Export Marketing 9789350431658, 9789350245248

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EXPORT MARKETING

Dr. W. K.Acharya

Jain KhushpatS.

(Heod. Department of Commerce) (Sydenham College)

(Lecturer. Department of Commerce) (Sydenham College)

Ashok Vanjani

Dr. ShaukatAIi

(Head. Department of Commerce) (M.M.K. College)

(Head. Department of Commerce) (Akbar Peerbhoy College)

Dr. Deelip Palsapure (Lecturer. Department of Commerce) (K. J. Somaiya College)

Hm

I t

Gflimalaya CJlublishingGflouse IIUIISAI. NEW DELHI. NAGPUR • BANGALORE .1IYllERABAIl. CHENNAI. PUNE. LIICKNCM

@

Atn'HORS No part of this book shall be reproduced, reprinted or translated for any purpose whatsoever without pennission of the author and publisher in writing.

ISBN Revised Edition

Published by

: 978-93-5024-524-8 2010

Mrs. Meena Pandey for HIMAlAYA PUBLISHING HOUSE PVT. LTD. "Ramdoot", Dr. Bhalerao Marg, Girgaon, Mumbai· 400 004. Phones: 2386 01 7012386 38 63, Fax: 022-2387 71 78 Email: [email protected], Website: www.bimpub.com

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Sachin Printer, 2nd, TK Industrial Estate, Sewari, Mumbai.

l.

Introduction to Export Marketing

1-12.

2.

India's Foreign Trade

13-25.

3.

International Marketing

26-50.

4.

Trading Blocs

51-6l.

5.

Preliminaries for Starting Export Business

62-89.

6.

Export Promotion Organisations

90-117.

7.

Foreign Trade Policy and its Implications

118-13l.

8.

Export Costing. and Pricing

132-154.

9.

Export Finance

155-172.

10.

Export Financial Institutions

173-182.

ll.

Methods of Payment

183-195.

12.

Export Procedure

196-217.

13.

Export Documentation

218-233.

14.

Export Assistance and Incentives

234-250.

Abbreviations

251-254.

Annexure

255-262.

"This page is Intentionally Left Blank"

Introduction to Export Marketing »

Introduction.

»

Export Marketing:Definitions. (Mar.2004, Oct.2004, 2005) Features. (Mar.2004, Oct.2004) Functions.

»

Special Problems of Export Marketing. (Mar.2006)

»

Importance of Exports :From Nation's Viewpoint. (Mar.2006) From Business Viewpoint.

»

Qualities of a Successful Export Manager. (Mar.2006)

»

Objective Questions.

»

Question Bank.

Export Marketing._ _ __

2. CIa

Introduction

J0

The slogan 'Export or Perish' coined by Shri Jawaharlal Nehru in the early sixties finds its validity in the present context as well when not only underdeveloped and developing countries but also advanced countries of the world have realised the importance of export trade. Export marketing is the process of exchanging goods and services between the residents of one country to the residents of another country. CIa

Definitions of Export Marketing

9!)

'Export marketing includes the management of marketing activities for products, which cross the national boundaries of a country.' • B. S. Rathor 'Export marketing is the performance of business activities that direct the flow of company's goods and services to the consumers or users in more than one nation.' • Hess and Cateora

•

CIa

Features of Export Marketing

9!)

The main features of export marketing are as under :(a) Lengthy Procedure :- Export procedure is subject to government rules and regulation. Therefore, it is a lengthy and complicated process. It consists of many stages, viz., ~ Discovery of a foreign market(s). ~ Procuring or manufacturing goods. ~ Costing and pricing. ~ Packing and packaging. ~ Registration formalities. ~ Shipment of goods. ~ Realisation of sales proceeds and incentives. (b) Large Scale Operations :- Price is an important factor that d.etermines the success of an exporter in the highly competitive international market. Large-scale operations, full utilisation of installed capacity and transactions in bulk reduce overall cost of production and thereby price of the product.

_ _ _ _ _ Introduction to Export Marketing_ _ _ _ _ _ __

3.

(c) Dominances of MNCslTNCs f,om Developed Countries :-

The international trade is dommated by MNCs and TNCs originating from developed countries especially from USA, Japan and European countries. These companies have huge financial and physical resources Jnd operate throughout the world. (d) Trade Barriers :- Trade barriers are the artificial restrictions on the free movement of goods among countries of the world. These barriers are of two types, tariff and non-tariff. Tariff barriers are in the form of taxes and customs duties. Non-tariff barriers are in the form of quotas and licences. (e) Trading Blocs :- Trading blocs are the associations of countries situated in a particular region whereby they come to a common understanding regarding rules and regulations to be followed while exporting and importing goods among them. For example, the European Union (EU), North American Free Trade Association (NAFTA). (0 Importance of Advanced Technology :- Technology plays an

important role in building competitive strength in the highly competitive international market. MNCs from countries like USA, Japan and Germany dominate the world trade due to continuous research, development, innovations and inventions. (g) Foreign Exchange Regulations :- Different countries have different currencies and conversion rates. Therefore, each country has a separate set of rules for collection and payment of foreign currencies. For example, In India, all foreign currency transactions are regulated by the Foreign Exchange Management Act, 1999 (FEMA). (h) Three-faced Competition :- International market is highly competitive. Exporters face stiff competition from three angles: ~ Exporters from his own country. ~ Exporters from the other countries. ~ Local suppliers in the importing country. (i) International Organisations

:- International trade is subject to the rules laid down by th...3 World Trade

Export Marketing._ _ __

4.

Organisation (WTO) and the United Nations Conference on Trade and Development (UNCTAD). The objective of these organisations is to promote world trade and help underdeveloped countries to built their export potentials. Gil

Functions of Export Marketing

SIO

Export marketing is the process of getting an order from a foreign country, its successful execution and realisation of sales proceeds. This process includes various functions, viz., (a) Export Marketing Research :- The needs and requirements of individuals differ from region to region and more so from country to country. Therefore, it is necessary for an exporter to understand the needs and requirements of diverse segments of consumers through proper marketing research technique and try to satisfy them effectively. (b) Research and Development :~ Technology plays an important role in building competitive strength. Countries, like USA, Japan and Germany dominate the world trade due to the use of advanced technology. Technology changes rapidly and therefore, every exporter must upgrade himself through continuous research and development. (c) Export Financing :- Exporters require finance at both preshipment as well as at post-shipment stage. Pre-shipment finance, also referred to as packing credit, is required prior to the shipment of goods for the execution of export order while post-shipment finance is required after the shipment of goods for meeting working capital requirements.

(d) Export Production :- Price is an important factor that determines the success of an exporter in the highly competitive international market. Large-scale operations, full utilisation of installed capacity and transactions in bulk leads to economies of scale and reduce overall cost of production and thereby price of the product. (e) Export Packaging :- Packaging plays an important role in the international market. Attractive and durable packing not only protects the product but also acts as a silent salesman. Certain countries have strict packing standards.

_ _ _ _ _ Introduction to Export Marketing._ _ _ _ _ _ __

5.

An exporter can avail assistance from the Indian Institute of Packaging (IIP) in this regard.

(0 Export Pricing :- While quoting a price to the foreign buyer, it should be ensured that the price quoted is reasonable and final as it is the buyers' market. Other factors such as price charged by the competitors, incentives offered by the government, elasticity of demand for the product, etc., should also be taken into consideration. (g) Export Procedure :- Export procedure is very lengthy and complicated as it consists of many procedural formalities such as registration formalities, customs formalities and • licensing formalities. An exporter is expected to be well aware of such formalities else assistance of the Clearing and Forwarding agents (C&F agents) should be taken. (h) Export Incentives and Assistance :- The Government gives a number of incentives to the Indian exporters such as, duty drawback (DBK) , exemption from excise, market development assistance, etc. In order to avail these incentives, an exporter is required to register with Export Promotion Council (EPC) or Commodity Board (CB). (i) Foreign Trade Policy :- The foreign trade of India is guided

by the provisions of the Foreign Trade Policy announced by the government and is regulated by the Foreign Trade (Development and Regulation) Act. It contains various policy decisions especially export promotion measures and policies and procedures related thereto. all

Special Problems of Export Marketing

In

Export marketing is a very complex and time-consuming process as it is subject to rules and regulations of both exporting as well as importing country. At the same time, there are other problems such as long distance, currency fluctuations and high degree of competition. (a) Long Distance :- International trade is spread over the world and therefore, goods are to be transported over a considerable distance. During transportation goods are exposed to risks and uncertainties of transportation and

6.

Ex~Afarketing.~

______

perils of the sea. Again lengthy and time-consuming customs formalities act as constraint. A suitable marine insurance policy can be taken to insure risk during transportation. (b) High Risks and Uncertainties :- International trade is subject to political as well as commercial risks. Political risks arise due to the political actions of the government(s). For exampJe, war and internal aggression. Commercial risks arise due to insolvency of buyer or buyer's failure to accept goods. Export Credit and Guarantee Corporation of India (ECGC) issues a variety of policies to insure such risks. (c) Customs Formalities :- Customs formal~ties are different in different countries. Again, these formalities are very lengthy, time consuming and complicated. Sometimes, these formalities act as barriers to the free flow of trade between countries of the world. Clearing & Forwarding (C&F) agents provide all types of trade related services in return for commission to exporters as well as importers. (d) Trade Barriers :- Trade barriers are the artificial restrictions on the free flow of goods from one country to other. These barriers are of two types, viz., tariff and nontariff. Tariff barriers are in the form of taxes and duties. Non-tariff barriers are in the form of quotas and licences. World Trade Organisation (WTO) is making efforts to . eliminate these barriers and promote free flow of trade. (e) Three-faced Competition :- International market is highly competitive. An exporter faces stiff competition from three angles :~ Exporters from his own country. ~ Exporters from other countries. ~ Local suppliers in importing country. International competition can be sustained by upgrading quality, reducing cost and innovations and inventions.

W Payment Difficulties :- Different countries have diffe:"ent currencies and conversion rates. These rates are subject to

_____ Introd'lction to Export Marketing.~_ _ _ _ _ __

7.

fluctuations. Thus, an exporter may suffer a loss if there is a change in the exchange rate after entering into a contract with a foreign buyer. Losses on account of fluctuations in the exchange rates can be eliminated by entering into forward contracts. (g) Documentation Formalities ;- There are a number of documents to be filed with various authorities· while exporting goods. For example, in India, an exporter is required to prepare and file as many as 25 documents of which 16 are commercial and 9 are regulatory. Aligned Documentation System (ADS) has simplified the export documentation procedure to a great extent. (h) Diverse Languages, Customs and Traditions :- Languages, customs and traditions are very sensitive issues and must be taken into consideration while exporting goods to foreign countries.

An exporter should try to get first hand information about such issues before exporting goods. (18.

Export as an Engine of Economic Growth

91)

In recent years more and more states have shifted to a strategy of export-led growth, which is the strategy used by the Newly Industrialized Countries (NICs). This strategy seeks to develop industries that can compete in specific niches in the world economy. The chosen industries may receive special treatment such as subsidies, tax breaks, and protected access to local markets. Exports from these industries generate hard currency and create a favourable trade balance. The state can then spend part of its money on imports of commodities produced more cheaply elsewhere. Therefore, exports have been rightly treated as an engine of growth. The need and importance of export marketing froin a nation's point of view can be highlighted as under ;(a) Balance of Payments Situation :- A country's external economic strength depends upon its balance of payments. When the outflow of foreign currencies exceeds the inflow,

8.

ExportA1arketing.~

______

a country suffers from unfavourable balance of payments. Such imbalance can be solved only through exports. ·(b) Foreign Exchange Reserves :- In order to import capital goods and raw materials and also to meet deficient supply of consumer goods in the domestic market and for debt servicing, a country needs adequate reserves of foreign exchange which can be earned through exports. (c) Financing Development Plans :- Developing countries need

finance for executing their development plans. They need to import technical know-how, machineries, raw materials, etc., from foreign countries. All these require foreign exchange, which can be earned only through exports. (d) Optimum Utilisation of Resources :- A country can make optimum utilisation of its resources by promoting exports. If the resources remain unutilised or underutilised due to the want of demand in the domestic market, the same can be utilised by promoting exports of surplus production. (e) Employment Opportunities :- Development of exports brings about multiple increase in employment opportunities. It not only increases employment in the export sector but also in other related sectors such as banking, insurance, advertising, transportation, etc.

W Increase in National and Per-capita Income :- National income is defined as the money value of goods and services produced in an economy in one accounting year. Increased exports increase production of goods. This leads to increase in national income and per capita income of the country. (g) International Peace :- In the age of nuclear weapons, there is a greater need of promoting dialogues between countries of the world. International trade promotes exchange of ideas between nations of the world and thereby helps promoting international peace and friendly relations. (h) Research and Development :- International market is highly competitive. In order to sustain international competition, a local firm is compelled to undertake research and development. This leads to development of technology in backward and developing countries.

_ _ _ _ _ Introduction to Export Marketing _ _ _ _ _ _ __ (iQ.

Importance of Exports for a Business Unit

9.

