concerning international commercial arbitration.
The council also conducts training courses on commercial arbitration. It also
conducts regular meetings at which businessmen, representatives of Export
Promotion Councils. Public Sector Undertakings, Chambers of Commerce and trade
associations meet to discuss problems of settlement of disputes and conduct of
arbitration. It brings out a number of informative brochures one of the important
ones being 'Standard Contract Forms and General Conditions for use in
International Trade Contracts'. This publication deals with all important aspects of
international trade " transactions and suggests comprehensive specimen terms and
conditions concerning rights and duties of the parties to a trade contract.
16.6 FEDERATION OF INDIAN EXPORT ORGANLSATIONS
An apex body called the Federation of Indian Export Organisations (FIEO) was
set up in 1965 with its registered office in Delhi, as a common and coordinating
platform for the various export organisations including the Commodity Councils
and Boards and the service, institutions and organisations. The principal activities
of the FlEO are:
i) Convening meetings, conferences, seminars and workshops to provide as
opportunity to all sectors of the exporting community and export promotion
institutions in India to review, discuss and, wherever necessary to
formulate recommendations to the Government and other authorities, on
problems, prospects and potentials of India's exports.
ii) Arranging 'round-table' conferences of business interests in India with trade
missions and other business teams on a visit to India.
iii) Inviting leading business interests and Economic and Trade Missions from
abroad specially for a tour of industrial and commercial centres in India.

135
International Business

iv) Projecting Indian goods and services abroad through various media
including films, exhibitions, advertisements and publications.
v) Sponsoring outgoing multi-interest trade and economic missions, and
special teams of government recognised export houses, consultancy firms.
small scale industries and individual study-cum sales teams.
vi) Maintaining overseas liaison with International and U.N. Agencies-like ITC,
GAIT, UNCTAD, ESCAP, UNIDO, IMF, World Bank, ADB, ILO, etc.
vii) Establishing rapport with overseas chambers of commerce, trade
associations and government departments concerned.
viii) Sponsoring 'special, projects' related to the export promotion of India's
consultancy services.
ix) Executing projects and responsibilities entrusted to it, from time to time, by
the Government of India and servicing as a forum for two-way transmission
of views and information between government departments and the
exporting community.
x) Promoting trade, economic and technical co-operation between India and
other Countries by way of international seminars and creating special
infrastructure for follow-up.
The FIEO is the primary servicing agency to provide integrated assistance to
Government recognised export houses as also the central coordinating agency for
export promotion of consultancy services.
FIEO is now placing great emphasis on intra and inter-regional co-operation in
trade and economic matters with a View to promoting harmony and understanding
through economic, trade and technical ties.
16.7 TRADE FAIR AUTHORITY OF INDIA
The Trade Fair Authority of India came into existence on March11, 1977, after
unifying three organisations, namely, the Directorate of Exhibitions and commercial
publicity, the Indian Council of Trade Fairs and Exhibitions and Trade Fair
Organisation.
The objectives of the Trade Fair Authority are:
i) to promote, organise and participate in industrial trade and other fairs and
exhibitions.
ii) to set up showrooms and shops in India and abroad,
iii) to undertake trading activities in commodities connected with or relating to
such fairs and exhibitions, and
iv) to develop exports of new items for diversification and expansion of India's
exports.
The Trade Fair Authority of India brings out regularly three journals, namely,
Udyog Vyapar Patrika (Hindi-Monthly), Indian Export Bulletin (English-weekly), and
Economic and Commercial News (English-weekly). These periodicals provide
authentic information on the country's economy, business possibilities offered by
136
International Business

foreign markets, Government trade policies, facilities available for exports and
important tenders floated by other countries. They also provide material to Indian
Missions for their publicity efforts.
The Authority has been organising wholly Indian exhibitions and India's
participation in severa1international fairs on a countrywide basis.
With effect from July 1981, all fairs and exhibitions, both within the country
and outside, are coordinated by the Trade Fair Authority. It is also the agency for
organising fairs and exhibitions assisted be Marketing Development Assistance.
16.8 DEPARTMENT OF COMMERCIAL INTELLIGENCE AND STATISTICS
The Department of Commercial Intelligence and Statistics is located at
Calcutta. Its functions comprise (i) commercial intelligence and (ii) collection,
compilation and publication of the statistics of trade, tariff and shipping.
The work of the Department is broadly divided into the following principal categories:
i) Collection and supply of commercial information required by the
Government and the trade;
ii) Maintenance of registers of Indian and foreign firms:
iii) Publication of the 'Directory of Exporters of Indian Products and
Manufacturer's':
iv) Publication of the weekly 'Indian Trade Journal' and 'Monthly Statistics of
Foreign Trade of India':
v) Publication of the periodical reports received from Indian Government Trade
Representatives stationed in foreign countries in regard to economic
conditions in these countries:
vi) Mediation in commercial disputes between Indian and foreign firms with a
view to bringing about amicable settlement:
vii) Trade introduction: and
viii) Maintenance of Commercial Library in Calcutta for the use of the public.
16.9 DIRECTORATE GENERAL OF SHIPPING
Till 1949, the Ministry of Commerce was responsible for all matters relating to
policy and administration of merchant shipping. Subsequently, it was felt that there
should be a separate organisation to deal with all executive matters relating to
merchant shipping. Accordingly, the Directorate General of Shipping was set up in
September 1949, with headquarters at Bombay. Its functions include, inter alia.
i) Matters affecting merchant shipping, navigation, administration of
merchant shipping:
ii) Development of Indian Shipping: and
iii) Regulation of ocean freight rates in overseas trade.
16.10 FREIGHT INVESTIGATION BUREAU
Freight Investigation Bureau (FIB) was set up in the Directorate General of
Shipping in 1959. This has branch offices at Calcutta, Cochin, Kandla, Madras and
Vishakapatnam.

137
International Business

The main functions of FIB are:


i) To investigate into the representations of shippers/shippers councils
relating to high/anomalous/discriminatory freight rates and to secure
necessary adjustment:
ii) To critically examine proposals of Conference Lines on periodic increases in
freight rates and to provide guidance to shippers councils with a view to
enabling them to have an effective dialogue with conferences on such
proposals:
iii) To provide spot assistance to shippers all over the country in procuring
timely and adequate shipping space:
iv) To collect, maintain and examine, freight rates of conferences/shipping
lines operating in India's overseas trade and also in international cross
trade:
v) To analyse the impact of changes in freight rates and to keep shippers
councils and other organisations concerned posted on such amendments;
vi) To investigate into complaints regarding lack of shipping facilities; and
vii) To serve as a liaison organisation between shippers and shipping
companies to solve shipping and freight problems through mutual
consultation.
16.11 ALL INDIA SHIPPERS COUNCIL
The freight Investigation Bureau organised shippers in various parts of India
on regional basis and formed five regional shippers associations. viz., Eastern,
Western, Southern, Northern and South-Western. In addition, there is an apex
body on all-India basis, viz., All India Shippers Council, New Delhi. The activities of
the council include consultation between shippers, ship-owners, Conference Lines,
port authorities and the Government on matters of common interest such as
structure of freight rates, conference practices, availability and adequacy of
shipping space, port facilities, and terms of shipment, port charges, coastal
shipping, etc., for export-import cargo. The council also deals with air cargo
problems.
Indian Government Trade Representatives Abroad
The institutional arrangements which have been developed and strengthened
within the country are supplemented by the Indian Trade representatives abroad.
The trade representations in our Embassies and consulates are continually being
strengthened to enable them to effectively support the effort which is being made
within the country. The commercial representatives assist the industry and trade as
well as the government by transmitting useful information and data on foreign
countries, market opportunities for Indian exporters, tariff regulations, market
surveys etc. They also provide facilities to the Indian trade delegations and
exporters visiting foreign countries, and help to procure and forward samples of
goods imported from other countries which are capable of being manufactured and
exported from India.
138
International Business

Government Participation in Foreign Trade


For supplementing the efforts of the private sector in the field of foreign trade,
Government of India has set up a number of Governments trading corporations,
namely. (1) The State Trading Corporations, (2) The Minerals and Metals Trading
Corporation, (3) The Tea Trading Corporation of India, and (4) Metal Scrap Trading
Corporation. The State Trading Corporation itself has a number of subsidiaries,
namely, the Handicrafts and Handlooms Export Corporation, the Projects and
Equipment Corporation, and the Cashew Corporation of India. The Mica Trading
Corporation is a subsidiary of the Minerals and Metals Trading Corporation.
These corporations have provided the essential base for developing and
strengthening the efforts relating to specific commodities and products and
diversifying the country's foreign trade. Briefly, their activities are:
1. to arrange for exports where bulk handling and long-term contracts are
advantageous.
2. to facilitate exports of 'difficult to sell items through various devices such as
linking essential imports with additional exports under barter, link and
parallel deals.
3. to organise production to meet export demands and to help production
units overcome difficulties of raw materials and other essential
requirements to meet export orders and develop lines of exports by various
methods, and
4. to undertake imports of such commodities where bulk procurement is
advantageous.
The corporations handle actual transactions. They maintain offices abroad and
function like any commercial unit in the private sector. Apart from the trading
organisations mentioned above there are several other Government Corporations
which are involved in foreign trade as per instructions which are involved in foreign
trade as per instructions issued by the Government from time to time.
These include Jute Corporation of India. Cotton Corporation of India: oil and
Natural Gas Commission. National Agricultural Cooperative Marketing Federation
of India Ltd., National Textiles Corporation, Cardamom Trading Corporation.
National Small Industries Corporation, and the Electronics Trade and Technology
Development Corporation.
16.12 EXPORT PROMOTION MEASURES
Fiscal Financial Measures
1. According to Central Budget for 1991-92:
a) Tax concession under section 80 HHC of Income Tax Act has been extended
to the export of software and processed minerals.
b) Deduction under Section 80 (0) in respect of royalties, commission, fees etc
has been extended to non-corporate assesses.

139
International Business

c) Coverage of concessional duty available to specified capital goods of Leather


and Marine Product industry has been expanded.
d) Customs duty on certain raw materials of leather & jewellery sectors has
been expanded.
e) A larger coverage of drug intermediates & bulk drugs have been made
eligible for concessional rate of import duty.
2. Interest rates, both for preshipment and post-shipment export credits, have
been enhanced w.e.f. 9th October. 1991 due to depreciation in the exchange value of
Rupee and the abolition of Export Credit (Interest subsidy) Scheme. For preshipment
credit, the revised rates are 15% p.a. upto 180 days and 17% p.a for 181 days to 270
days (in the case where extension of the period has been approved by the RBI). For
post-shipment credit, the revised rate Is 15% p.a. upto 90 days and 20% p.a. for 91
days and, upto 6 months from the date of shipment. In respect of post-shipment
export credit denominated in US dollars. the rate of interest applicable to demand bills
upto normal transit period and balance bills upto six months from the date of
shipment is 8.5% per annum w.e.f. 1.1.1992.
3. At the directive of the RBI, the commercial banks waive the requirement of
lodgement of letters of credit or firm export orders subject to certain conditions for
availing or preshipment credit. During the year under report a list of the commodities
eligible for the facility has been enlarged by including frozen meat. basmati rice. and its
extraction, cutting tools, steel files and small/hand tools. spice oils and oleoresins,
deoiled rice bran (extractions), deoiled meals (extractions) of groundnut, rape
seed/mustard, cotton seed, linseed & castor seed, soyabean extraction, deoiled meals
(extractions) of seasame seed, copra, and neem seed. mahua seed, sunflower seed, and
kardi seed, freeze dried pepper and dehydrated green pepper.
4. The Exim bank has introduced for the first time ever a new scheme to provide
per-shipment export credit in foreign exchange to eligible exporters to fac1l1tate import
of raw-materials components and consumables required for export production.
5. Exporters having satisfactory track record are selectively permitted to maintain
foreign currency accounts with banks in India. Presently, such accounts are permitted
to be maintained with the State Bank of India, other public sector banks and foreign
banks operating in India (as also at their designated branches) which have adequate
infrastructure and expertise.
6. As a step towards import compression vis-a-vis conservation of foreign
exchange due to critical balance of payment situation. RBI prescribed high rates of
minimum cash margin requirement for financing imports of certain categories of raw
materials required for export production. On review of the reserves position, the rates
were reduced to 25% w.e.f. 1.1.1992 so as to promote exports of value added items.
7. A downward adjustment of about 18 percent in the external value of the Indian
Rupee against a basket of international currencies was effected in two steps on July
1st and 3rd. 1991. These adjustments were aimed at improving the country's
international competitiveness in the short and medium term, thus boosting growth of
exports.
140
International Business

8. Natural Rubber Subsidy (NRS) Scheme, under which a portion of the difference
between the cost of indigenous natural rubber used in export production of rubber
manufactured products, and the international price of equivalent grade of rubber is
compensated, has been in operation. The Scheme has been extended upto 31.3.1996. The
maximum amount of subsidy payable under this scheme, at present, is Rs.6000/- MT.
9. Tea bags have been exempted from Excise duty. Full rebate of excise duty on
loose tea and of additional excise duty on packet tea has been granted. Customs Duty
on filter paper used in manufacture of tea bags has been abolished. To counter
misbranding of other areas as Darjeeling tea a new logo for Darjeeling tea has been
launched. Only packet teas (Indian & Foreign) containing a minimum of 60% pure
Darjeeling tea will be allowed to use that Logo.
10. Diamond exporters have been given permission to open dollar accounts
abroad to finance their trade. A number of items of machinery tools and equipment
used in the Gem and Jewellery industry have been placed under OGL with a reduced
level of import duty.
II. Institutional Measures
1. The Cabinet Committee on Trade and investment (CCTI), which was
reconstituted in Oct., 1991, with the Prime Minister as its Chairman and the Ministers
of Finance, Agriculture and Commerce as its members continued to provide the fora for
Co-ordinated consideration of various proposals in regard to export promotion, export
production and performance.
2. The Ministry of Commerce had constituted on May 5, 1989 a Board of Trade to
provide a forum for ensuring continuous dialogue with Trade and Industry in respect
of major developments in the field of international trade. The Board of Trade was
reconstituted on 13.8.91. The Chairman of the Board of Trade is the Commerce
Minister and the membership of the Board includes the Governor, Reserve Bank of
India, Secretaries of the Ministries of Commerce. Industry, Finance and Textiles,
Special Secretary, Prime Minister's Office, President of FICCI, ASSOCHAM, CEI, FIEO,
representatives of Trade and Industry and a few specialists;
3. A State Cell has been operating in Ministry of Commerce under the overall
charge of an Additional Secretary. The functions of the State Cell are to act as a nodal
agency for interacting with the State Governments/Union Territories on matters
concerning imports and exports from the States.
4. Commodity Boards, Export Development Authorities and eleven Export
promotion councils functioning under the Development of Commerce have been
helping to boost up exports.
5. The Export Processing Zones at Madras Falta, NOIDA and Cochin have become
operational and export performance of these zones is steadily in progress. The Export
processing Zones at Vishakapattinam is under implementation.
6. The Design-Cum-Development Centre set up at Jalandhar has commenced
stocking essential raw materials for supply to the sports goods industry. Also a Project-
cum-product Development Centre has been set up at Meerut to help the Indian Sports
Goods industry to upgrade the production 'techniques and develop improved materials.

141
International Business

7. A footwear Design and Development Institute has been set up at NOIDA to


provide necessary infrastructure for Indian Footwear Industry and to enable it to attain
International standards in footwear design and development.
8. A network of Inland Container Depots (ICDS) and container Freight Stations
(CFSs) is being created in the country to facilitate door movement of cargo in
containers. Container handling facilities have so far been created at 24 places in the
country.
16.13 III. INDUSTRIAL POLICY 1991
1. In order to free the Industrial sector from unnecessary bureaucratic
controls, the Government announced major changes In Its industrial policy on July
24, 1991. The objective of all these changes is to streamline and simplify policies
and procedures. Great emphasis has been placed on building up our ability to pay
for Imports through our own foreign exchange earnings. The policy welcomes
foreign Investment and technology collaborations to enable, inter alia, an Increase
in exports and help to attain international competitiveness. Foreign investment
would bring attendant advantages of technology transfer, marketing expertise,
introduction of modern managerial techniques and new possibilities for promotion
of exports.
2. Industrial Licensing has been abolished for all projects, except for a short
list of 18 industries.
3. If projects where imported capital goods clearance will be given in cases
where foreign ensured through foreign equity.
4. Existing units will be provided a new broad banding facility to enable them
to produce any article without additional licensing. This will particularly help those
firms who want to change their product mix according to the changing world
demands are required, automatic exchange availability is
5. Approval is to be given for direct, foreign investments upto 51% foreign
equity in high priority industries. Clearance will be available if foreign equity covers
the foreign exchange requirements for imported capital goods.
6. Payment of dividends will be monitored through the Reserve Bank of India
so as to ensure that outflow on account of dividend payments are balances by
export earnings over a period of 7 years from the commencement of production.
7. To provide access to international markets, majority foreign equity holdings
upto 51 % equity will be allowed for international trading companies primarily
engaged in export activities.
8. A Special Empowered Board has been constituted to negotiate with large
international firms and to approve direct foreign investment in selected areas.
9. Automatic permission will be given for foreign technology agreements in
high priority industries which will allow royalty upto 5% of domestic sales and 8%
of exports sa1e, along with lump sum technology payments upto Rs.1 crore.
10. The asset limit for MRTP companies has been dispensed with, and the
requirement of prior approval of Central Government for establishment of new
undertakings, merger, amalgamation and take over etc., has been eliminated.

142
International Business

16.14 IV. 100% EXPORT ORIENTED UNITS II EXPORT PROCESSING ZONES


1. The 100% Export Oriented Units have been permitted to subcontract part of
their production for a job work to units in the domestic tariff area (DTA), provided DTA
units are registered with the Central Excise.
2. A Scheme of Charging Concessional Lease rent for plots and built-up areas in
the Export Processing Zones for an initial 3 years period, linked to commencement of
production has been introduced.
3. Exports from EPZ/I00% EOUs have been exempted from the purview of
Compulsory Export Inspection.
4. Revised procedure of applications under I00% EOUs and Schemes has been
announced on 26th September, 1991, which provide for 'automatic approval' in certain
cases.
5. Development Commissioners of EPZs have been delegated with some specific
powers of the Board of Approvals/Administrative Ministries to clear cases of import of
additional capital goods (CG), increase in the value of CG imports owing to currency
fluctuations, capacity enhancement and broad banding etc.
6. To encourage large companies to set up 100%. EOUs and units in the EPZs,
"clubbing" of their earnings from these units with their export earnings from the
domestic tariff area has been provided for the purpose of according status of Export
House/Trading House/Star Trading House.
7. EOUs/EPZ units are being permitted to supply/transfer finished goods among
themselves without payment of duties.
8. The Scheme of International Price Reimbursement Scheme (IPRS) for supply of
Iron & Steel to exporters has been extended to units in EPZs/I00% EOUs.
16.15 V. OTHERS
1. Star Trading House, Trading Houses and Export Houses recognised by the
Central Government are exempted from pre- shipment inspection for export of footwear
and footwear components. The inspection procedures are applicable for other
manufacturer-exporters of footwear and footwear components has also been
liberalised. Further liberalisation was announced on 25.7.91 whereby export
consignments will be exempted from pre-shipment Inspection if an exporter has a firm
letter from the overseas buyer stating that overseas buyer does not want pre- shipment
inspection from any official Indian Inspection Agency.
2. Under the International Price Reimbursement Scheme (lPRS) exporters are
reimbursed difference between the domestic and International prices of Iron, steel,
alloy steel, inputs etc. used in export production. A stipulation of a minimum value
addition in exports has been prescribed for being eligible for reimbursements under the
scheme.
3. Export of cement has been allowed on decontrolled basis, Cement clinker
which was not allowed for export earlier, has also been allowed for export.
4. Import of Coal against specific export commitment of cement has been allowed
under Advance Licence Scheme and accordingly, input-output norms for Import of
Coal against export of cement have been fixed.

143
International Business

5. Export of Iron-ore of Redi origin has been decanalised and iron ore of Goan
origin can now be exported directly by Goan exporters to China in addition to their
traditional markets of Japan, South Korea, Taiwan and West Europe.
6. Export of low grade bauxite with alumina content less than 54% of West Coast
origin, and export of Coal/Coke has also been decanalised.
7. Single window clearance has been granted for all proposals relating to deep-sea
fishing including joint ventures, test fishing and leasing of foreign vessels.
8. Input and Output norms for 128 electronic items for advance licence have been
announced and the powers of Issuing advance licences for such cases have been
delegated to the Regional Offices, with an upper limit of Rs.5 crores. For obtaining
advance licences, the number of documents required to be submitted have been
reduced substantially.
9. The 'Open Sky Policy' under which scheduled and non-scheduled freighter
operators/airlines all over the world have been permitted to provide cargo services to
meet the requirements of the shippers, has been permitted to be continued on a
permanent basis.
10. The Ministry of Commerce has identified 15 broad sectors for a special export
thrust abroad. These sectors area Tea, especially in package and value-added forms;
cereals, in particular wheat, processed foods, including fruit and juices, meat and meat
products and fresh fruits & vegetables. Marine Products, especially in value added
forms, Iron Ore. Leather and leather manufactures, with an emphasis on the latter.
Handicrafts and Jewellery, Capital goods and consumer durables, Electronic goods
and computer software, Basic chemicals, Fabrics, Piece goods and made-ups,
Readymade garments, Woolen fabrics and Knitwear, projects and services and Granite.
16.15 SUMMARY
To minimize the risk element in export business and to facilitate the flow of
finance from the banks to exporters, there is an ECGC. The prime measure of export
promotion as per 1991-92 budget is to provide tax concessions and deductions under
80(C). The industrial policy 1991 also seeks to abolish the industrial licensing except
for a short list of 18 industries the 100% Eou/Ep2s have been exempted from the
purview of compulsory export inspection and permitted to subcontract in the DTA,
provided DTA units are registered with the central excise.
16.16 ASSIGNMENT QUESTIONS
1. Analyse the recent trends in India's export.
2. Explain the role of STC in India's foreign Trade.
3. Discuss the meaning and importance of international marketing.
4. Evaluate the export promotion measures taken by Government.
5. How are export credit needs financed? Evaluate the export credit and
finance system in India.
‰

144
International Business

LESSON – 17

EXPORT MARKET RESEARCH


LESSON OBJECTIVES
(1) To understand the meaning and importance of export market Research.
(2) To explain the need for joint ventures abroad.
(3) To analyse the Export Licensing Procedure.
(4) To examine Banking Procedure for negotiation of documents.
STRUCTURE
17.1 Preamble
17.2 What Is Marketing Research?
17.3 Distinction between Market Research And Marketing Research
17.4 Need for Market Research
17.5 Main Parts of Export Market Research
17.6 Export Market Analysis
17.8 Summary
17.9 Assignment Questions
17.1 PREAMBLE
The Unit deals with analysing and understanding export market through
export market research. Globalisation and internationalisation calls for setting up
of joint ventures in home country and abroad. The unit also deals with export
licensing procedure and banking procedure for negotiation of documents for better
export management.
Every producer has to sell his product. He can profitably sell his product if it
satisfies the needs of the consumers or in other words he has to take a decision
about the market where he can sell it successfully. The decision can be the
outcome of the analysis of the factual data. In modem marketing, the exporter
cannot sell the product what he offers to sell or produces but he can successfully
sell only what is desired by the customers. If the product lacks something, he has
to adapt it to suit consumer's requirements. What does customer desire is a
burning problem before the marketing executives. This problem can be solved by
getting necessary information regarding consumers and the market-conditions
through conducting research and survey specific markets. The outcome of the
survey necessarily helps the marketer to raise the level of performance. If the
survey reveals that customers are not satisfied with the exporters, he may take a
decision to adapt it accordingly.
Conducting surveyor market research is not an easy task because it involves
money and efforts. So, an exporter may collect information from secondary sources
and analyse them. Various institutions in foreign markets gather information
through market research. Trade commissioners abroad, export promotional
councils, commodity boards and international institutions supply and publish
necessary information on general and specific market conditions. The exporter may

145
International Business

analyse these data in order to arrive at a decision. If an exporter undertakes to


conduct an original market research, he should be well-versed in the survey
techniques and methods. He may seek the help of various research institutions for
the design of the questionnaire and conduct the market survey.
Market research is a continuous process because market condition such as
competition, terms of business, market demand and supply position, and
consumers taste, behaviour brand image and loyalty and status continue to
change. To be aware of these changes market research is continuously required.
Market research as its name suggests, is a complete analysis of the market.
Information regarding the nature, size, organization, profitability of different
markets, changes in markets and various factors (Economic, Social and Political)
affecting those changes are studied, vigorously. The main purpose of market
research is to know about consumers and the markets of its products and services.
The researcher is mainly concerned with the details regarding consumers. It is a
technique to know who are customers existing and prospective-of our products or
services? Where do they live? When and how do they buy the products of the
company? Are they consumers of our products or services? Where do they live?
When and how do they buy the products of the company? Are consumers of our
products or services satisfied? Who are our main competitors and what policies and
strategies are they following? In order to know about answers of these and other
similar questions regarding the market and the consumers market research is
conducted so that the marketer may come to know the shortcoming in his product,
policies and strategies and can make the necessary modifications and
improvements in them to make them more effective in the best interest of the
consumers and the company and thus increase the profitability of the concern.
Thus, the following activities are included in Market Research:
i) Analysis of the market size according to age, sex, income, profession and
standard of living of the customers.
ii) Estimating the regional or territorial demand of different markets.
iii) Collecting information about the existing and prospective customers of the
company's product, various competitors' share the market and all about
competitors' products and their attributes.
iv) Studying the market changes and conditions affecting market changes such
as customers' preference, shift in brand loyalty etc.
v) Analysing the working of various channels of distribution and their role in
creating market demand of the product.
vi) Forecasting the profitability of different markets and marketing segments.
17.2 WHAT IS MARKETING RESEARCH?
Market Research and Marketing research are two terms which are often
confused and are used in the same sense. But marketing research is not the same
as market research.
Market research is the application of scientific method to the solution of
marketing problems. It is a systematic attempt to get information useful in solving
146
International Business

marketing problems or making marketing decisions. According to Philips Kotler


"Marketing Research is a systematic problem analysis, model-building and fact-
finding for the purpose of improved decision making and control in the marketing of
goods and services." In the words of Crisp "Marketing Research is the systematic
objective and exhaustive search for and study of all facts relevant to any problem in
the field of marketing."
The above definitions of marketing research indicate clearly that marketing
research embraces all research activities carried on in connection with the
management of marketing work. This may therefore, include market research, sales
research, product research, advertising research, motivation research etc.,
American Marketing Association has defined the scope of marketing research as
“the systematic gathering, recording and analysis of all facts about problems
relating to the transfer and sales of goods and services from producer to customer."
17.3 DISTINCTION BETWEEN MARKET RESEARCH AND MARKETING RESEARCH
Marketing research covers researches about all aspects of the marketing
activities such as markets, product, consumers, advertising, sales promotion
techniques, and channels of distribution, were-housing, transport and packaging
problems relating to firm's product, while on the otherhand, market research
emphasises, research on the market and market segment and consumers and their
behaviour. In this way market research is only a part of marketing research and
covers only a few aspects of marketing. The term market research is more
appropriate in describing research into markets, their size, geographical
distribution, income of customers, their behaviour and so on. However, the term
market research fails to establish the idea of research into the effects of marketing
research is more appropriate.
17.4 NEED FOR MARKET RESEARCH
Market research is the basic tool for management decision making. A\decision
to manufacture a product will be quite useless unless market research or market
analysis is done because production is made in anticipation of demand or sale
prospects of the product. This data regarding the anticipated volume of sales,
product acceptability, the price that the market car bear and other demand
determinant variables is a must before manufacturing process is started. There is
no fun in manufacturing a product for which there is no demand and the market
research is the main instrument to analyse the character and trend of the demand.
The need for market research not only arises before the manufacturing
decision but it has also greater role to play even when the demand potential is well
established. Further research is required as to the requirements for actualising the
potential. it" implies that way through that market research data are to be collected
on the methods of distribution promotion systems, alternative pricing strategies
etc.,
The need for market research, therefore, arises to provide a sound data base which
will help the management in taking decision in the following circumstances:
i) when a new product is to be introduced in the market.
147
International Business

ii) when the sale of the product is showing a downward trend and the reason
for the fall could not be established.
iii) when facts and figures about Demand potential are not available.
iv) in designing an advertising programme when consumers habits and
preferences and of the markets are not known.
v) when product development is needed to adapt the product according to the
needs of the consumers.
vi) when the income, fashion, habits and preferences are changing fast.
vii) Having an idea of competitors’ policies and strategies regarding their
products, advertising and sales promotion to make the necessary changes
in its policies and strategies.
viii) when companies own pricing policy is not conductive to competitors pricing
policies and needs change.
The market research is, therefore, needed in taking decisions regarding new
product launching, product, adaptation, entry to new market, and alternative
pricing strategies etc.
17.5 MAIN PARTS OF EXPORT MARKET RESEARCH
Export market research may be divided into the following four main parts:
(A) Elements market research may be divided Into the following four main part-ll:
i) Resources and production;
ii) Transportation;
iii) Location;
iv) Climate;
v) Population;
vi) Standard of living;
vii) Government;
viii) Foreign trade: and
ix) Per capita income
(B) General Market Elements Related to Export Product
i) Foreign trade policy; and
ii) Foreign exchange policy.
(C) Specific Market Factors Concerned with Export Product
i) Domestic production:
ii) Imports: and
iii) Alternate sources.
(D) Particular Factors Affecting Exports
i) The policy of the company:
ii) Adaptability of the product to the export market:
iii) The price of the product:
148
International Business

iv) Channels of distribution: and


v) Terms of sale.
Having collected the information on these points, an export market research
report must conclude with a summary of findings and recommendations.
17.6 EXPORT MARKET ANALYSIS
There is no one correct and infallible method of export market analysis. The
method which should be used in analysing an export market should be adapted
first to the product and then to the market.
There have been literally dozens of plans to market analysis proposed and
published, and almost every one of them has special merits of its own as well as
some special demerits. One cardinal point should be kept upper most in the mind
of the exporter making the analysis. The area under consideration should be
analysed as a market for a given product. Unless all of the facts necessary to
determine whether a market can be found for that specific product are included in
the market analysis, the study would become defective to that extent, and
extraneous material, which is not essential in determining whether a market exists
for the product, should be discarded. .
Any market analysis falls naturally into two essential divisions:
i) General information: and
ii) Information pertaining to a particular business or particular product
under consideration.
Information on the following subjects is of value for it would have a bearing on
exports.
(1) Product Analysis
a) Do my production facilities and domestic distribution justify my entry
into the export market?
b) Is my product of the type that will be in demand abroad?
c) What change, if any, should be made in my product to meet foreign
preferences?
d) What volume of production can I allocate regularly to exports?
(2) Export Facilities
(a) In India
i) What are the export facilities in India available to me?
ii) Should I set up my own export organization, or should I use such export
middle map as an export commission house or export merchant or
manufacturers export agent?
(b) In Foreign Countries
i) What channel of distribution should I use in foreign countries?
ii) How can I select a satisfactory agent or distributor?
(3) foreign Area Analysis
The exporter will need such det8.1led data on each country in. which be sells as:
149
International Business

(a) Geography
i) Area, topography, climate and seasons.
ii) Natural divisions or sales regions of the country.
(b) Resources
i) Character of resources and extent of development.
ii) Minerals, agriculture, chief crops, forests, water power and potential
and developed electrification areas.
(c) Industries
i) Kinds, location, amount arid quality of output, labour conditions and
unemployment record.
ii) Degree of competition with my export products.
iii) Growth of industries during the last decade or so.
(d) Population
i) Amount, density, rural and urban, location and size of important cities.
ii) Historical background, religious, nationality distribution, social classes,
progressiveness, customs, bias in favour of or against, India or other
nations.
iii) Literacy, educational development, language groups.
iv) Purchasing power, wages, per capita figures in savings, bank deposits,
cars, telephones, radios, T.V. etc.
(e) Transportation and Shipping
i) What transportation facilities to the country are available steamship, air
services, railways, frequency and rates, harbour facilities, free ports?
ii) What are the transportation conditions within the country railways,
highways, air, river ports, and carriage?
(f)Business Customs
i) Business methods as compared with those in India's ethical standards.
ii) Business hours, buying and selling seasons.
iii) Importance of formality in correspondence and selling tactics.
iv) Association, Chamber of commerce.
v) Organisation of trade, channels of distribution of particular products.
vi) Advertising development, media available, character and circulation of
newspapers and magazines, radio advertising, outdoor advertising,
availability of local advertising agencies.
(4) Analysis of competition
(a) Local competition
i) How efficient are these local industries?
ii) To what extent are they protected by tariffs?'
(b) Indian Competition
i) Can I meet the competition of other Indian exporters to market?