SlO

The factors that motivate a firm to go international may be classified as :(a) Pull Factors :- Pull factors are proactive reasons, which motivate firms to internationalise. For example, profit advantage, greater market share and spreading risks. (b) Push Factors :- Push factors are reactive reasons, which make it compulsory for domestic firms to internationalise. For example, government rules and regulations and declining business in domestic market. Let us analyse some of these factors in detail :(a) Profit Advantage :- An important incentive for international business is profit advantage. Although, international business is less profitable due to high competition it certainly increases the overall profitability due to optimum utilisation of resources and economies of scale. (b) Goodwill and Reputation :- An organisation operating globally acquires reputation and prestige in the domestic market and is recognised as an Export Oriented Unit (EOU). Such units get a special package of incentives from the government. (c) Spreading Risks :- Trade cycles are global phenomenon. A domestic firm can spread its risks to different markets by exporting goods to different countries of the world. Thus, a depression in one market can be set off by prosperity in some other markets. (d) Export Obligation :- Under the Export Promotion Capital Goods (EPCG) scheme, Indian manufacturers are allowed to import duty free capital goods subject to export obligation, i.e., fulfilment of exports of certain value. Thus, only exporters have access to this facility. (e) Improves Organisational Efficiency :- In order tb face intense competition in the world market, a domestic firm has to undertake continuous research and development and improve organisational efficiency. This increases productivity and profitably.

10. ________________________

ExportAfarketing~

_______

(D Financial Benefits and Incentives :- The Government of India gives various incentives to exporters such as Duty Drawback (DBK), exemption from excise, octroi duty, etc. In order to avail the benefits of such incentives, local firms may be motivated to internationalise. (g) Optimum Utilisation of Installed Capacity :- If a firm's installed capacity remains unutilised or underutilised for want of demand in the domestic market, it can be utilised by exporting surplus production. This makes firm more competitive by bringing in economies of scale. (h) Government Policies and Regulations :- Sometimes, government policies and regulations also make it compulsory for firms to internationalise. Excessive government control and discouraging industrial policy for a specific sector may compel domestic firms to internationalise. GIl

Essential Qualities for Export Manager

a;)

In order to enable an export manager to perform his functions efficiently, he is expected to possess certain qualities and qualifications : (a) Educational Qualification :- An export manager should have a good educational background, which should be a good blend of theory as well practice. (b) Professional Qualifications :- No professional qualifications have been prescribed for an export manager. But a person having undergone practical training courses in EXIM management should be preferred. (c) Spet:ialised Knowledge :- An export manager should have specialised knowledge in his own field about selection of export market and product, understanding government policies, export procedures and formalities. (d) Managerial Abilities :- An export manager should also have a knowledge of managerial functions, viz., planning, ability to take quick decisions and prompt actions and ahi~l':,y to manage and co-ordinate export operations. (e) Essential Qualities :~ Orderliness, i.e., doing things neatly and methodically.

_____ Introduction to ~port M8rketing.~_ _ _ _ _ __ 11. ~ ~ ~ ~ ~

Courtesy, i.e., being polite and co-operative with others. Adaptability, i.e., an ability to adjust to the changing environment. Sound judgment, i.e., taking correct decisions at the correct time. Self-confidence, i.e., firm faith in one's actions. Leadership, i.e., an ability to motivate and direct people in the right direction. all

Objective Questions so

Q.1 Answer the following questions in brief: (1) Explain the significance of the slogan 'Export or Perish'. Ans:- The slogan 'Export or Perish' was coined by the Former Indian Prime Minister Pandit Jawaharlal Nehru in mid-sixties when India .was experiencing a severe foreign exchange crisis. The reason being excessive imports during the period of First and Second Five Year plans with meagre exports of primary commodities. (2) Enumerate the special problems of export marketing. Ans:- The special problems of export marketing are: (a) Transportation risk and pe rils of sea. (b) Political and commercial risks. (c) Lengthy and complicated customs formalities. (d) Presence of trade barriers. (3) Define Exports. Ans :(a) 'Export means taking out of India, any goods by land, sea or air.' -Foreign Trade (Development and Regulations) Act, 1992. (b) 'Any goods, which are to be taken out of India to place outside India.' - Customs Act, 1962. (4) Define Export Marketing. Ans :(a) 'Export marketing includes the management of marketing activities for products, which cross the national boundaries of a country.' - B. S. Rathod (b) 'Export marketing is the performance of business activities that direct the flow of company's goods an d services to the consumers or users in more than one nation.' - Hess and Cateora (5) State four requirements of an export manager.

(Mar.20Q4)

Export Marketing._ _ _ __

12.

Ans :- An export manager should be : (a) Foresighted in order to forecast future. (b) Visionary enough to perce ive trends in international market. (c) A good planner and capable leader. (d) Should have marketing abilities. (6) State any four advantages of export trade for a less developed

(Mar.2005) country. Ans:- Four advantages of exports for a less developed coun try are :(a) Increases national income and per capita income of a country. (b) Helps a country to solve balance of payments crisis. (c) Provides foreign exchange for financing development plans. (d) Creates employment opportunities. Q.2 State with reasons, true or false :(1) No country in the world is independent and self-sufficient. Ans :- TRUE - Natural resources, quantity and quality of human resources and level of technology differ from country to country. Hence, it is not possible for a country to produce all its requirements on its own at econom ical costs. Therefore, all economies of the world are dependent on each other. (2) Import substitution saves foreign exchange. (Mar.2006) Ans :- TRUE - Import substitution means producing a domestic substitute for existing imported commodity. This saves valuable foreign exchange which ot herwise could have been used for imports. (3) Export marketing is dominated by MNCs and developed (Mar.2004) countries. Ans :- TRUE :- The international trade is dominated by MNCs and TNCs originating from developed countries especially from USA, Japan and European countries. These companies have huge financial and physical resources and operate throughout the world. 01

Question Bank

.9'.)

(1) Define export marketing. What are its features? (Mar.2004,Oct.2004) (2) What are the functions of export marketing? (3) Discuss the special problems of export marketing. (Mar.2006) (4) 'Exports act as an engine of economic growth.' Explain. (Mar.2006) (5) How is export beneficial to less developed countries ? (6) Wh"l.t factors compel a domestic firm to internationalise? (7) What are the qualities of a successful export manager? (Mar.2006)

India's Export Trade ~

Introduction.

~

India's Export Trade :In Terms of Value. (Mar.2005) In Terms of Composition. In Terms of Direction.

~

Reasons for the Poor Growth of India's Exports. (Oct.2005)

~

~

Measures for Improving India's Share in World Exports. (Mar.2004, 2005, Oct.2004) Objective Questions.

~

Question Bank.

14. ________________________

al

ExportMarketing.~

______

Introduction so

Composition of foreign trade of any country means the composition of exports and imports of that country. An examination of the composition of foreign trade of a country enables us to analyse the progress of that country and the rate at which such economy is growing. For example, if a country imports foodgrains and raw materials but exports finished goods, machinery and capital equipment, it can be concluded that it has reached a high level of economic development. On the other hand, if it exports primary commodities like jute, tea, raw cotton, sugar, etc., but imports finished goods, capital equipments and machineries, etc., it can be concluded that the country is an underdeveloped one. al

Value ofIndia's Export so

The value of exports presented in terms of rupees cannot be used for comparison over long periods of time, as thare has been continuous depreciation of the value of the rupee. Therefore, the value of India's export has been presented in terms of dollars. Value of India's Exports (US $ million) Exports % change Year -1.50 1991-92 17865 1992-93 18537 3.80 1993-94 22238 20.00 1994-95 26330 18.40 1995-96 31797 20.80 1996-97 33470 5.30 1997-98 35006 4.60 -5.10 1998-99 33218 1999-2000 36822 10.80 2000-2001 44560 21.00 2001-2002 -1.60 43827 2002-2003 52719 20.30 . 2003-2004 63843 21.10 Source: Government ofIndia, Economic Survey, 2004 -2005.

India's Export Trade _ _ _ _ _ _ _ _ _ _ __ 15.

1991-92 :- In the year 1991-92, the Government of India adhered to strict import restriction policy. As a result both imports as well as exports registered a negative growth. During this period, India's export registered a negative growth of 1.50%. 1992-93 :- However, this sharp cut back in imports had a decelerating effect on industrial growth and to reverse trend, massive import liberalisation measures were undertaken in the year 1992-93. The year registered a marginal improvement of 3.80% in the exports over the preceding year. 1993-96:- The next three years, i.e., from 1993-94 to 1995-96, saw a strong resurgence in export earnings. The rate of growth in exports was as high as 20.0% in 1993-94, 18.4% in 1994-95 and 20.8% in 1995-96. This resulted in considerable fall in the trade deficit. 1996-99 :- The growth of exports during 1996-99 turned out to be rather slow due to several reasons. The recessionary tendencies across the world severely affected the demand side of India's exports. The slowdown and contraction of the world trade in 1997-98 resulted in the emergence of protectionist sentiments. Non-trade barriers imposed by the developed countries on Indian exports added to uncertainty in trade and to ma~ked disruption of India's exports. The Indian exports registered a negative growth of 5.1% in 1998-99. 1999-2002 :- However, due to buoyant global demand coupled with improvements in the world commodity prices in 2000 and the revival of world trade following the Asian crisis, there was a sharp turnaround in exports which registered a growth of 10.8% in 1999-2000 and 21.0% in 2000-2001. As reported by the Economic Survey, various export facilitating measures also contributed to the strengthening of exports. The exchange rate of the rupee remained relatively stable in real effective terms during 2000-2001 suggesting a broad retention of the competitiveness of India's exports in the global markets. The last year of th.:l Ninth Plan, 2001-2002 was bad for exports as they registerea a decline of 1.6% due to wakening global demand, poor supply response of exports due to various domestic impediments and appreciation of Indian rupee.

Export Marketing._ _ __

16.

2002-2004 .- During 2002-2003 and 2003-2004, exports registered impressive increases of 20.3% and 21.1% respectively. According to the Economic Survey, 2004-2005, both external and domestic factors have contributed to the satisfactory performance. Improved global growth and recovery in world market aided the strengthening of India exports. On the other hand, firming up of domestic economic . activity, especially in the manufacturing sector, provided a supporting base for strong sector-specific exports. GI1

Composition of India's Exports ro

Before the advent of planning, the main exports from India were primary goods like jute, tea, cotton, hides and skins, manganese ore, mica, etc., while manufactured goods constituted the bulk of imports. During the planning period, the process of industrialisation and economic development has induced a number of changes in the composition of India's foreign trade. This would be clear from the discussion below. The post-liberalisation period has shown a considerable increase in India's imports as well as exports. The Government of India initiated a policy of trade liberalisation since the year 1991, opening up the economy to foreign MNCs and integrating the Indian economy with the world economy. This has resulted in a considerable increase in the exports from India both in traditional as well as in nontraditional items. India's exports can be broadly classified into two categories :(a) Traditional Exports :- Traditional items of exports from India include coffee, tea, oil cakes, tobacco, cashew kernel, cotton yarn, spices, jute, etc. (b) Non-traditional Exports :- Non-traditional items of exports from India include iron ore, sugar, molasses, fish and fish preparations, ready-made garments, leather, gems and jewellery, chemicals and allied products, machinery, etc. The following table shows the exports of aggregate traditional and non-traditional items in post-liberalisation period from India.

IndmsExporl1rade ______________________ 17.

Aggregate Traditional and Non -traditional Exports of India (US $ million) 1990-91 % 2003-04 % Commodities 19.4 12.4 Agriculture and Allied 3521 7888 Products Ores and Minerals 834 4.6 1932 3.0 (Excluding Coal) 13229 78.0 Manufactured Goods 73.0 49671 2.9 Fuel and Lubricant 528 3734 6.0 618 0.6 Others 31 0.1 Grand Total 18143 100.0 63843 100.0 Source: Government ofIndia, Economic Survey, 20042005. (a) Agriculture and Allied Products :- The share of agricultural items in the total exports from India has -declined consistently in the post-liberalisation period. Agricultural and allied items constituted 19.4% of the total exports from India in the year 1990-91. This proportion came down to about 12.4% in the year 2003-2004. The major agricultural items of exports from India are: ).>- Fish and fish preparations. ).>- Rice. ).>- Cashew kernel. ).>- Tea and mate. These items collectively constituted about 40% of the total exports of agriculture and allied items in the year 2003-2004. (b) Ores and minerals :- Ores and minerals constitute a meagre part of the total exports earning of India. In the year 1990-91, ores and minerals constituted only 4.6% of the total exports from India, which came down to just 3.0% in the year 2003-2004. Iron ire is the major constituent of this category, which individually contributes about 60% of the total exports of this category. (c) Manufactured Goods :- The proportion of manufactured

items in the total exports of India has increased from 73% in the year 1990-91 to 78% in the year 2003-2004. The major items in this category are: ).>- EnginE(ering goods. ).>- Gems and jewellery. ).>- Chemical products.

18. ________________________ Export Marketing.~______ ~ ~

Readymade garments. Cotton yarn, fabrics, made-ups, etc.

Of these, engineering goods and gems and jewellery together constitute more than 50% of the total exports of this category. (d) Fuels and Lubricants :- There has been considerable

increase in the exports of fuels and lubricants in the total exports of the country both in terms of percentage as well as value. The share of fuels and lubricants has doubled from just less than 3% of the total exports in the year 1990-91 to almost 6% in the year 2003-2004. (e) Others:- The other items of exports from India include raw cotton, rice, meat and meat preparations, fruits and vegetables, pulses, miscellaneous processed foods, mica, textile fabrics and manufactures, ores and minerals, fuels and lubricants, coir yarn and manufactures, etc. (Ill

Direction of India's Exports

JI'.)