150
International Business

ii) How are they selling there-through branches, Subsidiaries, distributors,


sales agents or directly to consumers?
(c) Foreign competition
i) What competition will I meet from manufacturers in other countries?
ii) Do these manufacturers enjoy tariff preferences?
(d) Trade Statistics
i) Domestic-value, principal articles, quality.
ii) Foreign-imports, value, competitive articles, chief sources of supply.
iii) Balance of payments with India and with the world.
(5) Government and Laws
a) Type of government, stability, progressiveness, financial position,
foreign loan record, bias against India or other countries.
b) Attitude towards investment in India and other countries.
c) Commercial treaties with India and other countries.
d) Tariffs in general and for particular products, types of duties levied,
stability of duties.
e) Customs regulations regarding packing of shipments, making of goods
and cases, documentation, commercial samples, catalogues.
f) Laws covering taxes on foreign business enterprises, salesmen's
licences, patents and trade marks protection.
g) Systems of weights and measures.
h) Government of India's regulations governing the export of my product.
(6) Financial Factors
(a) Currency, stability, foreign exchange control regulation.
(b) Domestic credit conditions, customary credit terms.
(c) Availability of capital, interest rates.
(d) Current economic conditions, employment, volume of trade, crop
conditions, price situation.
(7) Export Cost Analysis
The cost of exports which affects export prices and profits must be estimated with care:
(a) Customary quotations, F.O.B. or C.I.F., port of destinations;
(b) Packing, transportation, documentation fees, marine insurance; and
(c) Selling cost, regulation fees, and selling licences, discounts,
commission, advertising cost, credit financing etc.
17.7 OPTIONS AVAILABLE TO EXPORTERS WHO WISH TO CONDUCT MARKET RESEARCH
1. Sending home country personnel overseas or travel himself.
2. Asking the foreign subsidiary or office to either do it or liaise with a
local supplier overseas.
3. Hiring and dealing directly with a foreign research supplier.

151
International Business

4. Asking its domestic research supplier to conduct the research and then
the domestic research supplier may contract the work to a foreign
research, supplier.
5. Asking a multinational marketing research firm to conduct the study.
17.8 SUMMARY
Indian companies could entrust the job to multinational research firms to
minimize the problems and risks inherent in overseas marketing research projects,
to standardize and centralize the research process, and to provide c1oser-to-home
co-ordination. But finding the right group 'to carry out work overseas research is
just the first part of the process.
17.9 ASSIGNMENT QUESTIONS
1. What do you mean by export market research?
2. Explain the importance of export market research.
3. Discuss the need for joint ventures in abroad.
4. Examine the banking procedure for negotiation of documents.
5. What are the main parts of export market research?
‰

152
International Business

LESSON -18

METHODOLOGY AND TECHNIQUES OF MARKET RESEARCH


LESSON OBJECTIVES
1. To study the types and techniques of market research
2. To learn the meaning, reasons and advantages and disadvantages of joint
venture
3. To explain the problems and some suggestions and guidelines for joint
ventures.
STRUCTURE
18.1 Preamble
18.2 Desk Research
18.3 Field Research
18.4 Techniques of Field Research
18.5 Types of Interviews
18.6 Questionnaires-Design and Testing
18.8 Joint Ventures in Home Country or Abroad
18.9 Advantages and Disadvantages of Joint-ventures
18.10 Disadvantages of Joint Ventures
18.11 Areas of Collaboration
18.12 Problems Faced by Indian Venture
18.13 Some Suggestion
18.14 Guidelines for Joint Ventures
18.15 Summary
18.16 Assignment Questions
18.1 PREAMBLE
In order to achieve the objectives, the exporter may choose any methodology
for conducting the research and surveys. There is more than one method and no
single method can be recommended. In fact two or more method of collecting data
is usually adopted with a view to eliminating the possibility of collecting incorrect
data. Desk research and field research are most common methods adopted for this
purposes. Generally, these two methods are used in two phases viz. Desk Research
and Field Research. Initially desk research is undertaken and on the basis of
information so analysed a field research is conducted to fill the gaps on the basis of
structured or unstructured questionnaire.
18.2 DESK RESEARCH
It is first phase of overseas market research. It involves collection of all
relevant information known from published and unpublished documentation
available within and outside the organisation. Internal sources of information will
include past sales record enquiries received from abroad, reports received from its
branches and agents and its officers dealing in export trade, complaints received
from foreign customers etc. External documentation will include any published
data which may provide data on the problems to be analysed. Such information is

153
International Business

available from a wide number of sources including national and international


agencies. National agencies include Government departments are agencies, export
promotion councils, commodity boards, research institutions, chambers of
commerce, commercial and export import bank etc. The international sources
providing information to exporters are UN OECD, embassies. IMF year book, GAIT,
UNCTAD, International Trade Centre etc. Apart from the internal sources of
information, the company should establish the relevant source of external
information. Once, the source is established information is gathered.
The data so collected is then analysed and giving allowance for the anticipated
market fluctuations in demand, prices and competition in the target market, the
exporter can take the decision whether to enter a particular market or not.
18.3 FIELD RESEARCH
The results, disclosed by the analysis of the published and unpublished data,
collected from the desk research, reveals gaps which will have to be covered only
through personal investigation of the market. To cover the gaps, field research is to
be conducted. Field research means collection of data from the people directly
associated in some form with the problem to be analysed. In export marketing, desk
research is carried out in exporter's country whereas field research is done is the
market i.e. importing country.
Desk research is generally based on internal and published data from external
sources. This data provide only the general information of the market and not the
specific information relating to the exporter's product. Product specific information
will not be available from published sources. Questions like, what colour, what size,
what packaging requirements, cannot be answered unless the researcher has a
chance to approach the end users and the various middlemen involved in the
channel of distribution. Similarly, a proper evaluation of firm's competitive profile
and that of other suppliers cannot be found out in the absence of direct contact
with the target market segment. Other similar enquiries such as strengths and
weaknesses of competitors and their products, forms of competition in terms of
price, quality, and credit or delivery schedule gap in their product line, reliability of
the agents and distributors and intermediaries identified at the desk research stage
can be answered only after field survey of the market.
18.4 TECHNIQUES OF FIELD RESEARCH
Field research can be conducted through (a) Personal interviews, b) Telephone
interviews, and (c) Mail questionnaire survey technique.
(a) Personal Interview: This technique is most dependable. Under this method
information is gathered through face to face interviews from the person concerned.
His opinion and attitude about the product is noted. This method has a number of
positive aspects:
i) It is easy and intensive method.
ii) It allows extensive discussion and analysis of specific and relevant;
points.

154
International Business

iii) The information so gathered is reliable because interviewer may be able


to persuade the respondent to part with confidential and sensitive
information which cannot be made available otherwise.
The method has some drawbacks also:
i) Personal prejudices may destroy authenticity of information.
ii) Extensive use of this method is not possible because time planning in
this method is necessary. It takes much larger time in conducting the
research and hence proves costlier.
iii) Some respondents may not be available and the response may not
necessary be reliable.
iv) Some areas are difficult to be covered by this method.
(b) Telephone Interviews: Here both interviewer and the interviewee
(respondent) are on telephones and have discussions over the product and the
markets. The advantages of this technique are:
i) It is economical and saves time and travelling. More interviewee can be
contacted in a short time.
ii) Surveyor finds immediate response to the questions asked. The
questions can be asked in a planned way.
iii) Personal contacts, if necessary, may be had.
There are certain limitations in this method:
i) Only rich persons who have telephones can be contacted and this
renders the sample imperfect and biased.
ii) The respondent does not find sufficient time to answer as he is to
answer the questions immediately and there is possibility of supplying
information simply based on opinions and estimates.
iii) In the absence of observational information, people cannot be classified
according to age, education, occupation and economic conditions.
(c) The mail questionnaire: Under this technique, the respondent is contacted
through mail. A questionnaire is dispatched to the overseas, respondent along with
a covering letter explaining the purpose of study, and an envelope (postage
prepaid). Sometimes a gift is also offered. The respondent sends back the completed
questionnaire to the surveyor for analysis.
The method is economical if the response is good. The cost is also low
percontactee. This method can be extensively used because the distant areas are
possible to be covered with limited expenses.
The main drawback of this technique is 'that the response under this method
is quite poor. People are not bothered to answer or send back the questionnaire.
Moreover, only limited amount of information could be collected because all
persons do not respond to the questionnaire. Some do not answer all the questions.
Such information is relatively not useful for qualitative studies. The more difficult
task is to prepare the questionnaire and the mailing list. Besides, answers to the
155
International Business

questions may be Incomplete and incorrect hence the very purpose of the field
survey is defeated.
The technique is suitable where numbers of respondents are limited.
Thus, desk research and field research are complementary to each other. The
results arrived at the desk research analysis, the gaps can be covered through field
survey. The information collected in field research by the surveyor can again be
analysed through desk research by applying various mathematical formulate and
models.
18.5 TYPES OF INTERVIEWS
The above field research techniques are based on interviews. Interviews may
be of three types for this purpose (a) structured (b) unstructured, and (c) semi-
structured.
(o) Structured Interview: An interview is structured when the interviewer
follows the questionnaire prepared strictly for the purpose. Me asks only those
questions set in the questionnaire.
(b) An unstructured interview is one where interviewer has no questionnaire
and the entire discussion is free-flowing.
(c) A semi-structured interview is one where both questionnaire based
discussion as well as free flow discussion takes place.
Which type of interview should be conducted depends on a number of factors.
A structured interview will be adopted in the following cases (i) If a large number of
the same classes of respondents are to be interviewed and their responses are to be
collected and compared; (ii) If information sought includes a high proportion of hard
facts; (iii) Where the interviewer is immature and inexperienced; (iv) It reduces
interviewer's bias. Semi or unstructured interview is more suitable when (i)
judgement responses are sought when the aim of interview is not to collect the
statistical data but only to probe the interviewee's mind on a specific issue. The
probing methodology cannot be standardised but can be devised instantaneously
depending upon the response of the respondent; (ii) In-depth interviews are to be
conducted and the interviewer is experienced in interview technique. Generally,
structured interview is suitable in consumer and retail surveys, whereas
unstructured or semi-structured interviews are preferably conducted in industrial
marketing.
18.6 QUESTIONNALRES-DESIGN AND TESTING
Questionnaire is the basic tool of the interview technique when an interview is
structured and semi-structured. Questionnaire is nothing but a formalised,
sequential array of questions designed in a way which is ideally suited to elicit
information from someone who is administered the questionnaire. The following
basic principles should be followed to make it effective. .
i) The questions must be short and in plain language.
ii) Questions must logically flow from the preceding to the succeeding
question.
156
International Business

iii) Each question must cover only one point.


iv) Each question must covey the same thing to each respondent. In other
words, questions must be simple and easily understandable,
v) Questions should not, as far as possible, be based on memory.
vi) Questions should not be unduly long and their. answers must not be long.
vii) Questions should.' be such that Information may be easily tabulated I and
compared.
viii) Introductory questions should be asked In the beginning:
ix) Questions relating to matters disclosing confidential data should be asked
in the last and that too indirectly.
18.7 PRE-TESTLNG AND QUESTIONNAIRE
It will be advisable to pre-test the questionnaire with a sample of respondents
readily available such as relatives, friends etc. The basic aim of the pretesting the
questionnaire is to find out whether the questions included in. are interpreted in
the desired' manner, whether all relevant information are being generated through
the questionnaire how much is taken to complete a questionnaire etc. If the
interviewer or surveyor finds any lacuna in the designing of the questionnaire it
may be corrected accordingly before it is approved or tested finally. If pretesting is
done on a sample closely resembling the ultimate sample of respondents to be
interviewed the result of pretesting will be more useful.
In market research problem, it is not feasible to have a census approach
because of limitation of time and costs. Therefore, survey is conducted on a sample
chosen representing the universe in all the characteristics. The process of
determination of sample involves (i) defining the population, (ii) determining the
sample frame and (iii) deciding on sampling method and size, and (iv) selecting the
sample.
The sample survey is not only feasible but also essential because, a new firm
entering the world market and that too from underdeveloped country, cannot bear
the cost of census survey. Moreover, the government' of the exporting country
imposes certain foreign exchange restrictions in relation to foreign exchange release
for this purposes. Thus, the selection of a sample is not only scientific but
pragmatic also taking into account the constraints imposed on the firm.
JOINT VENTURES ABROAD
Indian Joint Ventures and Wholly Owned Subsidiaries Abroad have been
recognised as an important instrument for promoting exports, trade expansion and
economic cooperation. Joint Ventures abroad enable India to enhance foreign
exchange earnings by way of dividends, other entitlements and additional exports.
These projects also serve as an outlet for Indian Entrepreneurs to internationalise
and in the process, expose themselves to the latest technological development,
management practices etc. Such ventures therefore serve as a conduct for the
transfer of new technology into the country.

157
International Business

A joint venture in international market is created when a foreign company


joins hands with the local company having a local interest in that country and
together they own some type of business operations. The two companies in Joint
Venture contribute with a feeling of cooperation. It may include sharing of
ownership and. control in an economic enterprise. licensing agreements, contract
manufacturing and management contracts.
For a developing country like India, the problem is two-fold-to propel the
economy forward and limit the extent of foreign participation, management and
control. Joint venture may achieve this dual purpose.
There are three ways in which a joint venture may be initiated:
i) A new business enterprise may be created in partnership sharing profits
and management.
ii) The foreign company may Invest In the existing local company: or
iii) A local company may Invest and acquire Interest in an existing foreign
company.
Regardless of its form in which it is created the central theme of joint venture
the sharing of ownership and management control.
18.8 JOINT VENTURES IN HOME COUNTRY OR ABROAD
Joint venture is a partnership having two sides-technical and emotional. On
the technical side, they share contributions, profits etc; on the emotional side, there
is a feeling of cooperative efforts. As pointed out earlier, a joint venture may be
established in home country in collaboration with a foreign firm or the local firm
may joint a foreign firm. It hardly matters as far as its basic concept of sharing
ownership, management and control is concerned. Where a joint venture should be
established in home country or in a foreign country? The decision is based on many
economic and other considerations. We shall analyse the rationale of setting of joint
venture in home country and abroad.
Reasons for Joint Venture Abroad
There are various reasons why a local firm wants to create joint venture in
foreign countries:
i) To utilise the special privileges and influence of the local partner.
ii) To make use of production facilities, sales network and indigenous capital
available in the local country.
iii) To reduce the risks involved in the venture caused by economic and
political circumstances of the capital importing country by sharing it with
the local partners:
iv) To enjoy the special tax benefits of the capital importing country.
Reason for Joint venture In Home Country
People want to have joint ventures with a foreign firm in the home country in order to:

158
International Business

i) expand foreign manufacturing and service activities equipped with I


modem techniques.
ii) develop a source of supply of required raw materials.
iii) Integrate the joint venture activity and the normal activity of the\ local
partners (supplier-customers relationship) for the advantage' of both the
local company and foreign company.
iv) ensure government participation in-joint ventures With a view to increase
the rate of economic development.
v) acquire means by which an international marketer is able to penetrate an
overseas market.
18.9 ADVANTAGES AND DISADVANTAGES OF JOINT-VENTURES
Advantages of Joint Ventures
The advantages of joint ventures are many and varied:
i) The joint venture approach enables the company to enter more overseas
markets with a limited capital and manpower resources than would be
otherwise possible.
ii) Risk is minimised because the management skins and experience of a
local partner fac1l1tates easier adaptation to the particular changes of an
unfamiliar business environment. The risk of adverse action by the local
government is also reduced because the local interest is also involved in
joint ventures. The risk is minimum, especially in those ventures where
the local partner is some agency of the government.
iii) The more of labour is high because of the local ownership. On the other
side, there is the potential of a favourable effect which local participation
in ownership can have on the morale of labour.
iv) As the joint venture is looked upon with more favour by nationalistic
consumers because it is not considered a foreign concern the sale and
profits of the joint venture, therefore, may be greater. A joint venture
approach can, therefore, achieve good public relations.
18.10 DISADVANTAGES OF JOINT VENTURES
The limitations of joint ventures are
i) As all profits and prosperity are shared with the partners, the amount of
resources and profits potential for the company are reduced.
ii) As is usual, potential disagreement begin to creep in between partner after
sometime.
iii) Companies that are either multinational in character or tend to become
multinational may find that joint venture may complicate long run
international manufacturing and marketing policies. This is particularly
true when the management and control of a joint venture is in the has of
local partners.
iv) When a party enters into joint venture, its operations in other foreign
markets may be substantially affected. The problem may be peculiar when
the party wants to operate in or to create a joint venture in third market
where the joint venture has been selling its products. The international
159
International Business

marketer by creating a new venture in the third market becomes a


competitor of the joint venture in which he is a partner. So competing with
one self is a very ridiculous situation. This policy has not yet been
accepted by many companies in foreign countries. Hence, as its activities
in foreign countries are restricted.
v) Where a foreign company buys into an existing local enterprise. a serious
problem may arise. Often a joint ownership does not work out
satisfactorily because the joint-ownership, unknowingly changes the
combination of attributes which were responsible for its success before the
foreign company entered into the picture. Hence, differences creep in very
soon.
Joint Ventures may be Appropriate
Joint ventures may be said to be appropriate when
i) a company lacks resources to expand its international operations.
ii) a company wants to enter an overseas market where wholly owned
activities are prohibited.
iii) the company wants to utilise the market position or the management skill
of the local partner.
Approvals for joint ventures/wholly owned subsidiaries established abroad are
given on the basis of the guidelines laid down by the Government under Section 27
of Foreign Exchange Regulations Act 1973 (FERA) by an Inter Ministerial
Committee on Joint Ventures Abroad headed by an Additional Secretary in the
Ministry of Commerce.
Pattern of Investment
Investments by Indian companies in the equity share capital has been mainly
through export of machinery and equipment/technology for capitalisation of
earnings of the Indian company through provision of technical know how or other
services. The total quantum of Indian equity in the 161 joint ventures in operation
was about Rs.120.92 crores (including bonus shares). The approved Indian equity
of the joint ventures under implementation amounts to Rs.454.67 crores.
Size of the Indian Joint Ventures
The size and scale of operations of the Indian Joint Ventures abroad has
generally been small. In most of the operating joint ventures, India's shareholding is
less than 50% and value of investments less than Rs.50.00 lakhs. During the past
few years however, projects with larger equity capital are coming up. In the recent
past, well established Indian companies both from the private and public sector
have started embarking upon well conceived, carefully planned and economically
viable projects capable of yielding not only higher returns but also projecting a
better image of Indian expertise abroad.
18.11 AREAS OF COLLABORATION
Indian Entrepreneurs have set up joint ventures covering a fairly wide
spectrum both in manufacturing and non-manufacturing fields. Among the 161
joint ventures which are in operation; 91 i.e. 561.52% are in the manufacturing.
sector and 70 projects' i.e. 43.48% are in the non-manufacturing sector. Fields in
160
International Business

which Indian Entrepreneurs have set up companies abroad and have acquired a
certain degree of capability to compete in the International Technology Market are
Light Engineering, Textiles and allied products, Chemical & Pharmaceuticals, Food
products (including soft drinks), Leather, and Rubber products, Iron & Steel,
Commercial Vehicles, oil seeds crushing and Palm oil refining, Glass and Glass,
products. Pulp and Paper and Cement products, etc. Non-manufacturing sector
generally includes Hotels and Restaurants, Trading and Marketing, Consultancy,
Engineering and Construction.
Regional Dispersal
Indian joint ventures are dispersed over 43 countries. More than 72% of the
approved JVs are concentrated in 12 countries, i.e. Russia (14), Malaysia (23), UK
(19), Sri Lanka (16), Nigeria (15), Nepal (14), Indonesia (12), USA (12), Kenya (9) and
UAE (11). As regards regional dispersal, the maximum numbers of operating joint
ventures i.e., 58 (36%) are in the East Asia region, followed by 18.0% (29 JVs each)
in the Europe-America region and in the Africa region. South Asia accounts for
14.2% (23). West Asia for 11.18% (18) and Oceania for 2.4% (4) JVs.
18.12 PROBLERNS FACED BY INDIAN VENTURE
Joint ventures, approved by the government so far are 400. Out of them 40 per
cent (160) were abandoned, many of them half way, after considerable money and
time were spent on them. Some of the reasons for their failure were.
(a) inability to gauge the market prospects.
(b) failure to select the right partners.
(c) subsequent backing out of the local partners, and non-approval of the
technology sought to be supplied, by Indian partners.
(d) relentless price competition.
However, the basic cause of the failure of Indian joint venture was the problem
of adjustment in the new marketing environment. They could not adjust themselves
because they were habituated to a sheltered market in India. Marty units found it
difficult to survive in the face of relentless price competition.
Most of the problems could have been avoided if the entrepreneurs had
thought seriously before entering into joint venture agreements. Of course, there
was information gap and the Indian entrepreneurs did not have enough information
about many countries. Fortunately, the rate of mostly has come down in recent
years. Between i976 and 1979, of the 149 proposals only 31 had failed to come off.
This could be due to greater care exercised in the scrutiny of the proposals by the
government.
The picture is not much satisfactory in case of those ventures which i.-, are
already in operation. A study of 28 ventures conducted by M.K. Raju reveled that
more than 80 per cent of the joint ventures that have commenced production are
unprofitable. Poor performance of Indian joint ventures is due to
i) poor project management
ii) poor operations control; and
iii) a lack of commitment.

161
International Business

Poor project management has led to cost escalation in the range of 40 to 100
per cent. Poor production control has led to poor quality, lack of cost
consciousness, and irregular deliveries. Some other problems identified by
Mr. Raju's study are - (i) insistence on using 'scaled down' duplication of Indian
plants back home in order to use Indian equipment and little regard to scale factor;
(11) the prohibition of cash remittance from India to Joint ventures thus artificially
restricting the growth of some Indian ventures, and (iii) Inability of Indian joint
ventures to control any of the critical variables such as-price, product, leadership,
distributor channel or manufacturing cost.
18.13 SOME SUGGESTION
There are some suggestions, which if implemented, would go a long way in
making India's joint ventures more successful
1. An export agency should be set up to disseminate information about
business opportunities in other countries.
2. The entrepreneur who is going to collaborate should make accurate
feasibility studies, undertake market surveys and prepare their own project reports
and not mainly depend upon the information supplied by other agencies.
3. More flexibility should be afforded to Indian entrepreneurs to specify
appropriate equipment and scale of operations rather insisting on India equipment.
In fact, insistence on Indian equipment adversely affects India's image as the host
countries feel that the main motive behind setting up joint venture is only to find
sales avenues for Indian capital goods and equipment.
4. A consortium of Indian banks should be formed to ease the cash starvation
problem of Indian joint ventures.
18.14 GUIDELINES FOR JOINT VENTURES
The Government of India has framed certain guidelines in order to link joint
ventures with the promotion of exports and to avoid substantial transfer of capital
from India.
The main features are:
1. Indian participation abroad should be through a corporate entity in India
that should have necessary manufacturing experienced and technical competence
at its command.
2. Participation by Indian companies should be in accordance with the ru1~
and regulations of the country where the project is to be located. Association of
local Parties, local development banks and financial institutions should be
encouraged to the maximum extent feasible.
3. Mode of Participation in the equity share capital should no1"lllaliy be
through export of new indigenous capital normally and .plant and machinery
required for joint venture. However participation in one or more of the following
ways, on merit of each case, may also be considered:
(a) export of know-how.
(b) capitalisation of services fees, royalty and other payments.
(c) raising of foreign exchange loans abroad.
(d) grant of loans by Indian participating companies to the joint venture units.
162
International Business

(e) cash remittance on consideration of fields of collaboration.


4. Requests for contribution to right issues/additional equity in the joint
venture project will be considered on the basis of past performance of the project
and other financial details. Such contribution shall normally be through exports of
machinery/equipment but exports of components and raw materials will be allowed
on merit of each case.
5. The scheme for industrial and manufacturing joint ventures should be
technical and financially viable and should be supported by a detailed project
report along with cash flow statement and profitability projections. Scheme for
commercial/trading/service ventures should similarly be supported by feasibility
studies and projections.
18.15 SUMMARY
The exporter may choose any technique for conducting the market research
and surveys. There are two methods widely used namely desk and field research.
Field research can be done by – personal interviews, telephone interviews and mail
questionnaire survey technique. The joint ventures abroad enable India to enhance
foreign exchange earnings by way of dividends, other entitlements and additional
exports. In this light, there are many advantages, disadvantages and problems are
made. Hence, to overcome the problems, some guidelines are made for joint
ventures.
18.16 ASSIGNMENT QUESTIONS
1. What is market research?
2. Explain the types of market research.
3. What are the techniques involve in field research?
4. What is joint venture abroad?
5. Discuss the pros and corps of joint ventures?
6. State any three reasons for Joint venture abroad?
7. Critically evaluate the problem faced by Indian ventures?
8. What are the suggestions to be followed for long way in making India’s joint
ventures more successful?
9. What are the guidelines for joint ventures abroad to be more effective?
‰

163
International Business

LESSON – 19

EXPORT LICENSING PROCEDURE


LESSON OBJECTIVES
1. To learn the meaning and categories of export licensing procedure.
2. To know the recognition of New Exporters and Transfer of Quotas (TQR).
3. To study the permission for utilization of Quota Licences.
STRUCTURE
19.1 Preamble
19.2 Categories of Exporters
19.4 Application for TQR
19.5 Permission for Utilisation of Quota Licences
19.6 Issue of Fresh Quota Certificates
19.7 Summary
19.8 Assignemnt Questions
19.1 PREAMBLE
The export of certain goods is regulated by licence. Goods of the description
specified in Schedule I of the Export (Control) order, made under the imports and
Exports (Control) Act 1947, may be exported only under, and in accordance with, a
licence granted by the Central Government. The export licensing procedure
announced by the Government is described in the following paragraphs:
19.2 CATEGORIES OF EXPORTERS
For the purpose of licensing, exporters are divided into the following two broad categorises:
(i) Established Exporters i.e., those who have exports of a particular
commodity in the prescribed basic period, as admitted by the licensing authority.
The basic period varies from commodity to commodity.
(ii) New comers, i.e, those who have no exports in the prescribed basic period
but possess sufficient experience in the particular field, either as exporters outside
the basic period or as dealers in the internal trade of the commodity concerned.
Quota Licensing
(1) Commodities, the export of which is allowed on a quota basic to established
exporters, have been mentioned in the Import Export Policy. Vol. II. Where an
exporter desires to secure an export quota of any such commodity, he is required to
prove his exports of that commodity during anyone year or part of a year selected
by him from out of the specified period called the basic period, prescribed for such
commodity.
(ii) An exporter is free to select, from out of the prescribed basic period, his
own best year or part of a year, as the case may be. The following evidence may be
accepted by the licensing authority in support of the basic period exports:

164
International Business

(a) Bill of lading.


(b) Certificate from the Manifest Clearance Department of the Customs when
the bill of lading is not available.
(c) Certified copies of Land Customs Appendices in the case of export by rail
or road
(d) Export invoices: and
(e) Postal receipts In the case of export by post
(Where original postal receipts are sent by banks for collection purposes to
foreign customers certificates from the banks concerned are accepted as valid
evidence).
(iii) The quota of an exporter is generally calculated on the basic of his basic
exports subject to adjustments in a few cases, promoted by considerations of
equity, e.g. fixation of minimum and/or maximum limits for export quotas.
Sometimes, a limited quantity of a commodity is released for export. In such cases,
the quota of each individual exporter is worked out on a pro rata basis calculations
being based upon the percentage that the total of the established exports bears to
the total quantity released for export.
(iv) In most cases, the percentage fixed for calculating the value of the quantity
to be allowed to be exported is announced. The quota of the individual exporter is
then worked out by applying the percentage to his basic exports.
(v) In certain cases, when the number of established exporters is very large as
compared to the ceiling available for export, quotas are granted at a flat rate.
(vi) In cases where quotas remain under-utilised or untilised, the item is
considered for being allowed to other exporters, subject to such conditions as are
deemed necessary.
(vii) Applications for the export of items, which are licensable against quotas,
should be made in the prescribed form. It should be accompanied by shipping bills,
quota slips granted by the licensing authority and/or such other documents as are
required to be furnished in terms of the relevant trade notice or are considered
necessary by the applicant.
Newcomers' Licensing
Ordinarily, an effort is made to provide for newcomers into the export trade
unless the quantity allowed for export is small, in proportion to the established
exporters’ quotas already in existence. Only such business concerns as have
previous experience of handling the commodity, financial standing etc., are eligible
to apply for newcomer, licences, normally applicants are required to prove their
standing in the internal trade of the commodity during a specific period. The
conditions which a person must fulfil and the manner in which he should prove his
experience are announced as and when applications are invited. Certificates of
chartered accountants, who are not partners, directors or employees of the
applicant firm or its associates, certifying purchases or sales are accepted in

165
International Business

evidences. Sometimes receipts of sales tax paid are called for as evidence. In
addition, a newcomer applicant may be required to prove to the licensing authority
his ability to enter into the export trade by producing the sales contracts already
concluded by him with overseas buyers.
Applications for export by newcomers should be made in the prescribed form,
which should be accompanied by shipping bills and/or such other documents as
are required to be furnished in terms of the relevant trade notice or as are
considered necessary by the applicant.
Canalised Exports
Certain items of exports are exported through a canalised agency i.e. the STC
or other recognised agency/organisation. The list of the items and are agencies so
nominated are given in Annexure I to Section II of Import-Export Policy (Vol.II).
For these items, exports will be allowed only through canalising agencies. The
quantum up to which export may be permitted in respect of these items and other
details pertaining thereto are decided by the government from time to time. The
operations of the canalising agencies in this regard are therefore, subject to such
directions as may be given to them by the government.
Open General Licence
Items covered by an Open General Licence may as long as it is valid, be
exported freely without any licensing formalities to all destinations permitted
therein.
At present, the following four Open General Licences are operated, and their
texts are contained in Import-Export Policy (Vol.ll):
(a) Open General Licence No. 1 applies to exports by land to any country
adjacent to India and having no seaport of its own of any goods included in
Schedule I to the Exports (Control) Order. 1977, which are consigned under a
procedure prescribed for regulating transit traffic.
(b) Open General Licence No.2 applies to exports of bonafide samples.
(c) Open General Licence No. 3 gives a list of item which may be exported on
fulfilment of the conditions specified against each of the items; and
(d) Open General Licence No. 4 includes a list of items which may be exported
directly by the canalising agency mentioned against each item.
Limited Free Licensing
Where the export of a commodity is regulated within a set celing or when there
is no established pattern of trade, exports will be allowed on "first-come, first-
served" basis. The following principles and procedures will be applicable in such
cases:
(i) A public notice/trade notice shall be issued, announcing the policy and
indicating the licensing offices to which the available celling has been allocated for
the purposes.