In the pre-independence period, the direction of India's foreign trade was determined by the colonial relations between India and Britain. In other words, it was Britain that decided from which countries India could import its requirements and to which countries India could export its products. Naturally, the major part of India's trade was restricted to Britain or its colonies or allies. However in the post-independence, India strengthened its political and diplomatic relations with many other countries and also made a headway in economic relations with them. The diversification in trade relations has reduced the vulnerability of the economy to outside political pressure. In order to study the direction of India's exports, India's trading partners have been categorised into five major groups, viz., Organisation of Economic Cooperation and Development (OECD), Organisation of the Petroleum Exporting Countries (OPEC), Eastern Europe, Developing nations and others.

_ _ _ _ IndissExportTrsde _ _ _ _ _ _ _ _ _ _ _ 19.

Direction of India's Export (in%)

1990-91 53.5

2003-2004 46.4

Economic Organisation of Cooperation & Development (OEC D) Organisation of the Petroleum 5.6 15.0 Exporting Countries (OPEC) Eastern Europe 17.9 1.8 Developing nations* 16.8 32.6 6.2 4.2 Others 100.0 Total 100.0 *Excluding OPEC members. Source: Government ofIndia, Economic Survey, 2004-2005. (a) Organisation of Economic Cooperation and Development (OECD) :- OECD countries constitute European Union (Belgium, France, Germany, UK), USA, Canada, Japan and Australia. As it is clear from the above table that the OECD group accounts for a major portion of India's exports, a little more than 50% of India's exports in the year 1990-91. This proportion has gradually come down to 46% in the year 2003-2004. Of the OECD countries, the European Union accounts for the highest imports from India followed by the USA. (b) Organisation of the Petroleum Exporting Countries (OPEC) :- OPEC countries constitute UAE, Saudi Arabia, Iran and Kuwait. The share of OPEC countries in India's total foreign exchange earnings has always remained low. However, it showed a positive sign of increase during the last decade. The share of OPEC countries has tripled during the last decade from just 5.6% of the total exports of India in the year 1990-91 to 15% in the year 2003-2004. (c) East Europe :- East European countries, especially USSR,

used to be a major trading partner of India. However, due to marked political upheaval in the region and the disintegration of the USSR, the exports to countries in these areas have received a severe blow. In 2003-2004 the share of Eastern Europe countries in the total exports of India had slumped to a mere 1.8% of the total exports. (d) Developing Nations :- Developing nations of Africa, Asia and Latin America accounted for more than one-third of

20. ________________________

Export Marketing.________

India's export earnings in the year 2003-2004. Most important in this group have been the countries of Asia. In fact, exports to Asian countries accounted for 27.6% of India's total export earnings in 2003-2004. - all

Reasons for Poor Share of India's Exports

In

India's share in the world trade is as meagre as about 0.6%. There are several reasons for the poor performance of India's export. Some of these reasons have been discussed below: (a) High Costs :- One of the major constraints in the development of India's exports is the high cost of production. This makes the position of Indian exporters uncompetitive in the world market. This is due to several reasons :~ Higher prices of importable and non-traded inputs. ~ Time and cost over-runs due to managerial inefficiency. ~ Lower levels of productivity. ~ Higher interest rates. ~ Higher freight and port charges. ~ Supply bottlenecks. (b) Poor Quality Image :- The poor quality image is the another hurdle in the development of India's exports. The Tandon Committee Report has quoted the following remark by one of India's representatives abroad, "We have a great scope for our exports; 1 can sell anything; if 1 am told to sell mud, 1 can; but 1 know it will be full of stone~ This is indeed a reflection our quality image. Japan, Korea and now China, on the other hand, are frequently quoted abroad as examples of dependable quality. Despite the measures taken under the Exports (Quality Control and Inspection) Act and other laws, our exports continue to suffer because of the quality problem. (c) Unreliability :- Besides quality, Indian exporters have been regarded as unreliable on many issues. A very important black mark on the Indian exporters is reneging. Reneging is a term used in the USA to refer to going back on a contract and refusing to fulfil it on its original terms. The Tandon Committee describes the major problems arising from reneging as - "due to delay in the delivery the importer may not be able to fulfil his commitments

..

Indias E:l(port Trade _ _ _ _ _ _ _ _ _ _ _ _ 21.

towards his buyer while the exporter may plead, sometimes truthfully and sometimes not, shortage ofraw materials, power and strikes". Indian exporters have also failed to provide prompt after sales service. (d) Supply Problems :- A serious drawback of Indian export sector is its inability to provide continuous and smooth supply of goods in adequate quantities. The problem arises due to the residual approach to exports rather than conscious effort of producing for export. The tendency of exporting what we produce rather than producing for export still "ontinues to characterise the export behaviour. Due to this, Indian exporters have failed to provide timely supply of goods to foreign buyers. (e) Faceless Presence :- Although India is an important supplier of several commodities in foreign markets, her presence in these markets is faceless. The consumers in foreign markets do not know that the commodities they are consuming are Indian. Major export items of India like seafood, leather goods, spices, etc., have. in many cases, a faceless presence in foreign market. In several cases the Indian exports are sold in the foreign markets in the same condition as they are exported but under foreign brand names. (f) Infrastructural Bottlenecks :- Infrastructural shortages

such as energy shortages, inadequate and unreliable transport and communication facilities hinder the growth of exports. Power shortages and breakdowns disrupt production schedules, increase cost and adversely affect· timely shipments. Exports also suffer for want of efficient and economic communication facilities. At the same time, the administrative lethargy continues to plague the Indian scenario causing heavy damage to export development. (g) Structural Weakness :- A major handicap of the Indian export sector is its structural weakness due to the absence of a systems approach to the process of management, marketing, information, planning and decision-making. It is important to note, ''India's exports do not pick up in periods of boom in the world economy to the same extent as the exports ofmany other countries. On the other hand, India is quick to pick up sluggishness in response to

22. ________________________

Export Marketing.~_ __

sluggishness in world market. This asymmetry is a reflection of structural weakness of the India ~ export sector as a whole'~ (h) Uncertainties, Procedural Complexities and Institutional Rigidities :- One of the defects of our trade policy regime has been the uncertainty about future policies, incentive schemes, etc. The Alexander Committee has recommended that in order to provide a suitable framework for production and export planning, the trade policy should be stable over a fairly longer period of time. Economic policy changes, often apparent than real, when a new government comes to power. The Union Commerce Minister has admitted that inter-ministerial wrangling and resultant inordinate delay in taking crucial decisions are hampering export efforts. (i) Inadequacy of Trade Information System :- An efficient

Trade Information System is essential for success in the dynamic global market. But our marketing infrastructure as well as marketing techniques are neither effective nor efficient. We do not have any machinery to keep prompt track of business information overseas, as is done by JETRO in Japan, KOTRA in Korea, CETDC in Hong Kong and STDB in Singapore. India has, no doubt, a plethora of organisations, governmental, semi-governmental and also non-governmental, engaged in this task, but we do not have an easy access to market intelligence and information.

ae. Measures for Improving India's Share in World Exports a>

I

The necessary measure for improving India's share in the world trade should be initiated both at the Government as well as at the exporters' level. Policy Measures at the Government Level The two major objectives of the Foreign Trade Policy 20042009 are:(a) To double our percentage share of global merchandise trade within the next five years; (b) To act as an effective instrument of economic growth by giving a thrust to employment generation.

Indias Export Trade _ _ _ _ _ _ _ _ _ _ _ _ 23.

The target is to be achieve through a series of strategies declared in the policy: (a) Unshackling of Controls :- The government proposes to unshackle policy constraints by simplifying procedures and bringing down transaction costs. The objective is to create an atmosphere of trust and transparency in order to unleash the innate entrepreneurship of our businessmen, industrialists and traders. (b) Neutralizing Incidence Levies and Duties :- The policy also aims at neutralizing incidence of all levies and duties on inputs used in export products. The policy is based on the fundamelltal principle that duties and levies should not be exported. This is necessary in order to make Indian products cost effective in the international market. (c) India - A Potential Global Hub :- The government also

aims at facilitating development of India as a global hub for manufacturing, trading and services. This can be ensured through identifying and nurturing special focus areas, which would generate additional employment opportunities, particularly in semi-urban and rural areas. (d) Technological & Infrastructural Upgradation:- Technological and infrastructural upgradation of all sectors is a prerequisite for developing India as a global hub. This can be achieved through import of capital goods and equipment necessary to increase value addition and productivity and also attaining internationally accepted standards of quality. (e) Promoting International Trade Agreements :- The policy also aims to avoid inverted duty structures. It plans to ensure that our domestic sectors are not disadvantaged in the Free Trade Agreements, Regiona'l Trade Agreements and Preferential Trade Agreements. This is necessary in order strengthen our trade ties with the other economies. (D Institutional Reforms :- The policy proposes to revitalise the Board of Trade by redefining its role, giving it due recognition and inducting experts on Trade Policy. It also a.ims at activating embassies as key players in the formulation of export strategy and linking India's Commercial Wings abroad through an electronic platform for real time trade intelligence and enquiry dissemination.

24. _______________________

Export Marketing.~_____

Measures at the Organisational Level The following are the measures to be undertaken at the organisational level in order to improve India's share in the world export trade :(a) Cost Control :- In a large number of cases, high domestic costs is an inhibiting factor due to several constraints. Indi.an companies should become cost effective at the international level. (b) Improving Quality of Goods and Services :- India has a very poor quality image abroad. Indian companies should improve the quality of their goods by entering into joint ventures and collaborations with foreign MNCs. (c) Timely Execution of Order :- A very important black mark

on the Indian exporters is reneging - a term used in the USA to refer to going back on a contract. Indians should take positive steps to fulfill their commitments. (d) Guidelines for Successful Exporting :- An exporter should take into consideration the following points before entering into an export field :~ To develop formal export marketing plans and strategies. ~ To choose export products and markets carefully. ~ To adopt marketing strategies which add value to the company's products. ~ To appoint good sales agents or distributors abroad. ~ To price products carefully and not to load too much. ~ To be creative in finding solutions to marketing bottlenecks. ~ To look upon exporting as a long-term investment. Other Measures (a) Policy Consistency and Simplifications :- One of the defects of our trade policy regime has been the uncertainty about future policies, incentive schemes, etc. The Alexander Committee has strongly recommended stabilization of export policy. (b) Data Base :- An efficient Trade Information System is essential for success in the dynamic global market. The .government and private agencies should take initiatives to

India's Export Trade _ _ _ _ _ _ _ _ _ _ _ _ 25.

develop a data base covering detailed information about global markets and policy changes. GIl

Objective Questions

JiG)

Q.1 Answer the following questions in brief: (1) What are the major components ofIndia's exports? Ans:- India's exports can be broadly classified as: (a) Traditional items of exports co nsist of coffee, tea, oil cakes, tobacco, cashew kernel, cotton yarn, spices, jute, etc. (b) Non-traditional items of exports consist of iron ore, molasses, fish and its preparations, ready -made garments, leather, gems and jewellery, chemicals and allied prod ucts, machinery, etc. (2) What is Indian's share in the world exports? (Oct.2005) Ans :- India's share in the world trade is very limited. It varies between 0.5% to 0.6% on average every year. In the year 20032004, India's share in the world exports was merely 0.8%. (3) Suggest four measures to improve India's share in the world trade. (Mar.2006) Ans :- Four measures for improving India's share in the world trade: (a) Policy consistency and simplifications. (b) Improving quality of goods and services. (c) Technological and infra structural upgradation. (d) Unshackling of controls. Q.2 State with reasons, true or false: (1) India's share in world trade has important position. (Mar.2005) Ans :- FALSE: India's share in the world trade is meagre. In the year 2003-2004, India's share in the world exports was merely 0.8% and in imports it stood at 1%. GIl

Question Bank

JiG)

(1) Discuss the trends in India's export during the last decade. (Mar.2005) (2) Discuss the changes in the composition of India's exports during last decade. (3) Analyse the changes in trading partners of India during the last decade. (4) What are the factors responsible for poor share of India's exports in the world trade? (Oct.2005) (5) Suggest measures for improving India's share in the world

International marketing is a broader concept and includes export marketing. Export marketing is concerned with the production of goods in one country and marketing them in different countries of the world while international marketing is a broader concept and includes joint ventures, foreign collaborations, multinational corporations, transnational corporations and globalisation. Gil

Definition of International Marketing

.91>

"International marketing is a process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges between nations that satisfy individual and organisational objectives." • American Marketing Association Gil

Features of International Marketing

.91>

The features of international marketing are as under :(a) Large Scale Operations :- Price is an important factor that determines the success of an exporter in the highly competitive international market. Large-scale operations, full utilisation of installed capacity and transactions in bulk reduce overall cost of production and thereby price of the product. (b) Dominance of MNCs/TNCs from Developed Countries :The international trade is dominated by MNCs and TNCs originating from developed countries especially from USA, Japan and European countries. These companies have huge financial and physical resources and operate throughout the world. (c) Trade Barriers :- Trade barriers are the artificial restrictions on the free movement of goods among countries of the world. These barriers are of two types, tariff and non -tariff. Tariff barriers are in the form of taxes and customs duties. Non-tariff barriers are in the form of quotas and licences. (d) Trading Blocs :- Trading blocs are the associations of countries situated in a particular region whereby they

28. ________________________ Export Marketing._______

come to a common understanding regarding rules and regulations to be followed while exporting and importing goods among them. For example, the European Union (EU), North American Free Trade Association (NAFTA). (e) Importance of Advanced Technology :- Technology plays an important role in building competitive strength in the highly competitive international market. MNCs from countries like USA, Japan and Germany dominate the world trade due to continuous research, development, innovations and inventions. (f) Foreign Exchange Regulations :- Different countries have

different currencies and conversion rates. Therefore, each country has a separate set of rules for collection and payment of foreign currencies. For example, In India, all foreign currency transactions are regulated by the Foreign Exchange Management Act, 1999 (FEMA). (g) Three-faced Competition :- International market is highly competitive. Exporters face stiff competition from three angles: >- Exporters from his own country. >- Exporters from the other countries. >- Local suppliers in the importing country. (h) International Organisations :- International trade is subject to the rules laid down by the World Trade Organisation (WTO) and the United Nations Conference on Trade and Development (UNCTAD). The objective of these organisations is to promote world trade and help underdeveloped countries to built their export potentials. CI.\l

Importance of International Marketing

In

No country in the world is self-sufficient in all its domestic requirements. The slogan 'Export or Perish' by Shri Jawaharlal Nehru is applicable to all the countries of the world, developed as well as developing. There are various factors which give rise to interdependence among countries. Therefore, international trade plays an important role in the economic development of a country.