166
International Business

(ii) Unless otherwise indicated in the public notice/trade notice applications


will be received 15 days after the date of its issue.
(iii) All applications made in Form AX, compel respect, received on the
prescribed date between 10.30 a.m. and 1 p.m. shall have the same priority. Such
applications should be accompanied by evidence to the effect that the Indian
exporter applicant has accepted the offer of the overseas buyer to purchase the
commodity and the quantity applied for, subject only to the grant of a licence in his
favour.
(iv) As a rule, the licensing authorities shall record, in writing, the reasons for
the rejection of applications.
(v) Each exporter shall be allowed to submit one application per day supported
by one contract from one foreign buyer only. With each export application, the
exporter should me a declaration that he has not submitted any export application
for the same commodity to any other licensing authority during the same licensing
period. The licensing authorities will allocate the quota strictly on a prorata basis.
subject to the conditions stipulated in sub para (vi).
(vi) An eligible applicant will be allowed a quota not exceeding 10 per cent of
the available ceiling per day allocated to the office concerned. If some quantity of
the ceiling is left over after the disposal of the applications received on the first day,
the balance will be carried over to the next day for fresh applications; this process
will be repeated until the ceil1ng.has been reached.
(vii) Exports will be allowed by issuing an export licence with a validity Period
of 45 days from the date of issue.
(viii) Shipment shall be made of the quantity covered by the contract against
which the licence has been issued within the period of its validity. No extension of
time shall be granted except in the following circumstances.
(a) The licensing authority, which issued the licence, is satisfied, within 7 days
of its issue, that no ship is available for carrying the consignment(s) within the said
period of 45 days; or
(b) Within the period of the validity of the licence, the licensing authority at the
port to which the consignment might have been carried, is satisfied that there has
been dea1y in the arrival of the ship within the initial period of validity.
In either event an extension of up to 15 days only shall be available for
effecting the shipments. No second extension will be granted. i.e., the licence will
lapse automatically there after.
(ix) After the shipment is effected but with, a period of 7 days of the shipment,
each licence holder shall intimate to the licensing authority which issued the
licence particulars of the shipment(s) actually effected Also, in case the licence is
not utilised at all or only partly utilised, the licence holder shall report the Position
to the licensing authority within 7 days of the date of shipment or the date of expiry
of the licence as the case may be. Any failure to do so, will result in refusal to grant
an export licence for the Items allowed under limited ceiling for further exports in
167
International Business

terms of clause 5(q) of the Export (Control) Order, 1977, as amended from time to
time, for the licensing period.
(x) Any quantity allocated against the earlier licence which lapses for the above
reasons shall be available again to the licensing office concerned for reallocation in
the same manner as laid down above.
Free Licensing
Where as item is allowed free for exported but is not covered by an Open
General Licence, the Intending exporters are required to secure licensing
endorsements on the connected shipping bills from the licensing authority.
Application should be made in the prescribed form.
Ad Hoc Licensing
(i) In order to develop new markets and encourage home based industries in
producing new export products, requisites for exports in small quantities are
sometimes considered on an ad hoc basis, even if the indigenous production of
such items is somewhat limited. Ad hoc licensing is, at time made use of to enable
an industry or unit to clear accumulated stocks and maintain continuous
production.
(ii) Application for the export of such items should be made in the prescribed
form and accompanied by shipping bills and/or such other documents as are
required to be furnished in terms of the relevant trade notice or are considered
necessarily by the applicant.
Pre-Ban Commitment
Unless otherwise provided, the following types of preban (including pre-control)
commitments may ordinarily be honoured for export control purposes:
(a) Where, against a specific export order an irrevocable letter of credit In
favour of the exporter/ exporting firm has been opened by the foreign buyer,
covering 100 per cent of the f.o.b. value of the prior to the date of ban/control.
(b) Where advance payment has been received provided that:
(i) The advance payment has been received against a specific export order
and covers 100 per cent-of the f.o.b. value of .the consignment; and
(ii) Such advance payment has been received through an authorised
dealer in foreign exchange on or prior to the date of the ban.
Notwithstanding the above the government may for sufficient reasons treat any
other claims not covered by the above provisions as a pre-bank commitment.
Copies of pre-bank commitment/export contracts (or pre-control commitments
/contracts) should be sent by the person concerned to the regional licensing
authority along with documentary evidence relied upon in support of such
commitments/contracts having been made. These documents should be sent to the
licensing authority by Registered Post (Acknowledgement Due) within a period of 15
days from the date of the public/trade notice or notification announcing the
imposition of the ban on the export of a commodity or the date on which such
168
International Business

commodity is placed under export control as the case may be Cognisance will be
taken only of cases where these documents have been filed in time. The submission
of such evidence shall not however confer any right on a person to the grant of any
export licence or permission to export.
NOTE
A contract is deemed to have been concluded after an offer has been made and
accepted by the second party. It should be specific as to the mutually accepted
terms and contents. i.e., it is binding on both with reference to its enforceability.
Where such evidence is in the nature of a telegraphic/telex message detailing
the offer or the acceptance of the contract in its materials particulars the evidence
relied upon the substantiating the pre-ban commitment/export contract (or pre-
control commitment/contract) should include the (confirmatory) post copy of the
said message sent immediately after its despatch together with the connected
envelope bearing the stamp of the post office.
Application Forms
Applications for export licences or licencing endorsements on shipping bills
should be made on prescribed forms along with relevant documents. These forms
aware given in the Hand book of Import-Export Procedures. The applicants may use
their own typed/cyclostyled or printed forms.
Persons Authorises to Sign Application
Every application for an export licence or for a licensing endorsement on the
shipping bill should be signed by applicant himself or by a person duly /legally
authorised by the applicant to do so. The position or nature of such legal authority
held by the person signing the application/document form should be clearly given
therein along with the official stamp of his status. Otherwise, such application
/document or form will receive no consideration by the licensing authority. This
requirement applies equally to the applications made to canalising agencies.
Deficient applications
Applications will be summarily rejected if they are not:
(i) In the prescribed form.
(ii) Accompanied by necessary export documents.
(iii) Accompanied by the necessary particulars setting out the authority of the
person signing it; or
(iv) Received before the last date prescribed.
Applications are expected to complete all the columns in the application form
truly and properly. They may take the help of the Counter Assistance System to
make sure that all these requirements are met.
Amendments an Alteration to Licence
No change shall be made or effected by the license or any other person in the
description of the goods or the name of the consignor or the consignee and in the
terms and conditions of the licence. Any unauthorised change would render the
licence null and void besides exposing the offender to the risk of being penalised.

169
International Business

Applications for amendments and alterations should be submitted to the authority


which issued the licence.
Report of Samples of Indian Origin a their Re-Import
The Imports (Control) Order, 1955 and the Customs Act, 1962, permit, subject
to certain conditions and the observance of certain formalities, are import of
samples sent or taken to foreign countries by Indian businessmen for the purpose
of getting the buyer's approval. With a view to avoiding any difficulty which the
Indian businessmen may have to face at the time of re-import, the prospective
exporters should contact the Customs/Import Trade Control authorities before
comporting the samples to foreign countries and ensure that the various conditions
laid down are fulfilled.
Jurisdiction
Unless otherwise stated, applications for the export of items which are not
normally allowed, or whose export is allowed on merits, should be addressed to the
Chief Controller of Imports and Exports, New Delhi. Applications for the export of
all other controlled items should be addressed to one of the regional licensing
authorities, depending on the port from which export is to be made. In respect of
commodities for which export ceilings have been fixed and one or more specified
licensing authorities deal with them the intending exporter may apply for export to
anyone of such licensing authorities with each export application in such cases.
The exporter should me a declaration to the effect that he has not made an export
application for the same commodity to any other licensing authority in the same
licensing period).
19.3 RECOGNITION OF NEW EXPORTERS IT TRANSFER OF QUOTAS (TOR)
(1) An established exporter may be:
(a) An individual.
(b) A partnership concern.
(c) A kartha of a Hindu undivided family in respect of, the fam1ly business.
(d) A Limited company; or
(e) Any association or body of individuals.
Licences are granted in the name of the business belonging to the established
exporter. Where there is any change in the ownership, constitution or name of the
business the established exporter will not be eligible for the grant of licences, for he
ceases to be an established exporter. However, in public interest and for the
continuity of business the licensing authority may recognise new established
exporters in respect of any business in accordance with the provisions made 1n' the
following paragraphs.
(ii) Where there is a change in the ownership or constitution of an established
exporter's business. Without any change in the name of the business, and the new
owner of the reconstituted concern, as the case may be acquires the quota of the
original concern, as a whole, the quota belonging to the original concern will be
deemed to have been transferred to the new concern. The new concern may obtain
170
International Business

export licences on the basis of such quota, if otherwise admissible. In such cases,
no application for TGR need be made; but an intimation about the change should
be sent in the prescribed form, to the licensing authority within 90 days of the date
of change. The constitution of the new concern should also be mentioned in the
usual manner in the next application for an export licence, indicating therein the
nature of the change and the date from which it has taken place. Where the
intimation about the change is sent after the expiry of 90 days, the quota
entitlement of the applicant will be liable to as cut of 25 per cent in the first
licensing period after the change. The licensing authority may, however, condone
the delay if it is satisfied that the delay was due to circumstances beyond the
control of the applicant.
(iii) Where there is a change in the name of the established exporter's
business, without any change in the ownership or constitution of the business, no
application for TGR need be made. The established exporter should produce his
quota certificate before the licensing authority for the necessary change therein,
together with an affidavit about the change of name and affirming that he will not
claim any licence further in the old name. Where a private limited company
becomes a public limited company or vice versa, it should report the fact to the
licensing authority.
(iv) Where there is a change in the name of the established exporter's business
as well as a change in the ownership or constitution of the business, the new
concern cannot claim export licences on the basis of the quota of the original
concern without obtaining a TQR in its favour. The application of a TQR should be
made to the licensing authority.
(v) Where there is any change in the ownership or constitution of an
established exporter’s business and, as a result of such change, a part of the quota
of the original concern is required to be separated or the quota of the original
concern is required to be divided, the application for such separation of the quota
or for its division, as the case may be, should be made to the concerned licensing
authority. If the quota to be separated in sought to be transferred in favour of any
person, the transferee, too, should make an application for the TQR to the licensing
authority. In such make cases, the new owner or the reconstituted concern(s)
cannot claim export licences on the basis of the quota standing in the name of the
original concern without obtaining a TQR
(vi) Where an established exporter is a limited company and the company is
amalgamated with another company, the application for a TQR in favour of the new
company should be made to the licensing authority, supported by an order of the
competent court or other evidence of amalgamation.
19.4 APPLICATION FOR TQR
An application for TQR should be made in the prescribed from (Form α-X)
along with the prescribed documentary evidence. The application for the TQR
should be made by the head office of the applicant concern, covering all its
branches, and such application should be made to the licensing authority in whose
jurisdiction the head office is situated.

171
International Business

The application made in terms of the two paragraphs above should be


accompanied by the following documents:
i) In the event of the death of any person, a death certificate should be
produced.
ii) In the event of relinquishment of rights by any person in favour of
another, an affidavit of relinquishment should be produced.
iii) If the transfer of quota in favour of any legal heir or heirs is claimed on the
basis of a "will" the application should also be supported by the said "will"
and the probate thereof, or an affidavit of consent by all the other legal
heirs.
iv) Partnership deed of the outgoing concerns.
v) If the business has been sold the deed of transfer, duly registered with
Registrar of Document should be produced: if the firm is dissolved, a deed
of dissolution should be produced.
vi) Partnership deed of the incoming concern, if it is a partnership concern.
vii) Where a common basic year is required to be selected for the calculation of
quota, an application should be supported by an affidavit to the effect that
the parties w1ll select a common basic year for the establishment of
quotas in respect of the same or similar items on the basis of the business
done by the outgoing concern; and
viii) Any other document on which the applicant may rely in support of his
application.
Affidavit to be produced by the applicants with their application for
transfer/division of quotas, wherever laid down, should be sworn before a First
Class Magistrate or a Notary Public.
i) Subject to the provisions of sub-paragraph below, an established exporter
is not allowed to transfer his business to which a quota is attached except
as a whole.
ii) If an established exporter has two or more branches, each having a
separate quota in respect thereof, it will be open to such established
exporter to transfer the business of any branch with the entire quota
belonging to that branch.
In the following cases, export licences may be cla1med only against quotas
calculated on the "common basic year" in respect of the same or similar items on
the basis of the business done by the outgoing concern:
i) Where a quota is divided and transferred in part to several persons
separately, the persons in whose favour the quota is sought to be
transferred have to select a common basic year. However, where a person
acquires a quota in respect of any item transferred in his favour and he
already holds a quota in respect of the same item by virtue of a business
done separately, it shall be open to him to claim licences on the combined

172
International Business

value of the two quota certificates even if the quota certificates are in
different basic years. This w1ll also apply in the case of amalgamation of
two limited companies.
ii) In cases fa1l1ng under para (2) above, the transferor and the transferee
w1ll be required to select the common basic year for the same or similar
items.
iii) The provisions of this paragraph will also apply to cases where the parties
have been exempted from making an application for a TQR.
Where an application for a TQR is required to be made in terms of these
provisions such application should be made so as to reach the licensing authority
concerned, complete in all respects, within a period of 90 days from the date of
change in the ownership, constitution or name of business, etc., as the case may
be. The licensing authority may however, in deserving cases, condone the delay in
making the application if such authority is satisfied that the delay was caused by
circumstances beyond the control of the applicant. If the applicant is not in a
position to make an application complete in all respects within the prescribed
period of 90 days due to formalities to be observed in getting the deed of transfer of
business registered with the Registrar of Documents he may apply by producing an
attested copy of the transfer deed with evidence to show that the original deed has
been deposited for registration and should furnish an undertaking to the effect that
the original deed, duly registered, will be provided by him within a period of 15 days
from the date of registration.
Where an application for as TQR, complete in all respects. i.e., accompanied by
documents specified above, is received by the licensing authority concerned within
a period of 90 days from the date of the ownership, constitution or name of the
business, as the case may be, or where the delay in the receipt of the application is
condensed by the licensing authority, as indicated above, the transferee will be
eligible for the transfer of the quota from the licensing period during which the
change occurred. In other cases, the TQR will be effective from the licensing period
during which the application for it is made, complete in all respects. In the case of a
deficient application, the TQR will be valid from the licensing period during which
the documents are produced.
Where an applicant is unable to produce the original document specified
above, he may submit Photostat/certified/attested copies thereof in support of his
application for a TQR. The applicant may submit Photostat/certified/attested
copies thereof and the original documents subsequently to show that the
Photostat/certified/attested copies are correct. The benefit of the TQR may, in such
a case, be given from the date on which the Photostat/certified/attested copies of
the documents in question were received. If the, TQR is otherwise admissible from
such date.

173
International Business

The licensing authorities will expeditiously dispose of applications for TQRs. If


an application for a TQR complete in all respects is not disposed of within a period
of one month, the licensing authority will issue an interim reply to the applicant. If
an applicant does not receive an interim reply even with this limit, he may bring the
matter to the notice of the Public Relations Officer in the Export Trade Control
Office concerned; or fix up an interview with the officer concerned through the
Enquiry Officer in order to know the reasons for the delay in the disposal of his
application.
Where an established exporter has duly made an application for a licence, but
there is a change in the ownership or constitution or name of the business before
the licence is granted, the licence will be granted on such application, if there
otherwise admissible, to the new owner or owners or newly constituted firm, etc.,
after their having been recogniosed as established exporters, provided that the
validity of the TQR covers the period of the application in question. The licensing
authority may also consider the grant of licences in favour of the new owner(s) of
the business of the reconstituted concern, etc., against other pending claims of the
old owner(s) of the business, if otherwise admissible provided that the agreement
between the parties or the affidavit or relinquishment specifically contains a
provision to this effect.
If the licensing authority is satisfied that the approval of the recognition and
grant of quota is likely to be delayed on account of circumstances beyond the
control of the applicant, it will be open to it to grant licences to the applicant in
anticipation of the approval, if the applications are otherwise in order.
In the following cases, the quota of the established exporter will lapse:
i) If the established exporter is an individual and Is declared insolvent; and
ii) If the established exporter is a limited company which is wound up
without any arrangement having been made for the transfer of its
business.
In the following cases, no changes in the ownership of the business will he held to have
taken place for the purpose of the rules:
i) Change of directors or shareholders in public or private limited company.
ii) Changes in the Hindu undivided family by birth, death or otherwise except
the death or retirement of the karta; and
iii) Change in the address of an established exporter's business.
Any case which is not strictly covered by any of the above paragraphs will be
decided on analogous principles.
In cases where any application for a TQR is not required to be made under the
foregoing provisions, the application for a licence should be accompanied by a
declaration in the form prescribed.