_____ International Marketing _ _ _ _ _ _ _ _ _ _ _ 29.

(a) Division of Labour and Specialisation Each country enjoys comparative cost advantage in the production of specific commodities due to favourable climatic, technical, natural and human resources. Such countries produce commodities in excess of their requirements and exchange surplus production with other countries for the commodities they are deficient in. (b) Increases National Income and Per-capita Income :- Due to division of labour and specialisation, each country produces and exports commodities for which it has comparative cost advantage and imports commodities for which it has comparative cost disadvantage. This generates additional income and saves real income by providing imported goods at competitive rates. (c) Facilitates Transfer of Technology :- Some countries like

Japan, USA, UK and Germany are highly developed in terms of technology while most of the Mro-Asian and South American countries are backward in technology. This directs the flow of technology from technically advanced countries to technically backward countries of the world. (d) Resolves Balance of Payments Crisis :- Balance of payments may be defined as the difference between the monetary value of exports and imports of a country. When the outflow of foreign currencies exceeds the inflow, a country suffers from an unfavourable balance of payments. In order to solve such imbalance a country needs to export. (e) Global Peace :- In the age of nuclear weapons, there is a greater need of promoting dialogue between countries of the world. International trade may provide a platform for exchange of ideas and thereby helps promoting international peace and friendly relations among the countries of the world. (£) Optimum Utilisation of Resources :- A country can make

optimum utilisation of its resources by promoting exports. If the resources remain unutilised or underutilised due to want of demand in the domestic market, the same can be well utilised by promoting exports of surplus production.

30. ________________________

Export Marketing._________

(g) Employment Opportunities :- Development of exports brings about multiple increase in employment opportunities. It not only increases employment in the export sector but also in other related sectors such as banking, insurance, advertising, transportation, etc. (h) Research and Development :- International market is highly competitive. In order to survive cut-throat competition in the world market, a local firm has to undertake continuous research and development. This leads to development of technology in backward and developing countries of the world. 01

Definition of Trade Barriers

Bi)

Trade barriers are the artificial restrictions imposed by the governments on free flow of goods and services between countries. Tariffs, quotas, taxes, duties, foreign exchange restrictions, trade agreements and trading blocs are the techniques used for restricting free movement of goods from one country to the other. Trade barriers can be broadly classified into two categories :(a) Tariff barriers or fiscal controls. (b) Non-tariff barriers or quantitative restrictions. 01

Objectives of Trade Barriers

Bi)

Trade barriers are imposed with different objectives under different situations as under :(a) To Protect Home Industries from Foreign Competition :- In many of the developing countries, majority of basic and heavy industries are still in the initial stage of their development. The cost of production in such industries is very high and quality is poor in comparison to the international market. Therefore such industries need protection from foreign competitors. (b) To Promote New Industries and Research & Development :Developing countries, like India, are conducting research in various areas of technological development. In order to motivate the efforts of scientists and enable them to work

_ _ _ _ _ International Marketing _ _ _ _ _ _ _ _ _ _ _ 31.

with greater initiative such potential areas of development need protection from foreign giants. (c) To Conserve Foreign Exchange Reserves :- The immediate

solvency of any country depends upon its foreign exchange reserves. Excessive imports may lead to erosion of valuable foreign currency from the country. Therefore, the government has to use quotas and tariffs as instruments for controlling imports and conserve foreign exchange. (d) To Maintain Favourable Balance of Payments :- Balance of payments is defined as the difference between inflow and outflow of foreign currency in the economy. A country, having favourable balance of payments, commands goodwill and reputation in the international market. Trade barriers help in reducing imports and thereby improve balance of payments situation. (e) To Protect National Economy from Dumping :- Dumping is the situation whereby a big MNC tries to sell its products at a price which is much below its cost of production. As a result, the domestic manufacturers may not be able to compete and will have to withdraw from the market. To prevent this, the government may use tariffs to increase the price of dumped goods. (£) To Curb Conspicuous Consumption :- Goods, like diamonds and gold, have inelastic demand. Generally, people buy such goods when their prices are high in order to show off their wealth. Such consumption is known as conspicuous consumption. Such consumption cannot be curtailed by charging high duties and hence, quotas should be fixed for their curtailment.

(g) To Make Economy Self-reliant :- Initially, infant industries need protection from the government. Gradually, these protected industries develop competitive strength. At that juncture, the domestic market can be thrown open to foreign competitors to enable domestic companies to improve further. This gradually makes the country self-reliant. (h) To Mobilise Public Revenue :- In every economy, whether capitalist or socialist, the government plays a key role in the economic development. The government undertakes various

Export Marketing._ _ _ __

32.

developmental activities, which require enormous finance. Customs duties charged on import and export of goods can serve as a significant source of finance for such purposes. (i) To Counteract Trade Barriers Imposed by Other Countries :-

Sometimes, in order to counteract trade barriers imposed by other countries, a country may be forced to impose trade restrictions. 01.

Types of Tariff Trade Barriers

5'.)

Tariffs are extensively used trade barriers. Tariffs are in the form of customs duties and taxes imposed on internationally traded commodities when they cross the national boundaries. The aim of tariffs is to increase prices of imported goods and thereby reduce their demand and discourage their consumption. Classification of Tariffs on the basis of Origin (a) Export Duties :- Export duty is a tax imposed on commodities exported from a country. Generally, no duties are levied on exports. However, a country may impose a duty on exports with the following objectives :~ To earn revenue, if demand for exported goods is inelastic ~ To check outflow of commodity, deficient in supply in the domestic market. (b) Import Duties :- Import duty is a tax imposed on commodities imported by a country. Such duties are generally levied with the following objectives :~ To protect domestic producers from external competition. ~ To conserve foreign exchange. ~ To promote the use of Swadeshi. (c) Transit Duties :- Transit duty is a tax imposed on a

commodity when it passes through the national frontiers of a country, originating from and designed for other countries. Such duties are levied by countries having strategic location from international trade point of view. For example, Port of Singapore. Classification of Tariff on the basis of Criteria (a) Specific Duties :- Specific duty is a duty imposed on each unit of a commodity imported or exported. For example,

_____ International Marketing _ _ _ _ _ _ _ _ _ _ _ 33.

Rs.5 on each meter of cloth imported or Rs.500 on each T.V. set imported. In this case, the value of commodity is not taken into consideration. (b) Advalorem Duties :- Advalorem duty is a duty imposed on the total value of a commodity imported or exported. For example, 5% of F.O.B. value of cloth imported or 10% of C.I.F. value of T.V. sets imported. In this case, the physical units of commodity are not taken into consideration. (c) Compound Duties :- Compound duty is the combination of specific and advalorem duties. In this case, the quantity as well as the value of the commodity are taken into consideration while computing tariff. For example, 5% of F.O.B. value plus 50 paise per meter of cloth imported. Classification on the basis of Purpose (a) Revenue Tariff :- Revenue tariff is the tariffs imposed in order to earn revenue for the country. Generally, the rates of such duties are low and are levied on the items of mass consumption. Revenue tariff also serves other objectives like discouraging imports or giving protection to home industries. (b) Protective Tariff :- Protective tariff is imposed in order to protect infant industries by restricting or eliminating competition from foreign companies. The rate of protective duties is quite high. However, such duties may ~ve rise to many anti-social activities like smuggling and black marketing. (c) Anti-dumping Duties :- Dumping is the strategy by which

foreign companies try to penetrate into overseas markets by selling goods at a very low price. Once established, such companies charge high prices and exploit the market. In order to eliminate the effect of dumping, anti-dumping duties have been devised. (d) Countervailing Duties :- Countervailing duties are similar to anti-dumping duties to some extent. In many countries (including India), duty drawback is given to exporters in order to enable them to sell their products at competitive rates in the world market. To countervail the effect of such incentives, countervailing duties have been devised.

Export Marketing. _ _ _ __

34.

Classification of Tariff on the basis of Trade Relations (a) Single Column Tariff :- Under this system of tariff, a flat rate of duty is charged on imports from all the countries. No discrimination is made between different countries of the world in regard to tariff. (b) Double Column Tariff :- Under this system, two rates of duties are fixed. Lower rates for countries having bilateral trade agreements with the duty levying country and higher rates for countries having no such agreements. (c) Triple Column Tariff :- Under this system, in addition to the higher and lower rates mentioned above, there is a preferential rate, which is substantially lower and IS applicable to friendly countries having trade agreement. Oil

Types of Non-tariff Trade Barriers

~

Quantitative restrictions are more effective than tariff barriers in controlling the total inflow of goods in physical terms in the country. These restrictions are known as nontariff trade barriers. (a) Quota:- Quota means a restriction on the physical volume of import or export of a commodity. There are different types of quotas:~ Tariff Quota :- Under tariff quota, import or export of a commodity up to a specific limit is allowed duty free or at a lower rate of tariff. Any import or export above this limit is charged with a higher rate of tariff duty. ~

Mixing Quota :- Under mixing quota, a manufacturer has to use certain quantity of domestic raw materials in combination with the imported raw materials to manufacture finished products for exports.

~

Unilateral Quota :- Under the unilateral quota system, a country on its own fixes the maximum quantity of a commodity to be imported or exported without consuiting other countries.

~

Bilateral Quota :- Under the bilateral quota system, importing and exporting countries fix up quotas in consultation with each other.

_ _ _ _ _ International Marketing _ _ _ _ _ _ _ _ _ _ _ 35.

(b) Import Licensing :- As a part of liberalisation and globalisation process, a majority of items have been delicensed for global trade in many countries. However, there are a number of items, which are subject to compulsory licensing. For importing or exporting such items, a formal approval in the form of licence is required to be taken, which involves a lot of time and expenses. (c) Consular Formalities :- Some importing countries have

laid down strict con-sular formalities in order to restrict the inflow of inferior quality goods in the economy. Under consular formalities, an exporter is required to obtain a consular certificate from the consulate of importing country situated in his country. Penalties are levied for non-compliance with such formalities. (d) Trading Blocs :- Trading blocs are the regional associations of countries whereby they come to a common understanding regarding rules and regulations to be followed while exporting and importing goods among them. Such blocs offer special concessions and preferential treatment to member countries. As a result, trade with non-members is discouraged. (e) Customs Regulations :- :- All the countries of the world

have laid down complicated customs regulations in order to put a check on excessive inflow and outflow of goods. These formalities differ from country to country and are very lengthy, time consuming and complicated. These formalities act as barriers to the free flow of trade between countries of the world.

(D State Trading :- Import and export of certain commodities have been taken over by the government in many countries. There is an exclusive monopoly of governments in such sectors. Such action on the part of the government puts check on the activities of private individuals. For example, Minerals and Metals Trading Corporation (MMTC) in India. (g) Export Obligation Many countries have imposed compulsory export obligations in order to compensate for the outflow of foreign exchange due to imports. Thus, it

36. ________________________

Export Marketing._ _ __

becomes obligatory for every importer to export goods of certain value as specified by the EXIM Policy. For example, import of capital goods U/lder the Export Promotion Capital Goods (EPCG) scheme in India. (h) Exchange Control :- Foreign exchange regulations are framed in order to regulate the free buying and selling of foreign exchange. For example, in India, the Foreign Exchange Regulation Act (FERA) 1973 used to regulate transactions in foreign currency. However, due to the Full Convertibility of Rupee, the FERA has been replaced by the Foreign Exchange Management Act, 1999 (FEMA). G) Miscellaneous Non-tariff Barriers :- There are some other non-tariff barriers, viz. :» Prior import deposits. » Import restrictions due to environmental regulations. » Food and drugs regulations. » Provision of subsidies to domestic industries. » Health and safety regulations. » Anti-dumping regulations. » Government procurement regulations. GIl

General Agreement on Tariff and Trade (GATT) Background Il"i)

The Great Depression of 1929 made nations of the world to realise that the wide gap between the economic theory and practice in determination of internal trade policy was the major cause of worldwide economic disaster. Once again the need was felt of reviving the Classical Theory of Trade by adhering to free trade policy. The Brettonwoods Conference of 1944, which recommended the establishment of International Monetary Fund (IMF) and the World Bank, had also recommended the establishment of an International Trade Organisation (ITO). Although, the IMF and the World Bank were established in 1946, the proposal for ITO did not materialise. Instead, the General Agreement on Tariff and Trade (GATT), a less ambitious institution, was formed in 1948.