174
International Business

Where the new established exporters have been exempted from making
applications for TQRs, the export licences will be issued to them in the normal
course, if otherwise admissible. They will, however, be required to state in their
applications for licences the changes occurring in the business and the dates from
which such have taken place. If in such cases, any objection or granted received
from any person at any time against the licences claimed or granted, the licensing
authority will examine such objection and call for such evidence from both the
parties as may be deemed necessary. If as a result of the examination, the licensing
authority finds that the established exporter is not entitled to the whole or a part of
the quota on the basis of which he has been claiming licences without obtaining a
sanction for the TQR, the quota of the established exporter will be reduced
accordingly and the parties found guilty of misrepresentation or contravention of
these rules will be liable to panel action under the Imports and Exports (Control)
Act and the orders issued thereunder. In such cases, the value/quantity of the
excess licences already obtained by the party will also be adjusted against the
future quotas of the party in respect of any item(s).
If the objection is made to the licensing authority within three months from
the date of the change in the constitution or ownership or name of the established
exporter's business, and the objector is found to be entitled either to the whole or a
part of the quota, such quota will be transferred in his favour, if he is otherwise
eligible. The licensing authority may also condone the delay in making the
objections, if such authority is satisfied with the delay was caused by
circumstances beyond the control of the objection.
It will be open to the licensing authority to reject the application for a TQR:
i) If the application or the documents accompanying the application are
defective.
ii) If the licensing authority decides that the recognition and grant of quota is
not in public interest or for the continuity of any business.
iii) If the licensing authority decides that the transfer/division of quota is
sought with an intention to defeat the transferor's creditors; and
iv) For any other reasons to be recorded.
The licensing authority may, after giving a reasons opportunity to be heard to
the persons who have been granted through inadvertence or mistake or due to any
fraud or misrepresentation.
19.5 PERMISSION FOR UTILISATION OF QUOTA LICENCES
Where an export licence has been granted to an established exporter, and after
the grant of the licence but before its utilisation, there is a change in the ownership
or constitution or name of the established exporter's business, the new owner of the
business or the reconstituted concern, etc., as the case may be, cannot utilise the
reconstituted concern, etc., as the case may be, cannot utilise the licence in

175
International Business

question Without obtaining the written permission of the licensing authority which
granted the licence, or of any other person empowered in this behalf by such
authority in terms of sub clause 4(2) of the Exports (Control) Order, 1977. In such
cases, an application for the necessary permission of the authority should be
supported by an affidavit by the applicant, sworn before a First Class Magistrate or
Notary Public, to the effect that he is the rightful successor of the business for
which the licence in question was descondend that, in the event of any mis-
statement subsequently detected he will be liable to all actions and consequences
arising therefrom.
19.6 ISSUE OF FRESH QUOTA CERTIFICATES
i) In the event of a change in the ownership or constitution a business
without any change in the name of the business, where the new owner or
the reconstituted concern, as the case may be, is not required to apply for
a TQR, the quota certificates standing in the name of the original concern
will be endorsed by the licensing authority, indivating therein the nature
of the change and the date from which the change has taken place.
ii) If the name of the business changes, the quota certificate will be amended
by the licensing authority by changing the name of the established
exporter's business appearing thereon. An endorsement will also be made
on the quota certificate, indicating the data from which the change has
taken place.
iii) Where a quota has been divided, the quota certificates and their
counterfoils standing in the name of the dissolved concern will be
cancelled and fresh quota certificates will be issued in the name of the
succeeding parties according to the share of the quota transferred to the
name. A suitable endorsement, giving the number and date of the order
under which the division/transfer has been allowed by the Export Trade
Control Authority, will also be made on the old and fresh quota certificates
and their counterfoils.
iv) The persons concerned should produce the quota certificates before the
licensing authority which issued the same for necessary endorsement/
amendment as indicated above immediately after the change has
occurred. In cases where the new owner or the reconstituted concern is
required to apply for a TQR, the quota certification should immediately be
produced before the licensing authority for necessary endorsement/
amendment but, in any case, not later than 30 days, after the new owner
of the reconstituted concern, as the case may be, has been recognised as
an established exporter.
19.7 SUMMARY
To sum up, the export licensing procedure announced by Government, with
certain purposes – Established exporters and new comers. For this different kinds
of licensing were introduced such as, quota, newcomer, open general, limited free,

176
International Business

free, ad hoc licensing. Besides, the recognition of new exporters and Transfer of
Quotas (TQR) have been established for exporter in individual, a Partnership
concern, A karta of Hindu undivided family, a Limited company or any association
or body of individuals. With regard to the, permission, an export Licence has been
granted to an established exporter, and after the grant of the licence but before its
utilisation.
19.8 ASSIGNEMNT QUESTIONS
1. What are the categories of exporters?
2. What is Quota Licensing?
3. What is open General Licence?
4. What are canalized exports?
5. What is a limited free licensing?
6. Briefly analyse the recognition of new exporters and TQRs.
7. Write a note on: Permission for utilization of Quota licences.
8. What do you understand about issue of fresh quota certificates?
‰

177
International Business

LESSON - 20

BANKING PROCEDURE FOR NEGOTIATION OF DOCUMENTS


OBJECTIVES
™ To understand the complete set of documents used in negotiation.
STRUCTURE
20.1 Preamble
20.2 Bill of Lading
20.3 Commercial Invoice
20.4 Certificate of Origin
20.5 Marine Insurance Policy
20.6 Negotiation
20.7 Summary
20.8 Assignment Questions
20.1 PREAMBLE
Once the goods have been physically loaded on board the ship the exporter
should arrange to obtain his payment for the exports made by submitting relevant
documents. The submission of the relevant set of documents to the bank and the
process of obtaining payment consequently are called negotiating the documents
through the bank.
A complete set of documents normally submitted for the purpose of negotiation
is called a negotiable set of documents which will usually consist of the following.
1. Commercial invoice together with the packing slip if needed and the draft
(bill of exchange).
2. Certificate of origin.
3. GR-l form-duplicate.
4. Marine Insurance Policy in duplicate.
5. Letter of Credit in original.
6. Bills of Lading-three negotiable copies and as many non-negotiable copies,
as required.
20.2 BILL OF LADING
The bill of lading is one of the most important documents in the entire process
of exporting. It is a negotiable document. It is important because it carries with it
the legal title to the goods shipped on board the vessel indicated therein. Besides, it
is a receipt given by the shipping company for the goods loaded on a particular
ship.
A bill of lading would contain a broad description of the goods, the quantity of
goods, the total number of packages, gross and net weight, the port of shipment,
the port of discharge, the name of the ship, and the amount of freight paid. The
significant details of a bill of lading are the number, the date of the bill of lading
and the freight paid. The date on the bill of lading is highly significant, for it is

178
International Business

taken as the date of the shipment of goods and should therefore be within the
validity date given in the documentary letter of credit.
A clean bill of lading is one in which no adverse entry about the apparent
condition of goods has been made. When an adverse comment does appear on it,
the bill of lading is termed as a claused bill of lading. The remarks on the mate
receipt issued by the Master of the vessel about the apparent condition of goods at
the time they were received on board the vessel, usually find a place on the bill of
lading as well, thus making it a claused bill of lading.
A claused bill of lading is normally not accepted by the foreign buyer. Unless
the letter of credit specifically permits the acceptance of such a bill, the exporter
should endeavour to negotiate documents with a clean bill of lading, for otherwise
the buyer has the right to refuse acceptance of goods because they do not conform
to the conditions of the letter of credit. A bill of lading is transferable when a
suitable endorsement for this purpose is made on it. It is therefore essential that
the exporter should take due care while preparing it.
The three most widely used endorsements are:
i) ‘To order and endorsed in blank’, since it is endorsed in blank, any
individual who gains possessing of it can get delivery'.
ii) 'Endorsed to the order of . . . ‘When it is endorsed to the order of a person,
bank or a company, only the party indicated in the endorsement can get
delivery of goods. The endorse can further re-endorse the bill of lading in
favour of another party, who can then take delivery of goods. If the bill of
lading is made out in the name of the buyer or the foreign bank opening
the credit as a consignee, either the buyer or the foreign bank, as the case
may be, can take delivery of the goods.
A bill of lading issued after the goods are loaded on the vessels is called an ‘on
board bill of lading’, Negotiating banks usually accept only an ‘on board’ bill of
lading for the purpose of negotiation. A buyer usually asks for a full set of ‘clean
shipped’ or ‘on board’ bill of lading as part of the negotiable documents required by
him. The letter of credit would specify what constitutes the full set of bill of lading.
20.3 COMMERCIAL INVOICE
A commercial invoice is a document prepared by the exporter giving details of
the goods shipped, their brief description, the shipping marks, the unit and total
f.o.b., c. & f. or c.i.f. value as the case may be depending on the (L.C.) contract, the
number and date of the bill of lading as well as the name of the ship carrying the
cargo. The description of the cargo mentioned in the invoice should be on the same
lines as found in the letter of credit. It is essential that the invoice is made out in
the name of buyer or the consignee mentioned in the letter of credit.
20.4 CERTIFICATE OF ORIGIN
Sometimes import regulations of a foreign country may require that all import
consignments should be accompanied by a certificate of origin which states the
country in which products under export were originally produced/manufactured.

179
International Business

This is advisable, for it is quite likely that the goods produced in a particular
country attract preferential tariff rates in the foreign market at the time of
importation. Or it may be that goods produced in a particular country are banned
for import in the foreign market. The certificate of origin helps the buyer in
adhering to the import regulations of the country.
Some of the foreign markets may accept the certificate or origin issued by a
Chamber of Commerce of an exporting country. Others, especially countries in the
Middle East and the Gulf, require these certificates to be legalised by their own
respective consulates. An exporter submits a copy of the commercial invoice to the
Chamber of Commerce, together with the nominal fee prescribed by the Chamber.
On the basis of this, the Chamber issues a certificate of origin. Where legalisation is
required by the Consulate, the certificate of origin issued by the Chamber of
Commerce is submitted to the Consulate of the concerned foreign country, which
makes its endorsement on the certificate.
Special certificates of origin are applicable for availing of concessions under
Generalised System of Preferences as well as under Common-wealth Preferences.
Under General1sed System of Preferences, the certificate of origin in the specified
form usually in triplicate, is obtained from anyone of the following agencies.
(1) Export Inspection Council and Its agencies;
(2) Chief Controller of Imports and Exports.
The Central Silk Board, The Coir Board, The All India Handicrafts Board and
the Textile Committee are also authorised to issue certificates of origin for the
products under their purview.
For concessions under Commonwealth preferences, the certificates of origin
have to be submitted in special forms obtainable from the High Commission of the
county concerned. The form is also known as ‘combined certificate of origin and
value.’
20.5 MARINE INSURANCE POLICY
Where the contract will the foreign buyer is on c.i. (cost and insurance) or c.i.f.
(cost insurance and freight) basis, the responsibility for taking insurance cover
against all risks of damage to or loss of goods during the sea voyage is that of the
exporter. On an application received from him describing the goods and mentioning
the name of the ship on which the goods are loaded as well as the value of the
goods for which the insurance is required, the insurance company issues a policy
in the name of the exporter and endorsed in blank. The premium charged by the
insurance company would depend on the total value for which the goods are
insured, the type of ship as also its age, and the port of discharge of the cargo as
evidenced in the bill of lading. The premium rate when goods are loaded on deck of
the ship is higher than when they are loaded in the hold of the ship. This is
understandable, for the risks involved and the chances of damage to the cargo are
more when these are loaded on deck of the ship. The insurance policy issued by the
insurance company should carry the name of the vessel, and the description of

180
International Business

goods, corresponding to those found in the bill of lading. It comes into effect only
after the date of the bill of lading.
Marine Insurance is aspecialised subject as it covers many types of risks. The
insurance cover, too, differs from material to material and also depends upon the
risks involved. Suffice it is to say that the exporter should consult the insurer
before taking out a suitable policy.
20.6 NEGOTIATION
A complete set of negotiable documents is presented to the negotiating bank
through whom the documentary letter of credit has been advised. Where the
exporter has complied with all the terms and conditions of the letter of credit while
submitting his documents to the negotiating bank, the documents are deemed to be
clean. The letter of credit opened by the buyer through his bank (the opening. bank)
authorises drawing a bill of exchange against which payment will be made by the
opening bank on behalf of the buyer, provided the terms and conditions specified in
the letter of credit are complied with. A bill of exchange is a draft drawn by the
negotiating bank on the opening bank or the buyer as the case may be, and is an
instrument of payment which is negotiable. The drafts drawn are of two types,
(1) Sight Draft, (2) Usance Draft.
If the letter of credit stipulates payment at sight, the exporter draws a ‘sight
draft’ on the buyer or his bank. When sight drafts are drawn by the exporter, he
expects the buyer to arrange for payment immediately on presentation of the draft.
Until payment for the draft is made, shipping documents will not be handed over to
the buyer to enable him to clear the goods.
When the exporter has offered credit terms for payment, a ‘usance draft’ is
usually drawn by the negotiating bank of the exporter. It is drawn for payment after
a specified period. The buyer on whom the draft is drawn retires the draft after 30
days, 60 days or 90 days as agreed between him and the exporter at the time of
concluding the contract. The letter of credit opened by the buyer will Clearly specify
the credit period which has been agreed upon and would mention that the draft
should be drawn for 30, 60 or 90 days, as the case may be.
For a credit period beyond 180 days, the exporter has to obtain the prior
permission of the exchange control authorities in India.
The bill of exchange drawn should correspond to the conditions stipulated in
the letter of credit.
The letter of credit would further specify the details of the despatch of
documents. The negotiating bank of the exporter would accordingly mail the
complete set of documents. Usually, a set of documents is transmitted to the
banker of the buyer specified in the letter of credit by the first available air mail,
followed by a second set by the next available air mail, so as to ensure that even if
the first set is lost, the buyer or his bank may take possession of the goods on the
basis of the second copy. The process of negotiation is completed with the despatch
of documents by the exporter's banker.

181
International Business

Besides the negotiation of the documents, the banker is to perform other


formalities. As part of the negotiable set of documents, the exporter has submitted
the duplicate copy of the GR-l firm. After negotiations are complete, and payment is
physically received by the bank, the duplicate copy of the GR-l form is sent to the
RBI after due checks.
The exporter requests a commercial invoice attested by the bank for his use in
claiming incentives. The bank attests the extra copies of the commercial invoice
supplied by the exporter and returns them to him.
To enable the exporter to claim incentives applicable for exports, a certificate
known as Form 1 or ‘Bank Certificates’ is required.
The Form I bank certificate describe the product exported, its value, the details
of the invoice, the bill of lading against which the export was made, the rate of
conversion for the exchange used, etc. In the case of c.i.f. contracts, the bank
certificate specifies the f.o.b. value, freight and insurance under separate headings
as evidenced in the bill of lading, insurance policy and invoice. The bank certificate
also indicates the CR-l form number against which the export was made. The
original copy of the bank certificate is furnished to the exporter and the duplicate
copy is sent to the JCCI & E of the area. A third copy may be kept for its official
records.
20.7 SUMMARY
A complete set of documents normally submitted for the purpose of negotiation
is known as negotiable set of documents, which consists of Bill of Certificate,
Certificate of Origin, GR-1 form – duplicate, Marine Insurance Policy in duplicate
L/C of original and Bill of Lading. The original copies of the bank certificate is also
furnished.
20.8 ASSIGNMENT QUESTIONS
1. Elucidate Banking procedure for negotiation of documents.
2. What is bill of Lading?
3. What is GR-1 form duplicate?
4. What is letter of credit?
‰