_____ International Marketing _ _ _ _ _ _ _ _ _ _ _ 37. Gil

World Trade Organisation (WTO) - Objectives a-.>

The Uruguay Round negotiations concluded on 15th April 1994 at Marrakech, Morocco. According to the Marrakech declaration, the results of the Uruguay Round would strengthen the world economy and would lead to more trade, investment, employment and income growth throughout the world. In order to implement the final act of Uruguay Round agreement of GATT, the World Trade Organisation (WTO) was established on 1st January 1995 with the following objectives :(a) Trade Liberalisation :- The broad aim of WTO is to reduce trade restrictions put up by individual nations for their narrow national interests. The goal is to be achieved through multilateral negotiations, settling all trade disputes through a set of rules evolved by the WTO. (b) Non-discrimination :- Non-discrimination is one of the most important principles of the WTO. The principle of non-discrimination requires that no member country shall discriminate between the members of WTO in the conduct of international trade. (c) Raising Standards of Living :- The WTO Agreement aims

to raise the standards of living and the progressive development of the economies of all cont.'acting parties. It also ensures that the attainment of these objectives is particularly urgent for less-developed contracting parties. (d) Ensuring Optimum Use of World Resources :- The WTO Agreement endeavours to allow for the optimal use of the world's resources in accordance with the objective of sustainable development and thereby expanding production of goods and services and international trade. (e) Environmental Concern :- The Preamble to the WTO Agreement includes direct references to the objective of sustainable development and to the need to protect and preserve the environment. (f) Development of Less Developed Countries :- The WTO

Agreement ensure that developing countries should secure a share in the growth in global trade commensurate with the needs of their economic development.

38. --_______________________ " ExportAfarketing.________

(g) Full Employment :- The WTO Agreement aims to ensure full employment of world resources, both natural as well as human, and a large and steadily growing volume of real income and effective demand in the member nations. (h) Multilateral Trading System :- The ultimate aim of the WTO Agreement is to develop an integrated, more viable and durable multilateral trading system through mutual consultation and negotiations. (IQ

WTO - Functions

Jl'.)

The main functions of the WTO as set out in Article III are: (a) Administering WTO Trade Agreements :- The main function of the WTO is to facilitate the implementation, administration and operation of the Multilateral Trade Agreement and the Plurilateral Trade Agreements signed at the various Rounds of the GATTIWTO negotiations. (b) Reduction of Trade Barriers ;- The fundamental objective of the WTO is to remove all types of hurdles to the free flow of international trade. It secures implementation of the significant tariff cuts and also reduction of non-tariff measures agreed in the trade negotiations. (c) Settlement of International Trade Disputes ;- The Dispute

Settlement Body provides a mechanism for the settlement of trade disputes which could not be solved through bilateral talks. It has now been mandatory to settle a dispute within 18 months and the verdict of the Disputes Settlement Panels is final and binding on all parties. (d) Co·operation with Other International Organizations;WTO co-operates with other international institutions like the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) and its affiliated agencies to achieve greater coherenc(> in global economic policy making. (e) Forum for Trade Negotiations ;- WTO provides a forum for negotiations among its members concernmg their multilateral trade relations in matters dealt with under the agreements of the WTO. It also provides a framework for the implementation of the results of such negotiations.

_ _ _ _ _ International Marketing _ _ _ _ _ _ _ _ _ _ _ 39

(D Trade Policy Review Mechanism :- WTO acts as a

watchdog of national trade policies of its member countries. The General Council of the WTO convenes Trade Policy Review Body in order to frame such rules, which are necessary in order to keep a close watch over the trade policies of different member countries. (g) Consultancy Services :- In order to achieve its objective of trade liberalisation, the WTO acts as a management consultant for its member countries. It also helps underdeveloped and developing economies to promote their external trade by providing them with technical assistance and training. GAl

WTO - Most Favoured Nations (MFN) Clause

5'1)

Non-discrimination is one of the most important principles of the WTO. The principle of non-discrimination requires that no member country shall discriminate between the members of WTO in the conduct of international trade. This principle is known as the Most Favoured Nations (MFN) Clause. According to this Clause, a member nation of the WTO must give the same most favourable treatment with respect to tariffs and related matters to other members, which it gives to any other member country. This non-discriminatory treatment ensures that any tariff reduction or other trade concession is automatically extended to all contracting parties of the WTO. For example, if the USA gives a preferential treatment to Pakistan in respect of tariff reduction then the USA must give the same preferential treatment of tariff reduction to all the members of WTO. However, there are some exceptions to the MFN principle :(a) Grandfather Clause :- Article 1 (2) permits contracting parties to continue with the preferences received or granted under different arrangements, which were in existence prior to the formation of the GATT. But it prohibits any change in the margin of preferences granted or received. For example, the United States preferences to Philippines fall under this category, as also Common Wealth Preferences (CWP).

40. ________________________

Export Marketing.________

(b) Customs Union and Free Trade Areas :- Article XXIV provides for the formation of Customs Union and Free Trade Areas. As per this clause, nations of the world are allowed to form Customs Unions and Free Trade Zones. For example, member countries of the European Union are allowed to freely import and export not only goods and services but also factors of production such as capital and labour among them. al

Implications of WTO on the Indian Economy

J;-.)

Under the new WTO regime, the Indian companies are preparing and designing new strategies for survival. Lets us analyse the likely impact of the WTO rules on some crucial sectors in India :(a) Agriculture :- The WTO agreement on agriculture provides for :~ reduction of domestic subsidies; ~ reduction in export subsidies; ~ tariff reduction, and ~ bindings to provide market access. Critics are of the opinion that farmers will be hit hard by the WTO regime. Indian agriculture, which is reeling under severe drought and fall in cash crop prices, will die once the import curbs are removed and free flow of food items are allowed into India. But despite the concerns of farmers, many believe the WTO rules will not adversely affect the Indian agriculture as it is made out. Developed nations have committed to the WTO that they would reduce subsidies and tariff. This would provide better access to Indian agricultural products in the world market. Another advantage for India is that the subsidy reduction requirement under WTO is not applicable to India. As per the WTO rules, countries having less than $1,000 per capita income annually do not fall under the subsidy reduction requirement. (b) Pharmaceuticals :- India has one of the most efficient pharmaceutical industries in the world. Pharmaceutical

_ _ _ _ _ International Mal:keting _ _ _ _ _ _ _ _ _ _ _ 41.

firms grew in India mainly due to the absence of patent protection of medical drugs in the country. According to the Indian Drug Manufacturers' Association, self-sufficiency in Indian pharmaceutical sector is more than 70 per cent. Worldwide, India is a country of very low prices for high-quality medicines. But now the rules of the game in the pharmaceutical industry will change as India has committed to toe the WTO line on product patents. Product patent rules and Exclusive Marketing Rights (EMR) under the WTO could affect a paradigm shift in India's ph arm a majors. This would directly affect 500,000 employees working in roughly 20,000 pharma firms in the country. (c) Textiles and Clothing :- The WTO agreement on textiles

and clothing states that the Multi-Fibre Agreement (MFA) will eventually be eliminated. MFA at present groups the major importer countries - the United States, Austria, Canada, the European Community, Finland and Norway who apply restrictions on imports by way of quota. The phasing out of MFA will boost textile exports from India. But the risk is that as India opens up its market, import of textiles and clothing will considerably increase from countries like China, the US, Taiwan and Indonesia. (d) Information Technology :- Under the Information Technology Agreement singed under the WTO, Indian hardware and software companies can become major players in the value-added arena. Availability of highskilled IT personnel and low cost of labour and operation would allow India to compete in the international market. (e) Liquor Companies :- Once the quantitative restrictions on liquor are removed, the import tariffs on bottle-in-origin liquor brands will vanish. Currently the import tariff on liquor is very high. But as per the WTO regulations, the government will be forced to slash import duties on foreign liquor brands. This will considerably affect domestic liquor companies. (f) The Services Sector :- As per the WTO rules, two obligations apply to all services. They are the Most

42. ________________________

E,port Marketing._______

Favoured Nation (MFN) treatment and transparency by way of publication of all laws and regulations. Under the WTO regime, India will have to open up its services sector to other WTO member countries. The result being many overseas service providers will enter into the services sectors, posing threat to domestic enterprises. But experts are of the opinion that the WTO rules on services would not pose a serious threat to Indian service industry because the country has a distinct competitive advantage in many areas like health, engineering construction, computer software and other professional services. 01

Positive Impact of WTO on the Indian Economy

~

WTO Agreement is a mixed blessing for Indian Economy. It created many opportunities as well as threats for Indian business houses. Some of the positive implications of the WTO Agreements on Indian Economy are :(a) Growth in Merchandise Trade :- There has been a spectacular rise in the merchandise trade of India due to trade liberalisation initiated by the WTO. India's share in the total world exports was just 0.5% in 1995, which has increased to about 0.8% in 2004. However, it is very low in relation to other developing countries like China and Mexico. (b) Growth in Export of Services :- There has been a greater increase in the export of services from India in the post liberalisation period. India's share in the total world exports of services was just 0.6% in the year 1995, which has increased to about 1.4% in the year 2004. This is mainly due to increase in software exports from India. (c) Growth of Foreign Direct Investment (FDI) :- Considering the policy of the WTO, the Indian Government has provided a favourable environment for attracting foreign direct investment in India. This has resulted in manifold inc:-ease in FDI in India, from just US $ 129 million in 19:11-92 to about US $ 3.4 billion in the year 2003-2004. (d) Textiles and Clothing :- Import of textiles in developed countries was restricted by the Multi-fibre Agreement (MFA). The Uruguay Round has recommended the

_ _ _ _ _ International Marketing _ _ _ _ _ _ __

43.

phasing out of Multi-fibre Arrangement (MFA) by 2005. This would promote exports of textiles and clothing from India in near future. (e) Agricultural Sector :- Agriculture is one of the highly protected sectors in developed as well as developing countries. Farmers were patronised through subsidised imported inputs and export subsidies. The Uruguay Round recommended reduction in import barriers on agricultural goods. This would boost agricultural exports from India. (f) Multilateral Rules and Disciplines :- The multilateral rules and disciplines relating to anti-dumping, subsidies and countervailing measures, safeguard and dispute settlement machinery will ensure greater security and predictability of international trade. This would crate a favourable environment for India's international business. Gil

Negative Impact of WTO on the Indian Economy

Jjr;)

Despite several benefits of WTO to India, many economists and sociologists argue that, India would be in a disadvantageous position by becoming a member of WTO. (a) Adverse Impact of TRIPs on the Indian Economy :- The provisions of the TRIPs agreement goes against the Indian Patents Act, 1970. Under the Indian Patent Act, only process patents can be granted in food, chemicals and medicines. However, under TRIPs patents can be granted to methods of agriculture and horticulture, biotechnological process including living organisms like plants and animals. This would benefit foreign multinationals who hold a large number of patents. (b) Adverse Impact on Indian Agriculture :- The extension of intellectual property right to agriculture has negative effects on India. The Indian government provides seed to farmers at very low prices through its agencies like, National and State Seeds Corporations. Due to TRIPs Indian scientists would not be allowed to breed new varieties of seeds, Indian research institutions would not be able to compete financially with MNC's and would be denied access to patented genetic material. As a result, MNC's will get control over our genetic resources.

Export Marketing._ _ _ __

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(d Hike in the Prices of Drugs :- In pre-TRIPs regime, many developing countries, including India, did not grant product patents but process patents for pharmaceuticals. This enabled domestic researchers to develop similar products through a process called reverse engineering. However, introduction of product patents will lead to hike in drug prices by the MNCs who have the product patent. (d) Research in Bio-diversity and Micro-organisms :- TRIPs agreement has also introduced patent protection for plants and micro-organisms in order to prevent biopiracy worldwide. Biopiracy describes the situation whereby the patent holder of plants or micro-organisms may prevent importation of the products in question or demand royalty. (e) Service Industry :- Service sector like insurance, banking, telecommunications, transportation is backward in India compared to that of developed countries. Therefore, inclusion of trade in services is detrimental to the interest of India. 01

Domestic Marketing vis Export Marketing IlO

Domestic Marketing

Export Marketing

1. Meaning :-

Domestic marketing IS the planning, process of organising, directing and controlling activities related to exchange of goods within the different regions of the same country. 2. Scope:The scope of domestic marketing is narrow and is restricted to the political boundaries of a country. 3. Trade Barriers :TherE; are no artificial restrictions In the form of tariff and quota In the domestic markets.

Export marketing IS the process of planning, .. orgamsmg, directing and controlling activities related to exchange of goods between the different countries of the world. The scope export of marketing is wider as the whole world constitutes a market. International market In subject to severe barriers in the form of tariff and quota in order to restrict imports.

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4. Product Strategy:Standardisation Product adaptation strategy Product strategy can be used in the is required to be used due to local market due to similar difference III the SoClOsocio-economic environment economIC environment III in the local market. different countries. 5. Competition :The degree of competition in An exporter . faces intense three from domestic market IS low as competition these markets are generally angles, viz., exporters from protected by the government his own country, from other from external competition countries and local suppliers in the importing country. through trade barriers. 6. Scale of Operations :Due to limited competition in Due to intense competition in local market, a firm can world market, a firm has to operate on a smaller scale. operate at the optimum level. 7. Mobility of Factors of Production :Factors of production such as There are strict restrictions land, labour and capital are on the mobility of factors of the freely mobile in the domestic production In market. international market. (l'Q.

Tariff Barriers vis Non-tariff Barriers

Tariff Barriers

.9'.)

Non -tariff Barriers

1. Meaning :-

Tariff barriers are in the form of taxes and duties charged on commodities imported and exported. 2. Types:Tariff barriers are classified on the basis of origin, purpose, criteria and relations between trading nations. 3. Objectives :The objective of tariff barriers IS to Increase the price of imported goods and thereby reduce their consumption.

Non-tariff barriers are quantitative restrictions on physical units of goods imported or exported. Non-tariff barriers are in the form of quotas, licensing, consular formalities, foreign exchange restrictions, etc. The objective of non -tariff barriers IS to restrict imports and thereby protect domestic industries.

Export Marketing. _ _ __

46.

4. Nature:It is an indirect method of curtailing imports by . . prIce of mcreasmg the imported articles. 5. Effectiveness :As a method of controlling imports, tariffs may not be effective as people may continue to buy imported goods at a higher price. 6. Revenue :Tariffs generate revenue for the government, VIZ., taxes and duties. Gil

It IS a direct method of curtailing imports by imposing restrictions on the physical quantity of imports.

As a method of controlling imports, non-tariff barriers may be more effective as they directly control the total volume of goods imported. Non-tariff barriers do not generate any revenue for the government.

Advalorem Duty vis Specific Duty

Specific Duty

Jl:;)

Advalorem Duty

l. Meaning :-

Specific duty IS a duty imposed on each unit of a commodity imported or exported. 2. Convenience:Specific duty IS easy to calculate and administer. It by can calculated be multiplying the rate of duty with number of units traded. 3. Nature of Goods :It IS levied on such goods whose quantification in terms of number of units is possible. Fol' example, number of T. V. sets and metres of cloth. 4. Popularity:In spite of advantages over advalorem duty, specific duty is not very popular.

Advalorem duty is a duty imposed on the total value of commodity imported or exported. Advalorem duty is difficult to calculate, as it requires a proper assessment of the value of goods imported or exported. It is levied on such goods whose. quantification In terms of number of units is not possible. For example, rare paintings and statues.

Generally most of the countries charge duties on the basis of value of goods imported or exported.

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5. Main Considerations :In this case, the physical units or the quantity of the commodity is the mam consideration for the determination of duty. For example, Rs.5 on each meter of cloth imported or Rs.500 on each T.V. set imported. (lQ.

In this case, the value of the commodity is the mam consideration for the determination of duty. For example, 5% of F.O.B. value of cloth imported or 10% of C.LF. value of T.V. sets imported.

Objective Questions

fj'.)

Q.1 Answer the following questions in brief: (1) Explain the significance of MFN in international trade. (Mar.2005) Ans :- According to the Most Favoured Nations (MFN) principle, a member nation of the WTO must give the same most favourable treatment with respect to tariffs and related matters to other members, which it gives to any other member country. This non discriminatory treatment ensures that any tariff redu ction or other trade concession is automatically extended to all contracting parties of the WTO. (2) What is bilateral trade agreement? Ans :- Bilateral trade agreement means agreement between two countries on various trade issues such as its volume, nature, composition, facilities, mode of payment, etc. Such agreements may also be entered for balancing their mutual payments. (3) What is international dumping? (Oct.2005) Ans:- Dumping is the situation whereby a big MNC tries to sell its products at a price which is much below its cost of produ ction either (a) To drive away competitors and get hold of the market. (b) To sell slow moving items in such markets. (4) What is tariff barrier in export marketing? Ans :- Tariff barriers are in the form of customs duties and taxes imposed on internationally traded commodities when they cross the national boundaries. The aim of tariffs is to increase prices of imported goods and thereby reduce their demand and discourage their consumption. (5) State any 4 types of tariff barriers.

48. ________________________ Export Afarketing._________

Ans :- The four types of tariff barriers are: (a) Specific Duties : - Duty imposed on number of units imported or exported. (b) Advalorem Duties :- Duty imposed on the total value of a commodity imported or exported. (c) Revenue Tariff: - Tariff imposed in order to earn revenue for the country. (cO Protective Tariff: - Tariff imposed in order to protect the infant industries by restricting or eliminating external competition. (6) What is WTO ? Ans :- In order to implement the final act of Ur uguay Round agreement of GATT, the World Trade Organisation (WTO) was' established on 1 st January 1995 with the following 0 bjectives :(a) To raise the standards of living. (b) To ensure full employment. (c) To expand prod uction of goods and services. (d) To allow for the optimal use of the world's resources. (e) To protect and preserve the environment. - It has published Directory of Foreign Buyers and Indian Exporters. ~ It publishes a fortnightly magazine "FlEO News" to cover developments in the field of international trade. GIl

Indian Institute of Foreign Trade (11FT) ~

Indian Institute of Foreign Trade was set-up in 1963 by the Government of India as an autonomous body registered under the Societies Registration Act. It was set up with the prime objective of professionalising the country's foreign trade management and increase exports by developing human

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Export Marketing._ _ _ __

resource, generating, analysing and disseminating data and conducting research. Its specialisation in international business and a global outlook makes it unique among management schools in the country. Functions of Indian Institute of Foreign Trade (a) Training :- lIFT has been recognised as a centre of excellence for imparting training and education in international business. It offers an inspiring learning environment, which transforms the bright young students into talented creative professionals .

.

(b) Collects and Supplies Information :- lIFT conducts market studies and surveys in the overseas markets in order to find out demand for Indian products. It supplies this information to the exporters who can use such information while making their export marketing decisions. (c) Organises Seminars and Workshops :- lIFT organises

seminars and workshops in a number of export marketing areas such as export pricing, export promotion, etc. Exporters can take advantage of such workshops and seminars by taking active part them. (d) Trade Delegations :- lIFT sends delegates abroad to study overseas markets and also to interact with overseas importers. At the same time, it invites delegates from abroad, who can study Indian market conditions and can also interact with Indian exporters. (e) Publications :- A large part of lIFT's research work is published in the form of study reports, monographs, etc., ~ Foreign Trade Review (FTR), a quarterly journal. ~ Focus WTO, a bimonthly magazine. ~ Technology Exports, a quarterly newsletter. (£) Research and Consultancy :- lIFT also acts as a consulting house for solving the problems of Indian exporters and importers. It analyses the international trade environment al'd develops appropriate corporate strategies for the ove....seas markets.

(g) Management Development Programmes :- lIFT has been a pacesetter in catering to the needs of business executives

_ _ _ _ _ Export Promotion Organisation _ _ _ _ _ _ __ 107.

by continuously aligning its Management Development Programmes with the changing realities. As a result, its intensive short duration courses have received the most enthusiastic response. ClIl

Indian Institute Packaging (IIP)

M

Indian Institute of Packaging was set up as a national institute jointly by the Ministry of Commerce, Government of India and the Indian Packaging industry and allied interests in 1966. Its head quarter and principal laboratories are located at Mumbai and regional laboratories at Kolkata, Delhi and Chennai. Functions of Indian Institute of Packaging (a) Training Programmes :- It organises a number of training programmes pertaining to packaging and also provides suggestions pertaining to packaging. (b) Testing Facilities ;- It undertakes testing of packaging materials and packages in order to ensure that they are non-reactive and are as per the international standards. (c) UN Certification :- All dangerous goods packages need a

UN certification mark before they can be despatched. IIP is the only authorised body in India to give this certification. (d) Environmental Cell ;- The institute has an environment cell, which creates awareness about eco-friendly packing and packaging materials. (e) Research and Development :- It undertakes research and development programmes for creating and improving infra structural facilities for improving packaging standards. (0 Collection and Dissemination of Information :- It collects information on various packing and packaging strategies and disseminates it for the benefit of exporters. An up-todate information on packaging developments can be availed on its website, .. http://www.iip-in.com ...

(g) International Recognition :~ The institute is closely linked with international organisations. It is recognised by the United Nations Industrial Development Organisation

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Export Marketing.~_ __

(UNIDO) and International Trading Centre (ITC) for consultancy and training. (h) International Membership :- It is a member of the Asian Packaging Federation (ApF); the 'nstitute of Packaging Professionals EDI Initiatives :- DGFT shall introduce an automated electronic system for filing, retrieval and authentication of documents based on agreed protocols and message exchange with other authorities such including Customs and Banks. (1Q

A Note on Negative List of Exports 2002-07 JIG)

The negative list consists of goods, the import or export of which is either prohibited, restricted through licensing or otherwise to be canalised through a designated government agency. The negative list of exports, as per the EXIM Policy 2002-07, contains the following four categories of export items :(a) Prohibited Items :- The prohibited items are completely banned from exports. The following categories of items are banned from exports :~ All forms of wild animals including their parts and products. ~ Special chemicals as notified by the DG FT. ~ Exotic birds as notified by the DGFT. ~ Beef. ~ Sea shells, as specified. ~ Human skeleton. ~ Peacock tail feathers including handicrafts and articles ~ Manufactured articles and shavings of Shed Antlers of Chi tal and Sambhar. ~ All items of plants as specified by the DGFT. ~ Tallow, fat and oils of any animal origin excluding fish oil. ~ Sandalwood items as notified by the DGFT. ~ Red sanders wood in any form. (b) Restricted Items :- The restricted items are allowed for exports under special licence issued by the DGFT. Some of restricted export items are as follows :~ Dress materials, ready-made garments, fabrics or textile items with imprints of excerpts or verses of the Holy Quran.

ExponAfarketing________

126.

> >

,> > > > > >

Horses - Kathiawadi, Marwari and Manipuri breeds. Fresh and frozen silver promfrets of weight less than 300 gm. Paddy (Rice in husk). Seaweeds of all types. Fodder including wheat and rice straw. Chemical fertilizer of all types. Whole human blood and all products derived from it. Silkworm, silkworm seeds and silkworm cocoons.

(c) Canalised Items':- The canalised items can be exported without an export lil::ence through designated State Trading Enterprises (STEs). Some of the canalised items are :Items Onions (Except Bangalore Rose onion and Krishnapuram onion) Niger Seeds

Gum Karaya Iron ore, Manganese ore, and Chrome ore. Crude oil

Canalising A[ency_ Export Permitted through Specified STEs Tribal Cooperative Marketing Federation of India (TRIFED), New Delhi. National Agricultural Cooperative Marketin~ Federation of India. (NAFED) Tribal Cooperative Marketing Federation of India (TRIFED), New Delhi. Metals and Minerals Trading Corporation (MMTC). Indian Oil Corporation Limited.

(d) Freely Exportable Items :- The freely exportable items can be exported without an export licence or permission from the DGFT. However, export of such items is subject to certain procedures or conditions. Item Description Military stores as notified by DGFT Exotic birds, such as Bangali finches, White finches and Zebra finches Bones and bone products. Basmati Rice

Procedures or Conditions No objection certificate from the Department of Defence Production and Supplies. Subject to Pre-shipment inspection. Subject to a certificate from Chemicals and Allied Products Export Promotion Council (CAPEXILI Subject to registration of contracts with Agricultural & Processed Food Products Export Development Authority (APEDA)

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127.

A Note on Open General Licence (OGL) List ~

Open General Licence (OGL) list contains those items, which can be exported without any restrictions or licensing formalities to all permitted destinations. The following four OGLs are in operation :(a) OGL No.1 :- Applies to export by land to any country adjacent to India and having no sea port of its own. (b) OGL No.2 :- Applies to export of bonafide samples. (c) OGL No. 3 :- Applies to the items that can be exported on fulfilment of the conditions against each of the items. (d) OGL No.4 :- Applies to items that can be exported directly by the canalising agency mentioned against each items. (lQ

A Note on Canalisation of Exports

~

Canalisation of foreign trade means routing of import or export of certain specified commodities through the designated State Trading Enterprises (STEs) such as :(a) Tribal Cooperative Marketing Federation of India (TRIFED). (b) National Agricultural Cooperative Marketing Federatioll of India (NAFED). (c) Minerals and Metals Trading Corporation of India (MMTC), etc. The canalising agencies undertake various promotional programmes and provide incentives and assistance to the supporting manufacturers. However, during the postliberalisation era the number of canalised items have been drastically reduced and canalisation is confined to certain petroleum products, fertilizers, edible oils and few other items. I ems 0 f export s are .S omeo fth e canarIse d't Items Onions (Except Bangalore Rose onion and Krishnapuram onion) Niger Seeds

Gum Karaya

Canalising Agency Export Permitted through Specified STEs Tribal Cooperative Marketing Federation of India (TAIFED), New Delhi. National Agricultural Cooperative Marketing Federation of India. (NAFED) Tribal Cooperative Marketing Federation of India (TAIFED), New Delhi.

Export Marketing_ _ _ __

128.

Iron ore, Manganese ore, and Metals and Minerals Trading Corporation Chrome ore. JMMTGl· Crude oil Indian Oil Corporation Limited

Objectives of the Canalisation of Exports (a) To avoid the problem of under invoicing. (b) To increase the export volume. (c) To generate excess profit which can be used for export incentives and promotional purposes. (d) To increase the bargaining power of Indian exporters. (e) To fetch optimum price for export. (D To safeguard the interest of small exporters. Gil

A Note on Export Obligation

~

Export obligation means the obligation of the importer to undertake export of product or products in term of quantity, value or both, as may be prescribed or specified by the licensing or competent authority in order to compensate for the imports undertaken. Objectives of Export Obligation (a) The main objective of export obligation is to compensate for the outflow of foreign currency due to imports undertaken under certain schemes such as EPCG scheme. (b) The EPCG scheme enables the Indian exporters to import capital goods at 5% customs duty subject to export obligation. Advantages of Export obligations (a) Accessibility to imported raw materials and capital goods subject to export obligation would enhance the competitiveness of Indian exporters in terms of quality upgradation. (b) Due to export obligation, importers will be required to export compulsorily. This would increase exports and would generate foreign exchange for the economy. Gil

A Note on Counter Trade

~

Counter trade is a form of international trade in which certain export and import transactions are directly linked with each

_ _ _ _ _ Foreign Trade Policy ofIndia _ _ _ _ _ _ _ __ 129.

other and in which import of goods are paid for by export of goods ' instefln m"nau ..... .... _ "f' v.&. ........ ..., ... .J.vJ nn"-~~"~ pay llH:all. . b. In the modern economies, most irallg:!~tions involve monetary payments and receipts, either immediate or de;ei7~~. .~f5 against this, counter trade refers to a variety of unconventional international trade practices which link exchange of goods, directly or indirectly, in an attempt to dispense with currency transactions. Forms of Counter Trade (aJ Bartel; : Barter refers to direct exchange of goods against goods of equal value, with no money and no third party involved in it. (b) Compensation Deal: Under this arrangement, the seller receives a part of the payment in cash and the rest in products. (c) Buy Back: Under the buy back agreement, the supplier of plant, equipment or technology agrees to purchase goods manufactured with that equipment or technology.