182
International Business

LESSON – 21

IMPORT PROCEDURE
LESSON OBJECTIVES
(1) To understand import procedures and controls.
(2) To explain import policy of the Government.
(3) To examine canalisation of imports and exports.
STRUCTURE
21.1 Preamble
21.2 Stages in an Import Transaction
21.3 Import Procedure Simplified
21.4 Import Controls
21.5 Import Policy of India
21.6 Summary
21.7 Assignment Questions
21.1 PREAMBLE
The unit deals with import procedure and import controls. It also analyses
import policy of the Government. Canalisation of imports and exports are also dealt
with in this unit.
The first step toward the import of goods from abroad into India will be to set
up an establishment for importing things and secure recognition from the
government as an importer. A person of a firm can import goods only on the
strength of an import licence issued by the Controller of Exports and Imports. If the
firm imported goods of the class in which it is interested during the basic period
prescribed for such class, it will be treated as an established importer. In such
cases, application can be made to secure a quota certificate. For this the intending
importer furnishes details of the goods imported in anyone year in the basic period
prescribed for the goods together with documentary evidence including the Bill to
Entry / Postal Declaration forms and Customs Duty receipts with relevant invoices
and Bank Drafts / Chartered Accountant's Certificates in the prescribed form
certifying the C.I.F. value of the goods reported in the selected year. The quota
certificate entitles the established importer to import up to the value indicated
therein which is calculated on the basis of past imports. In case the importer is an
actual user, that is, one who requires raw materials, accessories, machinery, and
spare parts for his own use in an industrial manufacturing process, he has to
secure licence through the prescribed sponsoring authority which certificates his
requirements and recommends' the grant of licence. The sponsoring authority for
Scheduled Industries borne on the Register of the Director-General of Technical
Development (Technical Cell), New Delhi, and others have to move through the
authority prescribed for them. Small industries (with a capital of less than Rs. 5
laksh) have to apply for licence through the sponsorship of the Director of
Industries of the State where the factory is located unless some other authority is
expressly prescribed by the Government. For other categories of importers (a) those
183
International Business

importing against exports made under a scheme of export promotion, and (h) others
- licences have to be secured from the office of the Chief Controller of Exports and
Imports. The import licences are usually issued for a period of one year at a time.
21.2 STAGES IN AN IMPORT TRANSACTION
The following stages mark the various steps involved in importing goods into
India under an import licence and quota:
1. Placing the Indent
The importer places order for the goods he requires, and for which he holds an
import licence. The order is called ‘indent’ and may be placed either directly or
through special1sed intermediaries called ‘indent houses.’ The word ‘indent’ is used
for import of goods, according to which two or three copies of the order are
prepared and indented. An 'indent' may be ‘open’ or ‘closed.’ An open indent is one
which does not specify the price and other details of the goods ordered but leaves
them to the discretion of the buyer in the exporting country. A closed indent, on the
other hand, specifies the brand of the goods ordered, the price at which they are to
be purchased, and the details of packing, shipping and insurance, etc. If an indent
specifies the price at which goods are sought to be imported, it may give rise to
negotiations between the parties. In such a: case, the indent incorporating the price
finally settled is called a ‘confirmatory indent.’
Though one can order goods directly, generally importers prefer to make use of
the services of indent houses for this purpose. The indent firms serve as middlemen
between the exporters and importers and charge a certain percentage of
commission from the importer. In India, many of the big indent houses have their
offices in port towns like Bombay, Calcutta, Madras, etc.
The indent houses maintain close touch with the well-known foreign firms who
send the samples of their products to them. Their salesmen take these samples to
the intending importers and book orders from them. The details of the order taken
down by the salesmen in their note-books are entered in the indent form. Two
copies of the indent form are sent to the importer for his acceptance. The importer
returns one of the copies duly accepted and signed to the sindent house which then
sends a copy of the indent to its agent in the foreign country concerned.
If an importer does not act through an indent house, he may place an order
directly with the exporter.
2. Obtaining Foreign Exchange
The foreign exchange reserves of any country are controlled by the Government
and are released through the central bank. In India, the exchange Control
Department of the Reserve bank of India deals with applications for the release of
foreign currency. However, an importer is able to get the foreign exchange only from
an exchange bank approved and recognised by the Reserve Bank of India for dealing
in foreign exchange. The importer has to produce the import licence along with the
prescribed form for securing foreign exchange required to pay for the goods ordered
from another country. The exchange bank through which the payment is proposed to
be routed puts its endorsement on the application form. On the strength of the
184
International Business

application and the licence and the exchange policy of the Government of India in
force at the time of application, the Reserve Bank of India sanctions the release of a
certain amount of the desired foreign currency. This paves the way for the importer
to go ahead with the other formalities in connection with an import transaction. It
must be noted that while licence is issued by the Government for all imports during
the period of its validity, exchange is released and made available only for a specific
transaction for which an order has been placed.
3. Arrangement for Payment
After the importer has succeeded in securing the requisite amount of foreign
exchange from the Reserve. Bank of India, he has to make arrangements for paying
for the goods ordered. This may be done through an LIC where it is intended to
enable the shipper to obtain payment for the goods immediately on surrendering a
documentary bill to a bank in his own country.
Another method will be to request the exporter to forward the documentary bill
through his banker to the importer for being delivered to him either against
acceptance of the bill of exchange or against its payment. In such cases, when the
shipper (exporter) has shipped the goods, he sends an advice note to the importer
stating the date of shipment of goods and the probable date when the ship is
expected to reach its destination. At the same time he draws a bill of exchange on
the importer (also called indentor) for the full invoice value of the goods. Various
documents like master document, insurance policy, bill of 1~d1ng and certificate of
origin are attached to this bill. That is why it is called the ‘Documentary Bill.’ A
Documentary Bill may either be D/A or D/P, i.e., the banker through which it is
sent may be instructed to deliver the documents against the acceptance of the bill
by the importer or against the payment by him. (D/A=Documents against
Acceptance: DIP = Documents against Payment).
The bank's branch in the importing country, or its agent there, arranges for
the bill to be presented to the drawee (importer). The attached documents are
handed over to him, immediately thereafter if it is a D/A bill; in case of a D/P, bill,
the bank delivers the documents only after the importer pays the amount of the bill
on maturity. Generally, indent house is mentioned as the ‘Referee in case of need’
on the bill. In case, the importer cannot comply with the requirements regarding
acceptance or payment, the indent house does so on his behalf.
4. Clearing the Goods
Assuming that the importer has taken possession of the various documents
relating to the goods shipped, he will have to comply with the formalities prescribed
for clearing the goods. When the ship carrying the goods touches at a port, it is
notified in the news-papers and the importer has to secure the release of cargo from
the custody of the customs authorities. The first thing for him to do is to obtain the
‘Endorsement for Delivery’ Delivery or Order on the back of the Bill of Lading which
is the document of little to the goods. The shipping company win make such
endorsement only if it is satisfied that the freight has been paid. If freight has not
already been paid by the shipper or exporter, the importer will have to make the

185
International Business

payment on this score before that he can be given a green signal by the shipping
company. The importer then presents two copies of the Port Trust Dues Receipt and
three-copies of the Bill of Entry to the Port Trust Office to obtain clearance
regarding dock dues, etc. Thereafter, one copy of the first form and two copies of
the second are presented to the Customs Office.
Bill of Entry
The Bill of Entry, drawn in triplicate, attests the fact that goods of specified
quantity, value and description are entering the bounds of the country. Separate
forms of the Bill of Entry are used for each one of the three classes of good: (i) free
goods which are exempted from customs duty, (ii) goods for home consumption,
and (iii) bonded goods.
5. Payment of Customs Duties
If the goods are free, no import duty is to be paid at the Customs Office. On
dutiable goods, the importer or his agent will pay the import duty which may be
specified i.e., based on weight, measurements, etc. It may be ad valorem i.e.,
according to the tariff value or the market value of the commodity or its invoice
value.
Payment of customs duty can also be made under the system called the
‘Permanent Deposit System.’ Under this system, an importer may maintain a
running account with the Customs Office and make deposits from time to time. The
duty payable on a particular consignment of goods received at the customs is
charged to the account and the importer is informed of this, in case the importer Is
not in a position to pay the customs duty on the whole of Imported goods, he may
apply to the customs authorities to get them placed in the ‘Bonded Warehouse.’ He
can then pay the duty on each instalment of goods that he withdraws from time to
time.
To save themselves from the botheration of going through all the above
mentioned formalities, the importers may entrust the job to clearing and forwarding
agents. In such a case, these will take it upon themselves to deliver the goods at the
exporter's warehouse. Clearing agents charge commission for their services.
21.3 IMPORT PROCEDURE SIMPLIFIED
As per the new Import Policy 1992-1997 Import procedure has been simplified:
(1) Against seven application forms required for import of various items in the
negative list only one form will now be required.
(2) Most of the imports are now free from licensing. However, when licensing is
required-cases like duty-free imports for export production – considerable
delegation of powers has been made to the regional licensing authorities.
(3) Under new procedure, import licences/customs clearance permits will have
validity of 12 months. However, capital goods licences and customs clearance
permits will be valid for 24 months. Revalidation may be granted on merits.
(4) Other highlights of import procedures are: granted licences for certain
items of raw materials, components, and consumables in the negative list of
186
International Business

imports; decentralised application for second hand capital goods upto a CIF value
of Rs. 50 lakh to be considered by the regional licensing authorities.
(5) Imports through courier service upto a value of Rs. 5,000 at a time can be
made in accordance with the policy.
(6) Licences for import of cloves, cinnamon and cassia to be granted to the
extent of 10 per cent of best year's imports in value in any of the preceding
5 licensing years; subject to fulfilment of export obligations. Items qualifying for
exports include tea, coffee, tobacco and certain spices.
(7) Dealers of books may be granted licences on the basis of 20 per cent of the
purchase turnover for import of fiction' and other books.
(8) Import of motor vehicles including tourist coaches and air conditioning
units will be permitted within the entitlement of the licences given to hotels, travel
agents and tour operators.
(9) The import entitlement of anyone licensing year can be carried forward,
either in full or in part and added to the entitlement of the two succeeding licensing
years.
(10) A speica1 licensing committee headed by the Chief Controller of Imports
and Exports may consider applications for advice on the grant of licence for import
of restricted items.
(11) Import of spares for imported motor vehicles and tractors upto a
maximum value per year of Rs. 20,000 (for motor vehicles) and Rs. 10,000 for
tractors for each imported vehicle can be made without a licence.
(12) Similarly, aircraft spares can also be imported without a licence on the
basis of the manual of the aircraft or on the recommendations of the department of
civil aviation.
21.4 IMPORT CONTROLS
Import control is a powerful instrument of economic growth. It protects the
indigenous industry, optimises the use of scarce foreign exchange resources and
services as a vehicle of export promotion. It seeks to strengthen the industrial base
of the country, develops and diversifies the economic structure in consonance with
our social goals and in a measure, creates conditions of a self-generating economy.
Import control has wide ramifications. The livelihood and functioning of importers
are inevitably bound up with it. Import control is a versatile instrument in the
hands of the Government for conserving scarce foreign exchange, for diversifying
the economy for encouraging import substitution, for guiding the process of
industrial1sation and promoting exports.
Import trade control is regulated and administered under the provisions of the
Imports and Exports (control) Act 1947. Powers have been taken under it to
prohibit, restrict, and control imports or impose any conditions in respect of the
clearance of any goods.
21.5 IMPORT POLICY OF INDIA
The foreign trade policy refers to a set of policies which govern the external
economy, i.e., imports and exports of goods and services. In a developing country

187
International Business

like India trade policy is one of the many economic instruments which are used to
suit the requirements of economic growth.
The foreign trade policy mainly includes the export and import policies of a
country. There may be two separate export and import policies or an integrated
policy of export and import may be followed. Up to 1981-82, India followed separate
policies for exports and imports and since 1982-83 an integrated policy was
prepared and followed. India's foreign trade policy was being prepared on annual
basis since 1984-85. In 1985-86, the first year of Seventh Plan, a three-year export
import policy (foreign trade policy) is prepared and announced in Parliament on
April 12, 1985 with retrospective effect from 1st April 1985 for the first time.
The main objectives of India's foreign trade policy, is to regulate the country's
foreign trade in such a manner that (i) on the one hand exports are encouraged,
and (ii) on the other hand imports of the country are controlled and limited to the
extent of foreign exchange available to the Government and for this purpose,
imports of these items which are indigenously available or not required are banned
except when price instability requires the imports. In a developing country like
India, the basic problem is the non-availability of certain crucial raw materials,
capital equipment and technology which are to be imported for the economic
growth of the country. Higher is the rate of development, higher is the demand for
imports. To pay for imports, exports should be increased through special efforts but
due to higher domestic demand and low productivity the exportable surplus is not
sufficient to meet out the imports. Though in the short run, the excess imports can
be financed through foreign aid, in long run imports must be financed by additional
exports. The basic objective of foreign trade policy, therefore, revolves around the
instruments and techniques of export-promotion and import management within
the resources.
21.6 SUMMARY
To summarise, the import of goods from abroad into India will be established
for sewing recognition from the government as an importer. There are many stages
involved in importing goods into India, they are placing the indent, obtaining
foreign exchange, arrangement for payment, clearing the goods, payment of
customs duties, import procedure, controls and policies to be followed.
21.7 ASSIGNMENT QUESITONS
1. What are import policies of the Central Government?
2. Explain briefly the import procedures and controls.
3. What is canalization of imports and exports?
4. What are import controls?
‰

188
International Business

LESSON – 22

IMPORT POLICY OF INDIA


LESSON OBJECTIVES
1. To know the import policy of India in detail.
2. To identify the recent changes in import policy.
3. To learn the salient features of new EXIM policy 1992-97
STRUCTURE
21.1 Preamble
21.2 Stages in an Import Transaction
21.3 Import Procedure Simplified
21.4 Import Controls
21.5 Import Policy of India
21.6 Summary
21.7 Assignment Questions
22.1. PREAMBLE
The main thrust of India's Import Policy is to increase our export of traditional
as well non-traditional items by affecting a change in the composition and direction
of our foreign trade so that we can pay for our imports without any assistance or
loan from any other country. It is also necessary to reduce the burden on our
balance of payments and therefore to restrict the imports only when they are
necessary.
The main purpose of our import policy is to regulate the inflow of imports in
such a manner that she is not dependent on foreign sources for her supplies. For
this purpose she is to utilise the limited resources of foreign exchange rationally for
the economic development of the country. It aims at encouraging the production of
all those items which are presently being imported. By the end of the Third Plan,
India had developed necessary infrastructural facilities and, also developed a fairly
large number of industries and, therefore, it is now possible to produce the items
which we import due to short availability of indigenous product by utilising the
installed capacity to the full extent. Sometimes, it is found that the installed
capacity cannot be utilised due to non-availability of imported raw materials or
critical items. The import policy, therefore, takes care of their requirements so that
the investment already made can contribute to the growth of the national economy.
The import policy envisages that priority sectors should be allowed to import
their requirements so that our developmental projects may not be held up for want
of necessary imported items or raw materials or technology whereas imports of
such items which are considered non-essential should be banned or reduced to the
minimum.
Another basic objective of our import policy is to protect our infant industries
which are too young to face the competition with the matured industries in the
developed trade. The Government provides protection to such industries through

189
International Business

import policy, i.e., by increasing tariffs on foreign imports or applying quantitative


restrictions.
Another dimension of the import policy is that it avoids dependence on only
one source of supply. Thus, in order to satisfy the above objectives, it may be
observed that three criteria are to be followed on which our import policy is based:
(i) Availability of foreign exchange.
(ii) Non-availability of indigenous production, and
(iii) Essentiality of items required to be imported.
All imports are subject to the availability of foreign exchange. The second
criterion implies that imports in such items will only be allowed which are not
available in India and our industries or trade will be affected by their non-
availability. If any item is being domestically manufactured or produced, import of
that item will not be allowed. This policy will obviously protect the industries from
overseas. The third criterion vtz., essentially attempts, to allocate the available
foreign exchange in terms, of their contribution to Plan priorities i.e., only those
items will be allowed to be imported which are considered essential for the
fulfilment of the plan objectives. These criteria are still being followed but some
liberalisation has been introduced since 1976 when there was a substantial
improvement in our foreign exchange reserve position.
Another basic, objective of the import policy is to maintain the price level of the
indigenous products. Whenever there is a short fall in the supplies of an item,
Government allows imports of that item and by to hold the price line. This objective
could be followed only after 1976 when the foreign exchange reserve position was
comfortable. For example, Government imported sugar in large quantities during,
1984-85 to prevent the sharp rise, in the prices of sugar. Thus, this objective can
be achieved only when foreign exchange position is comfortable.
1981-82 import policy took out 165 items from the purview of the Open
General Licence (OGL) and it was stipulated that essential requirements of actual
users, in respect of raw materials, components and machinery will be met through
licensing mainly to give an impetus to exports. In order to give an impetus to
domestic production, Indian manufacturers were allowed to import even second
hand machinery and other capital goods provided they were not more than 10 years
old.
Thus, the objectives of India's import policy can be fulfilled in the following orders:
(1) Available foreign exchange will be used according to plan and national
priorities.
(2) Foreign exchange will be allocated in the manner as to maximise the
capacity utilisation of domestic industries.
(3) Domestic industries will be protected against the foreign competition
through tariff and quota measures.