(d) Counter Purchase: Under counter purchase agreement, the seller receives the full payment in cash but agrees to spend an equivalent amount of money in that country within a specified period. G.1

Objective Questions

f0

Q.1 Answer the following questions in brief: (1) What is EXIM policy? (Oct.2004) Ans :- EXIM Policy contains various policy decisions taken by the government in the sphere of foreign trade, i.e., with respect to imports and exports from the country and more especially export promotion measures, policies and procedures related thereto. It is prepared and announced by the Central Government. (2) What are the objectives of EXIM Policy? (Mar.2004) Ans :- India's EXIM policy, in general, aims at develo ping export potential, improving export performance, encouraging foreign trade and creating favourable balance of payments position. (3) State four features of Foreign Trade Policy 2004 -2009. (Mar.2006)

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Export Marketing' _ _ _ __

Ans:- The four features of Foreign Trade Policy 2004 -2009 :(a) Unshackling of controls and creating an atmosphere of trust and transparency. (b) Simplifying procedures and bringing down transaction costs. (c) Neutralizing incidence of all levies and duties on inputs used in export products. (d) Facilitating development of India as a global hub for manufacturing, trading and services. (4) What do you mean by Negative list of Exports? (Oct.2004) Ans :- The negative list in EXIM Policy consists of goods, the import or export of which is either prohibited, restricted through licensing or otherwise or to be canalised through a designated government agency. The negative list contains four categories of items:(a) Prohibited Items: - Completely banned from trading. (b) Restricted Items:- Traded under special licence from the DGFT. (c) Canalised Items : - Traded through designated State Trading Enterprises. (d) Freely Exportable Items : . Traded subject to certain procedures or conditions. (5) State four items of prohibited exports. (Oct.2005) Ans : The prohibited items are completely banned from exports. The following categories of items are banned from exports: . (a) All forms of wild animals including their p arts and products. (b) Special Chemicals as notified by the DGFT. (c) Exotic birds as notified by the DGFT. (d) Beef. (e) Sea shells as specified. (D Human skeleton. (6) What is canalisation of exports? Ans :- Canalisation of foreign trade means routing of import or export of certain specified commodities through the designated State Trading Enterprises (STEs) such as :. (a) Tribal Co·operative Marketing Federation of India (TRIFED). (b) National Agricultural Co ·operative Marketing Federation of India (NAFED). (c) Minerals and Metals Trading Corporation ofIndia (MMTC). Q.2 State with reasons, true or false: (1) Long-term export policy is not preferred by exporters. (Mar.2006, Oct.2004) Exporters prefer yearly EXIM policy over five year policy. (Mar.2005)

_ _ _ _ _ Foreign Trade Policy ofIndia _ _ _ _ _ _ _ __ 131.

Ans :. FALSE :. Long·term export policy is preferred by exporters as it provides uniformity, stability and continuity to export promotion programmes. (2) Yearly revision of five year EXIM Policy is not required. (Mar.2004) Ans :. FALSE :. In the fast changing international environment, it is necessary to revise five yearly EXIM policy annually. (3) Under the liberalised EXIM Policy no licence is required for export of any item from India. Every exporter in India has to obtain a licence before the goods are exported from India. Ans :. FALSE :. Restricted items contained in the Negative list of the EXIM Policy require special licence issued by the DGFI' for export. However, items contained in the OGL list can be exported without any licence. (4) The new EXIM policy has removed all qualitative restricti ons on exports. (Oct.2005) Ans : FALSE :. Though many of the quantitative restriction on exports have been removed, still there exists some items on which restrictions continue. (5) Canalisation of exports means exports through canals. Ans :. FALSE :. Canalisation of exporting means routing of export of certain specified commodities through the designated State Trading Enterprises (STEs) such as :. (a) Tribal Co·operative Marketing Federation ofIndia (TRIFED). (b) National Agricultural Co·operative Marketing Federation of India (NAFED). (c) Minerals and Metals Trading Corporation"ofIndia (MMTC). ClI1

(1) (2) (3) (4)

Question Bank

£G)

What is an EXIM Policy? What are its objectives? (Oct.2005) Explain the objectives of the Foreign Trade Policy 2004 ·09 ? Explain the major highli ghts of Foreign Trade Policy 2004 ·09. Discuss the implications of the Foreign Trade Policy 2004 . 2009. (5) Write a note on the following: . (Mar.2004) (a) Negative list of Exports. (b) Canalisation of Exports. (c) Export Obligations. (d) Annual Revision to the Foreign Trad e Policy 2004·2009.

Export Costing and Pricing ~

Export Pricing:Meaning. Factors Affecting. Importance.

~

Export Pricing Strategies :- (Mar.2006)

~

INCOTERMS 2000 or Export Price Quotations.

~

Determination of Export Price :Components. (Oct.2005) Computation of FOB Price and Impact of Incentives.

~

Short Notes :Break-even Analysis. Skimming Strategy. Penetration Strategy. C&F Price Quotation. CIF Quotation.

~

Distinguish Between :FOB Quotation and CIF Quotation. (Mar.2004, 2005) Skimming Pricing & Penetration Pricing. (Oct.2004) Total Cost Pricing and Marginal Cost Pricing.

~

Problems Based on Calculation of FOB and CF Price.

~

Objective Questions.

~

Question Bank.

_________ ExportCostingandPrwing __________________ 133. Oll

Meaning of Price

f')

Price is the value of utility of goods and services expressed in terms of money. It is one of the important factors that determines the success of an export organisation. International market is highly competitive and therefore, an exporter should take into consideration all the factors such as quality, cost, competition, demand, etc., before arriving at the final price. International market being buyers' market, the price quoted by an exporter should be reasonable and final. Oll

Factors Affecting Determination of Export Price

f')

The following factors affect the pricing decisions of an exporter: (a) Cost of the Product :- Cost is the most important determinant of the price. The cost of product constitutes :~ Direct costs include cost of materials, labour cost and other direct expenditure. ~ Indirect costs include manufacturing cost, office/administrative cost, selling/distribution cost, etc. (b) Competition :- International market is highly competitive. Exporters face competition from three angles. In order to survive intense competition, an exporter has to charge reasonable price. However, an exporter can charge higher prices and can face competition by innovating and improving the quality of goods. (c) Elasticity of Demand :- The price, to a great extent,

depends upon the elasticity of demand. In the markets, where demand for exporter's product is inelastic, he may charge a higher price and can earn supernormal profit while in the markets where demand is elastic he may earn normal profit by charging a marginal price. (d) Government Policies :- The EXIM policy of the economy is closely linked with the other policies of the governments such as fiscal policy, monetary policy, etc. If the overall export environment in terms of these policies is favourable then the exporter can certainly charge lower prices in the international market. (e) Incentives Offered by the Government :- The Governments of developing countries, including India, offer various incentives

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to exporters. Some of these incentives are tax exemption, customs and excise duty exemption, trade agreements, etc. Exporters may transfer the benefit of such incentives to the consumers in order to compete in the international market. (f) Frequency of Purchase :- Products of daily requirements, which are bought very frequently such as food articles, should be priced low. On the other hand, consumers are willing to pay higher prices for durable goods, which are bought once in a while.

(g) Product Differentiation and Brand Image :- The products marketed by MNC's and TNC's are widely accepted in the world market. Such companies can charge higher prices for their products. While exporters competing with such companies should charge lower prices. (h) Miscellaneous Factors :- Besides these factors, other factors listed below affect the pricing decisions of exporters. » Marketing policies; » Inflation rate; » Objectives of the firm, etc. G1

Importance of Export Pricing

fI")

The following are the pricing objectives an exporter intends to achieve in the international market :(a) Helps to Achieve Objectives :- Every organisation has some fundamental objectives, such as sales maximization, profit maximization, etc. Pricing helps organisations in achieving these objectives by suitably modifying the pricing strategy. (b) Increases Profitability :- Pricing decisions directly affect the sales revenue and thereby overall profitability. For example, low pricing helps market penetration but reduces revenue. On the other hand, skimming pricing generates more revenue, if demand conditions are favourable. (c) Helps to Penetrate the Market :- When there is an intense competition in the market, low pricing helps to penetrate market by driving away competitors. Low pricing attracts consumers and thereby helps in increasing market share. (d) Helps to Skim the Cream :- Higher pricing can be charged to skim the consumer surplus by introducing innovative

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features or products in the market. Thus a suitable price research can generate additional revenue for the exporter in the international market. (e) Helps to Increase the Market Share :- Exporters can increase the market share for their product by charging competitive price for their products. Low price is one of the important considerations that affect the purchase decisions of the consumers. (f) Helps to Develop Brand Loyalty :- Goods, which are sold at right and reasonable price, help to develop brand loyalty. Consumers continue to buy such products even if new entrants, selling goods at lower price, enter the market. (g) Helps to Face Competition :- Exporters face competition from three angles. In order to face intense competition, exporters should fix up appropriate prices for their products, which should be reasonable and, as far as possible, non-negotiable. (h) Reflects the Quality of the Product :- Generally, consumers correlate the quality of product with its price. Low priced products reflect low quality and vice versa. Hence, exporters should avoid charging a very low price. At the same time, very high prices are to be avoided. 01

Export Pricing Strategies

fj;,)

Pricing strategy may be defined as the strategy adopted by exporters with respect to the pricing of goods while marketing them to the ultimate consumer. An exporter may charge a uniform price in different markets of the world or he may practise price discrimination taking into consideration the situations prevailing in different markets. The various pricing strategies used in the international market are :(a) Skimming Pricing Strategy :- A pricing strategy in which exporter charges a very high price initially in order to recover the cost incurred on high promotional expenditure, research and development, etc., is known as skimming pricing

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strategy. Mter exploiting the rich market exporter gradually reduces the price in order to increase the market share. (b) Penetration Pricing Strategy :- A pricing strategy in which an exporter charges a very low price initially in order to get hold of the market and drive away competitors is known as penetration pricing strategy. Sometimes, such strategy is referred to as dumping. This strategy is suitable for items of mass consumption. (c) Transfer pricing :- Transfer price is the price at which goods are transferred from one subsidiary to another or to the parent company. Due to this, profits of one subsidiary are transferred to another or to the parent company. Transfer pricing decisions are affected by factors such as differences in tax and tariff rates, foreign exchange restrictions and import restrictions. (d) Marginal Cost Pricing :- Marginal cost is the cost of producing one extra unit of a product. Under this approach, an exporter simply considers variable costs or direct costs while arriving at the price to be charged in the international market and fixed costs are fully recovered from the domestic market. (e) Market Oriented Pricing :- This is a very flexible method of arriving at a price as it takes into consideration the changing market conditions. The price charged may be higher when demand conditions are favourable and vice versa. This method is sometimes referred to as what the traffic will bear method. (£) Competitor's Pricing :- Under this method, pricing strategy of dominant competitors is taken into consideration while arriving at pricing decisions. Generally, pricing decisions of price leaders are taken into consideration. A price leader is the firm, which initiates the price trends. G1

INCOTERMS 2000 or Export Price Quotations

1'0

In order to have uniform export terms for delivery of goods and payment, there are several trade terms that are used at the international level. These terms are codified by the International Chamber of Commerce (ICC) under the ti~le

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137.

'INCOTERMS'. The INCOTERMS were first introduced in 1936. These terms were known as "INCOTERMS 1936". Amendments and additions were later made in 1953, 1967, 1980, 1990 and 2000 in order to bring these terms in line with current international trade practices. The following are the commonly used INCOTERMS :(a) Ex-works (EXW) ...... Name and address of the exporter's premises :- Ex-works price is rarely used in the international market. Under this quotation, the importer should take delivery of goods at the exporter's premises and all risks and expenses thereafter are borne by the importer.

Ex-works Price =cost of production + profit margin. It is the lowest price that can be charged by an exporter in the international market.

(b) Free Alongside Ship (FAS) ...... Name of the port of shipment :- Under this quotation, the exporter undertakes to deliver the goods to the importer at the port of shipment of goods. All expenses thereafter, such as loading, ocean freight, marine insurance, etc., are borne by the importer.

FAS Price =Ex-works price + transportation charges in exporter's country As per the modified INCOTERMS 2000, the exporter is required to clear goods at the port of shipment as against old INCOTERMS where the importer was required to do so. (c) Free on Board (FOB) ...... Name of the vessel :- This is the

most frequently used price quotation in the international market. Under this quotation, the exporter undertakes to pay all expenses till the loading of goods on board the ship, including documentation charges. All expenses, thereafter, are borne by the importer.

FOB Price =FAS + loading charges. (d) Cost & Freight (C&F) ...... Name of the port of destination :Under this quotation, the exporter undertakes to pay all expenses including transportation of goods till the port of destination. The importer is required to pay for marine insurance, unloading of goods and expenditure thereafter.

CF Price =FOB price + marine freight.