190
International Business

(4) Prices' will be maintained in the local market by importing the necessary
supplies.
22.2 RECENT CHANGES
Recently on the recommendations of Alexander Committee, the Government
has introduced certain changes in India's trade policy. The major recommendations
were –
i) In view of the changing domestic environment, the framework of trade
policy should be more development oriented rather than control oriented
as in the past. The excessive control should be removed to speed up the
process of industrial development and for maximising the capacity
utilisation. The committee has recommended its close-fisted restrictive
characteristics.
ii) The total importable items should be classified into three categories
(a) raw materials and components, consumables, stores and spare; capital
goods and equipment, and (c) consumer goods. A list of banned items
should be prepared which are either indigenously available or are not
essential for domestic needs.
iii) Tariffs should be used as a control mechanism rather than the import
licensing system.
iv) In order to remove the uncertainties which are associated With annual
policy changes, three-year export-import policies should be announced,
and the item wise changes should be affected to the minimum during this
period and should be made not more than once a year.
v) The CCI & E (Chief Controller of Imports and Exports) should be
redesignated as director general of foreign trade and it should have the
specific responsibility of not merely regulating the foreign trade but
promoting exports and further serving as a nodal point for dealing with the
complaints and difficulties of exporters.
In line with these recommendations, the import policy has introduced
substantive liberalisation. So far as exports are concerned, the basic thrust remains
toward export promotion subject to the restrictions which might have to be imposed
in order to take care 'of the domestic requirements. In line with the changes in
import policy, export of many items have been decanalised. In order to ensure
proper unit value realization, minimum export prices have been stipulated for a
number of items. The Government has announced a long term (1985-88) export
import policy for three-year period commencing from 1st April 1985 giving affect to
the most of the recommendations.
The Government of India has also announced the long-term fiscal policy on
December-19, 1985 for a period of 5 years (1985-90). Some major policy decisions
regarding imports are -

191
International Business

(a) To protect the domestic capital goods industry, capital goods in composition
with domestic goods would be taxed at higher rates applicable to components where
they are allowed to be freely imported.
(b) Project imports would be treated as now, as, a special category with lower
rates of duty.
(c) Non-essential consumer goods would continue to be banned from being
imported while essential items like food, edible oils and life-saving drugs would be
imported through canalisation and at low or nil duty rates.
(d) Appropriate technology imports would be facilitated and in this, connection,
a number of steps have been initiated by the Government. Side by side, the
Government would accelerate the development of indigenous technology. The
Government has rationalised the excise and customs duties to facilitate the import
of essential raw materials, components and other peripheral devices for the
domestic electronics and computer industries.
22.3 SALIENT FEATURES OF NEW EXIM POLICY 1992-97
1. Under the new policy the scope of duty exemption scheme has been
enlarged by introducing value-based advance licensing besides the quantity based
advance licence. This will give greater flexibility to the exporter to import and export
goods within the over all value limits and without any quantity restrictions except
in the case of sensitive goods.
2. New policy sheds the mood of export pessimism. The policy has a
pronounced bias towards exports and strengthened special schemes directed
towards exports.
3. The scope of duty exemption has been enlarged by introducing value-based
licences besides the quality-based ones. This gives greater flexibility to the
exporters to import and export goods within the overall value limits and without
any quantitative restrictions except in the case of sensitive goods.
4. The export houses, trading houses and star trading houses will be eligible
for the facility of self-certification under the advance licence scheme. Exports of
specified products will be brought under the self-certificate scheme later.
5. The export promotion of capital goods (EPCG) Scheme has been liberalised
and two windows are now available for import of capital goods at concessional rates
of customs duty of 25% or 15% with corresponding export obligations. Both new
and second hand capital goods may be imported under the scheme. Domestic
manufactures of capital goods, who may require to import components may also
avail themselves EPCG Scheme at the concessional rate of customs duty at 15% of
CIF value. The export obligation for import at 25% duty will be four times of CIF
value of capital goods over a five year period.
6. The gem and jewellery scheme is continued with little modifications.
7. Under the new policy, the 100% EOUs and EPZs will be allowed to install
not only own machinery but also machinery taken on lease. They may also export
their production through export houses trading houses or star trading houses. The
EOU/EPZ schemes have been extended to agriculture, horticulture, aquaculture,
poultry and animal husbandry. The new policy also allows inter-unit transfers.

192
International Business

These units could also be considered for taking up services as an area of activity on
merits.
8. The Deemed exports have been defined arid benefits such as duty
exemption schemes, duty drawback schemes and exemption from terminal excise
duty have been extended to deemed exports. Certain categories of exports and
exporters will be eligible to receive special import licences. These include deemed
exports, export houses, trading houses and star trading houses and manufacturers
who acquire ISO 9000 (gems) or BIS 14000 (gems) certification of quality.
9. The important role of Export Promotion Councils, export houses, trading
houses and star trading houses has been reiterated. The registration cum-
membership certificate (RCMC) issued by EPCS will continue to be the essential
requirement for any importer to avail of the benefits or concessions or to apply for
any licence under the new policy.
10. The handbook of procedures has been published on May 1. 1992. The
procedures are simple, transparent, and easy to administer. The simplified
procedure relates for both imports and exports of a number of items including
cameras, motor vehicles, air craft and helicopters and delegated considerable power
to the regional licensing authorities. Only one application form each has been
prescribed for exports and imports, as also for legal undertakings and bank
guarantees as against several set of application forms earlier. The procedure for
project exports has been clearly defined and the terms and conditions in respect of
46 items in the negative list, which might be exported without a licence have been
simplified. The multiplicity of controlling agencies have been considerably reduced.
11. The licence for import of cameras with accessories upto Rs. 60.000 by
accredited correspondents and camera and other equipment by accredited foreign
correspondents of foreign TVs and new agencies has been done away with. These
could be imported on the recommendation of the Press Information Bureau now.
12. The foreign Trade (Development and Regulation) Bill 1992 would replace
the import and Export Control Act. 1947. The new Bill relating to foreign trade
comprise the new Act, the rules and orders made there under and the new export
and import policy. Violation of the law would attract monetary penalties,
confiscation of goods and/or suspension or cancellation of licence.
13. The list of canalised items has been drastically reduced in the new EXIM
Policy for 1992-97, with only and items on import side and 10 items on the export
side, throwing certain canalising agency partially and others fully out of Job on this
count. In the import category, the major items which have been decanalised include
newsprint, natural rubber, cinematographic films and all kind of steel and pig iron.
On the import side, there would only be four canalising agencies which include
Indian oil Corporation (lOC). Minerals and Metal Trading Corporation (MMTC),
State Trading Corporation (STC) and Food Corporation of India (FCI). Earlier there
used to be about a dozen agencies for importing canal1sed items. The canalised
items on the import side include petroleum products, all types of nitrogenous,
phosphatic, potassium and complex fertilizers, drugs, edible oils, seeds and oil
seeds, fatty acid oils and cereals. On the export side sugar, iron and steel, railway
wagons, passenger coaches and locomotives, exposed cinematographic films and
193
International Business

raw jute are few of the major items which have been taken out of the canal1sed list.
The reduced canal1sed lists for exports include petroleum products, butter, gum
karaya, gum resin, mica waste and scrap, rare earth minerals, iron ore, chrome ore,
all grades of bauxite, manganese ores, iron ore concentrate and pallets, major
seeds, onions, powder milk and pure milk ghee. Subsequently, a lesser number of
agencies will be engaged in handling canalised items. The agencies which shall lose
all strength on account of canalisation include Project and Equipment Corporation
(PEC), Steel Authority of India Ltd., (SAIL), National Film Development Corporation
(NFDC), Jute Corporation of India, Indian Petro Chemicals Corporation Limited
(lPCL) and Metal Scrap Trading Corporation (MSTC).
14. The import of newsprint has been decanalised certain conditions have
been set out for the newsprint import to which the use will have to hold a
‘certificate for entitlement to Import of Newsprint’ issued by the Registrar of
Newspapers for India (RNI). The imported newsprint will be subject to Actual User
condition and will have to be used only for the publication for which the entitlement
has been issued. The quota for entitlement will be determined by RNI. The new
Policy while decanalising import of newsprint removes it from the Open General
Licensing (OGL) list and places it under the restricted items. It restricts the import
of glazed newsprint to only those periodicals which are regularly published and
which have multicolour printing requirements under the new rule no sale, loan
transfer or disposal of news print in any other manner will be permissible without
prior written consent of the RNI. An violation of the prescribed norms arid
conditions will dlsqual1fy the newspaper concerned for future import-entitlement
certificate.
22.4 SUMMARY
The prime focus of India’s import policy is to develop our export of traditional
as well non-traditional items. The import policy envisages that priority sectors
should be allowed to import their requirements. It has to satisfy many objectives.
Recently, Alexander committee has recommended certain changes introduced in the
policy, as per that more importance to development oriented, import on three
classification, control mechanism, etc. Above all, the main features of new EXIM
policy 1992-97 is duty exemption scheme.
22.5 ASSIGNMENT QUESITONS
1. What are the objectives of import policy of India?
2. Name the criteria’s to be followed in our import policy.
3. Describe the recommendations of Alexander’s Committee in view of
changes incorporation.
4. Critically examine the salient features of New EXIM Policy 1992-97.
‰

194
International Business

LESSON – 23

HIGHLIGHTS OF NEW EXIM-POLICY 1992-97


LESSON OBJECTIVE
¾ To understand the highlights of new Exim policy 1992-97.
STRUCTURE
23.1 Preamble
23.2 Exports
23.3 Imports
23.5 Licensing
23.6 Capital Goods
23.6 Limitations
23.7 Summary
23.8 Assignment Questions
23.1 PREAMBLE
i) Stable EXIM-Policy for 5 years from 1992-97, subject to policy changes
only once in a quarter.
ii) Trade to be free, subject only to a negative list of imports and exports.
iii) National campaign for quality awareness to be launched.
23.2 EXPORTS
i) Negative list of exports curtailed 7 items banned, 62 items subject to
restriction, 10 items canalised.
ii) Export of 46 items permitted with minimum regulation.
iii) EOU and EPZ schemes liberalised.
iv) Crucial role of EPCs, export houses and star trading houses recognised.
23.3 IMPORTS
i) Smallest-ever negative list of imports.
ii) Consumer goods to continue under-restrains.
iii) Import of 3 items banned. 70 items restricted, 8 items canalised.
iv) Special import facilities for hotels: tourism industry and sports bodies.
v) EPCs Scheme liberalised: two 'Windows opened for concessional duty
imports.
23.5 LICENSING
i) Negative list administered by general scheme.
ii) Actual user condition eliminated except in special cases.
23.6 CAPITAL GOODS
i) Capital goods no longer in negative list.
ii) Import of capital goods liberalised.
iii) Second-hand capital goods allowed.

195
International Business

The new policy is noteworthy but its efficiency will largely depend on actual
implementation and generation of additional exports in a substantive way.
The negative list continues to be large. Even decanalised items like fertilizers
and newsprint have been brought in its fold. Restrictive regime continues despite
open and free policy frame.
Export of many items, like rice and cotton yarn are being subjected to certain
terms and conditions.
Trading with RPA and ACU countries has not been given the attention it
deserves. The exports to Asian Clearing Union Countries will generate exchange at
official rate only.
There are several other areas which need urgent attention. These include re-
structuring of customs duty especially with regard to capital goods, removal of
export duties, allowing all export linked imports at official exchange rate. In
addition, there needs to be liberal facility for trading and re-export. While fixing
shipping freight, there are obvious policy anomalies-while freight is determined at
market rates, the shipper is allowed at 60:40 ratio and this tends to make the
exports non-competitive. The new policy is likely to boost exports of agro-products
rather than value added goods.
The success of the new reform measures largely hinges on the acceleration in
exports to the tune of 16 per cent postulated in the IMF /World Bank perspectives
and a reigning of inflation to single digit m 1992-93.
Greater transparency since case by case licensing will be replaced by a general
scheme of guidelines and flexibility as the actual user condition is being withdrawn
except in a few cases. The realisation of ambitious export growth rate in a
recessionary climate prevailing in OECD countries is daunting.
A facility of self-certification and self-declaration under advance licence
scheme is being made available to export houses, trading houses and star trading
houses. Export of specified production will be brought under the scheme later.
The advance licensing scheme announces the concept of broad banding of
exports and imports by providing licence for a class of produces instead of
individual items.
All licences under duty exemption schemes are to be made transferable.
Special Import Licence: Three categories namely deemed exports; export
houses, trading and star trading houses; manufactures with ISO 9000 and BIS
14000 certification to be made eligible for special import licence.
Special incentives will be made available to exporters for achieving
internationally acceptable quality standards. The incentives include
recognition/reward to manufacturers who have acquired internationally recognised
certification of quality standards as ISO 9000 (series). BIS 14000 (series) etc.
Upgradation of laboratories/trading houses, role of export houses/trading
houses/star trading houses.
196
International Business

The catalytical role of Export Promotion Councils, Export Houses, Trading


Houses and Star Trading Houses has been recognised.
23.6 LIMITATIONS
While the new ex1m policy has several bold initiatives, it is not sufficient to
ensure export dynamism. There is room for both exports and imports to grow in a
developing country like India.
The first stage of latest Ex1m Policy related to abolition of controls and
licensing and simplification of procedures. The second stage involved making the
rupee partially convertible. The third stage related to the simplification of the Exim
Policy and the fourth stage pertains to tariff reforms. The trade policy is not
complete without tariff reforms.
23.7 SUMMARY
The stable Exim policy is subject to changes only once in a quarter. Various
aspects, with regard to exports, imports, licensing, capital goods were made. The
major limitation of the policy is not sufficient to ensure export dynamism.
23.8 ASSIGNMENT QUESTIONS
1. Examine the main points stated in new EXIM policy 1992-97 with regard to
exports and impost.
2. What is licensing?
3. What are capital goods?
4. What are the limitations of new EXIM policy 1992-97?
‰

197
International Business

LESSON – 24

CANALISATION OF EXPORTS AND IMPORTS


LESSON OBJECTIVES
¾ To identify the canalization of exports and imports.
STRUCTURE
24.1 Preamble
24.2 Canalised Exports and Imports Through MMTC (Rs. In Crores)
24.3 Import of Canalised Items
24.4 Summary
24.5 Assignment Questions
24.1 PREAMBLE
Exports and Imports take place through the Government agencies like STC
and MMTC. During 1989-90 canalised exports were Rs.135 crores and during the
same year canalised imports were Rs. 1045 crores though STC.
The following Table shows the canalised exports and imports during 1988-89
to 1990-91.
24.2 CANALISED EXPORTS AND IMPORTS THROUGH MMTC (RS. IN CRORES)
1988-89 1989-90 1990-91
Canalised Exports 477.88 623.1 629.7
Canalised Imports 2930.4 3814.9 4069.8
Source: Ministry of Commerce, Department of Commerce, Government of India, Annual Report
1991-92.
Exports
Export of Canalised items are given below, Exports of iron ore, Manganese ore
and Chrome ore are canalised thorough MMTC.
(a) Iron Ore
MMTC is the main exporter of iron ore from India. During 1990-91, the
corporation exported 14-23 million tones worth Rs. 525 crores.
(b) Manganese Ore
During 1990 and 1991 MMTC has exported manganese worth of Rs.19.37
crores and Rs. 29.50 crores respectively.
(c) Chrome Ore
In 1990-91 about 2.28 lakh tones of chrome ore worth Rs. 43 crores was
exported as against 2.921akh tones worth Rs. 67.3 crores.
(d) Coal
Coal exports during 1990-91 were only 0.881akh tones valued at Rs.10.80
crores as against 1.46lakh tones valued at Rs. 14.33 crores during 1989-90.
(e) Bauxite
Bauxite exports during 1990-91 were 2.851akh tones valued at Rs. 9 crores as
against 3.43lakh tones valued at Rs. 6.5 crores in 1989-90.

198
International Business

Imports
MMTCis vested with the responsibility of importing non-Ferrous metals,
industrial raw materials, steel, and Fertilizer raw materials. Intermediates and
finished fertilizers.
24.3 IMPORT OF CANALLSED ITEMS
(a) The total turnover of canalised non-ferrous metals during 1991 was
Rs. 290.25 crores as compared to Rs. 490.18 crores.
(b) Industria1 Raw materials: 1be turnover of canalised industrial raw material
during 1990-91 was Rs. 86.60 crores.
(c) Steel: MMTC imported steel items worth Rs. 508.40 crores during 1990-91
as compared to Rs. 724.50 crores during 1989-90.
(d) Fertil1zer Raw Materials, intermediates and finished fertilizers: during
1991, MMTC has imported fertil1zers worth Rs. 4006.96 crores as against
Rs. 2195.19 crores during 1990.
24.4 SUMMARY
Exports and Imports made through by STC and MMTC. As per Government
documents, there were Rs.629.7 crores (1990-91) canalized exports and Rs.4,069.8
crores (1990-91) canalized imports were made. The Government have totaled
turnover of canalized metals during 1991 was Rs.290.25 crores as compared to
Rs.400.18 corres. Like wise, industrial raw materials, steel and fertilizer raw
materials have also increased to sizeable amount.
24.5 ASSIGNMENT QUESTIONS
1. Discuss the canalisation of imports and exports.
‰

199
International Business

KEY WORDS

1. International trade

2. Terms of Trade

3. Balance of Trade (BOT)

4. Balance of Payments (BOP)

5. Export Marketing

6. Foreign Exchange Control

7. World Bank, ADB, IQ

8. Export Finance and Credit

9. International Marketing

10. Market Research

11. Licensing Procedure

12. Bill of Lading

13. Canalisation

14. Import Control

15. Import Policy

200