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138.

(e) Cost, Insurance & Freight (elF) ..... . Name of the port of destination :- Under this quotation, an exporter undertakes to pay all the expenses till the goods reach the port of destination including the cost of documentation and insurance. The importer is required to pay for unloading and expenditure thereafter. CIF Price = CF price + insurance. ClI.1

Components of Export Price

fJO

AtypIca . 1 s t ruc t ure 0 fth e expor t price IS as un d er .Rs. No. Particulars Cost of production 1. Produce~s profit 2. (a) EX-factory cost Expenditure in exporter's country :3. ~ Packing &marking ~ Loading charges at the factory ~ Transportation charge to dock or airport ~ Handling charges & fee at port or airport ~ Documentation charge Export duty, if any, ~ (b) FOB price Sea or Air freight charges 4. (c) C&F price 5. Cost of insurance (d) CIF price Expenditure in importe~s country (at the port) :6. ~ Unloading charges at destination ~ Import duties and taxes ~ Fee~aid to clearing agent (e) Landed price Expenditure in importe~s country (ex-port) :7. ~ Transportation charges to importe~s warehouse Importer's margin 8. Margin of market intermediaries in the importing 9. country . (f) Price to final consumer

r=c; Computation of FOB Price & Impact of Incentives

Rs.

-

.

fJO

The governments of developing countries, including India, offer various incentives to exporters in order to promote

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exports from their countries. These incentives are monetary as well as non-monetary. Of these, monetary incentives directly affect the pricing decisions of the exporter. Some of the monetary incentives are ;(a) Duty Drawback; (b) Exemption from sales tax; (c) Exemption from excise duty; (d) Rail/Ocean/Air freight concession; (e) Marketing Development Assistance; Now, let us try to analyse the impact of incentives on export pricing with the help of the following illustrations. Case 1 :. When incentives are not considered, Calculate the FOB price to be quoted by an exporter considering the following :Ex-factory cost Rs. 17000 Special packing charges Rs. 3000. Transportation (from factory to dock) Rs. 1500. Marine Loading charges Rs. 500, Contribution 10% of FOB cost. Duty drawback 10% of FOB price. Calculate minimum FOB price in pounds if 1 pound =40 rupees.

.

Case 1 '. When incentives are not considered Particulars Ex-factory cost Special packing charges Transportation (From factory to dock) Marine Loading charges a) Total cost

Profit margin (10% of FOB cost) b) Total revenue , 24200 Therefore, FOB pnce =Rs. 24,200 =-'- = 605 pounds, 40 Case 2 '. When incentives are considered Particulars Ex-factory cost Special packing charges Transportation (From factory to dock) Marine Loading charges a) Total cost Profit margin (10% of FOB cost) b} Total revenue

Rs, 17,000 3,000 1,500 500 22,000 2,200 24,200

Rs, 17000 3000 1500 500 22,000 2,200 24,200

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Let FOB price be x

= = = = =

FOB price x x 1.1x x

Incentives. (10% of x) 0.1x

FOB revenue 24,200 24,200 24,200 22,000

. 22000 Therefore, FOB pnce =Rs. 22,000 = - ' - =550 pounds. 40

Thus, it can be seen from the above illustrations, that given the cost structure and contribution, incentives reduce the price of goods to be exported. But reduction in price does not mean reduction in profit or total sales revenue. In the above cases, the exporter expects the total revenue of Rs.24,200. In the second case, due to consideration of incentives, the total revenue has reduced to Rs. 22,000. But the exporter will still get the expected revenue as the loss of Rs. 2,200 (10% of 22,000) can be recouped from incentives. G1

A Note on Break-even Analysis

f0

Break-even analysis is a graphical representation of the relations between cost, volume and profit. It indicates various levels of sales with varying degree of cost and output. Objective of Break-even Analysis The main objective of break-even analysis is to determine the break-even point. Break-even point is the point where the total revenue is equal to the total cost (variable + fixed cost). It is a point at which there is no profit or no loss. If the amount of sales is below break-even point then a firm suffers loss while if it is above it, the firm makes profit. Assumptions of Break-even Analysis (a)

Fix~d

costs remain constant. (b) P~'i\.:l:s of variable cost factors remain unchanged. (c) Semi-variable cost is segregated into variable cost and fixed cost. (d) Whatever is produced is sold out, i.e., production equals sales.

_________ Export Cosbng and Prking __________________ 141.

(e) Other factors such as method of production, operating efficiency, pricing policy, product mix, etc. remains constant. Diagrammatic Presentation of Break-even Graph Y

In the diagram, production and sales are measured along X-axis while cost and revenue along Y-axis. Break-even point is reached where total cost is equal to total revenue (TC=TR). Any operation below this point would cause the firm to make loss.

c

o S T &

R E V E N U E

Total Fixed

x

QUANTITY

Break _even Point =

Fixed Costs = Fixed Costs Selling Price - Variable Cost (Per unit) Contribution Illustration

Fixed costs =Rs. 1,00,000. Variable costs (per unit) =Rs. 2. Selling price (per unit) =Rs. 4. Production capacity =1,00,000 unit p.a. Break - even point 1'~O~~OO

50,000 units.

Advantages of Break-even Analysis (a) It is simple to construct and understand. (b) It helps to understand relation between cost, volume and profit. (c) It helps management to decide production level. (d) It indicates impact of change in production level on profit. 01

A Note on Skimming Pricing Strategy

f0

A pricing strategy in which an exporter charges a very high price initially in order to recover the cost incurred on high promotional expenditure and research and development is

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known as skimming pricing strategy. Mter exploiting the rich market an exporter gradually decreases the price in order to increase the market share for his product. Objectives of Skimming Pricing Strategy (a) To earn high profit. (b) To recover the cost incurred on research and development. (c) To recover the cost incurred on high promotional expenses. Suitability of Skimming Pricing Strategy (a) Fashionable items. (b) Innovative products. (c) Monopolistic items. Advantages of Skimming Pricing Strategy (a) High Profitability :- Higher prices result in higher profit. This profit can be utilised for further research and development, which would generate more profit and would increase the overall profitability of the organisation. (b) Speedy Recovery of Promotional Expenditure :Unproductive expenditure incurred on market development in the form of advertising and market research can be recovered speedily by charging higher prices. (c) Helps to Forecast Market Demand :- Higher prices also helps to forecast the market demand. If the product can capture adequate market share at a higher price, then it can further be expanded by gradually reducing the price. (d) Right Promotional Strategy for Innovative Products :Innovative products have a very transitionary demand. Hence, the maximum revenue should be collected at the introductory stage through skimming strategy. (e) Cash Flow :- This strategy provides speedy recovery of cash and therefore, maintains adequate cash flow in the organization. This reduces dependence on external sources of finance.

erts.

3. Usage:It IS used In the markets It is used in the markets where competition is not very where competition IS very severe, generally domestic severe, generally market. international market. 4. Value:.. Total cost pricing is higher as Marginal prlcmg IS it. involves both fixed costs as comparatively low as it well as variable costs. considers only variable costs. 5. Competitiveness ;It is not very competitive as it It is more competitive as it is is based on all co'Sts. based only on variable costs. 6. Market Penetration :This strategy cannot be used This strategy is useful m for penetrating into highly penetrating In the highly competitive market. competitive markets. 7. Elasticity of Demand ;This strategy does not This strategy is useful when consider elasticity of demand. demand m the domestic market is inelastic.

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151.

Problems Based on Calculation of FOB and CF Price JiG)

Formulae for Solving the Pricing Based Problems 1. Computation of FOB Price :Step-1 Find FOB cost by adding all the costs such as, Ex-factory cost, Packing charges, Transportation charges in seller's country, Loading charges, Documentation charges, etc. (except unloading charges and transportation in buyer's country) Step-2 Find FOB revenue. FOB Revenue =FOB cost + Profit contribution. Step-3 Apply the following formula, where FOB Price should be taken as x. FOB Price =FOB Revenue -Incentive (DBK) 2. Computation of C & F Price Step 1 Find FOa Price by the above method. Step 2 Apply the following formula. C & F Price =FOB Price + Freight charges (as given in the problem). 3. Computation of CIF Price Step 1 Find FOB Price by the above method. Step 2 Apply the following formula. CIF Price =FOB Price + Freight charges + Insurance (as given) Illustration 1 The following is the cost data of the Kalina Exports Ltd. Ex-works cost Rs. 5000 Special packing charges Rs. 1000. Transportation charges Rs. 500. Marine Loading charges Rs. 500. Contribution 5% of FOB cost. Duty drawback 5% of FOB price. (a) Calculate minimum FOB price if $ 1 =RS.35. (b) What will be CF price if marine freight is $ 20 ? Solution :Cost Statement of Kalina Exports Ltd. (No. of units :- ..................) Particulars Rs. Ex-works cost 5000 Special packing charges 1000 Transportation charges 500 Marine Loading charges 500 (a) Total Cost 7,000 Profit margin (5% of FOB cost) 350 (b) Total Revenue 7,350 Let FOB price be x

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FOB price x x 1.05x x

= = = = =

FOB revenue

incentives. (5% of x) 0.05x

7,350 7,350 7,350 7,000

. 7000 Therefore, FOB price = Rs. 7,000 = - ' - = $ 200. 35 IAns:- FOB price = Rs. 7,000 = $ 200. C & F Price

= =

=

FOB Price $200 $ 220

+ +

Freight charges $20

IAns:- C & F price =$ 220. Illustration 2 You are required to compute minimum FOB price to be quoted for 10,000 units to be exported to U.S.A. rate $ 1 =Rs 50. Production cost =Rs. 5 per unit Packing charges =Rs. 2 per unit Transportation (In exporter's country) =Rs. 1 per unit Transportation (In importer's country) =Rs. 1 per unit Loading charges =Rs. 2 per unit Unloading charges =Rs. 2 per unit Documentation =2.50 per unit Profit =15% of F.O.B cost. D.B.K. =25% of F.O.B price. Solution :Cost Statement of ................. (No. of units :-10,000) Particulars Rs. Rs. Production cost 10000 x 5.00 50000 Packing charges 10000 x 2.00 20000 Transportation (In exporter's country) 10000 x 1.00 10000 Loading charges 10000 x 2.00 20000 Documentation 10000 x 2.50 25000 (a) Total Cost 1,25,000 Profit marqin (15% of fOB cost) 18750 (b) Total Revenue 143750 .. Note: TransportatIon m Importer's country and unloadmg charges do not form the part of FOB price and therefore have been ignored. Let FOB price be x

FOB price

=

FOB revenue

incentives.

Export Costing and Pricing X

x 1.25 X X

= = = =

143750 143750 143750 115000

153.

(25% of x) 0.25x

Therefore, FOB price =Rs. 1,15,000 = 1,15,000 =$ 2300. 50 OIl

Objective Questions 5'.)

I

Q.1 Answer the following questions in brief: (1) What is Transfer Pricing Strategy? Ans :- Transfer pricing refers to the pricing of goods transferred from one subsidiary to another or to the parent co mpany. Transfer pricing decisions are affected by factors such as differences in tax and tariff rates, foreign exchange restr ictions and import restrictions. (2) Explain the term Skimming Price Strategy. (Mar.2005) Ans :- A pricing strategy in which exporter charges a very high price initially in order to recover the cost incurred on high promotional expenditure and research and development is known as skimming pricing strategy. (3) What is BEP in export pricing? (Oct.2004) Ans :- Break-even point is the point where the total revenue is equal to the total cost (variable + fixed cost). It is a point at which there is no profit or no loss. Hence, an exporter is in break -even when his total revenue is equal to the total costs. Q.2 State with reasons, true or false: (1) Transfer Pricing Strategy refers to pricing of goods and services among subsidiaries within a corporation. Ans :- TRUE - Transfer pricing refers to the pricing of goods transferred from one subsidiary to another or to the parent company. Due to this, profits of one subsidiary are transferred to another subsidiary or to the parent co mpany. (2) Charging lower prices at the early stage is called as Penetration Pricing Strategy. Ans :- TRUE - A pricing strategy in which an exporter charges a very low price initially in order to get hold of the market and drive away competitors is known as penetration pricing stra tegy. (3) Duty Drawbacks has no effect on export price. Ans :- FALSE - Duty Drawback reduces the price quoted by the exporter to the overseas buyers to the extent he decides to transfer

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the benefit of incentives to the consumers. If he does not wish to transfer the DBK to consumers the price will not be affected. (4) Profits will be the maximum at the B.E.P. Ans :- FALSE - Break-even point is the point where the total revenue is equal to the total cost (var iable + fixed cost). It is a point at which there is no profit orno loss. G1

(1) (2) (3) (4) (5) (6)

(7)

(8)

(9)

Question Bank £0

What do you mean by export pricing? What are the factors affecting export 'pricing decisions? Explain any two export pricing strategies? (Mar. 20.0.6) What are INCOTERMS? Explain them in detail. What is a price quotation ? What are the various (Oct.20.0.5) components of export price quotation? How is the FOB price determined? How does incentives affect export price? Write a short note :(a) Break-even Analysis. (b) Skimming Pricing Strategy. (c) Penetration Pricing Strategy. Distinguish between the following: (a) FOB Quotation and CIF Quotation. (Mar.20.0.4,20.0.5) (b) Skimming and Penetration Pricing Strategy. (Oct.2o.o.4) (c) Total Cost Pricing and Marginal Cost Pricing. Calculate minimum FOB Price to be quoted by an exporter on the basis of following data: . Ex-factory cost Rs. 17,0.0.0.. Packing cost Rs. 3,0.0.0.. Transportation Rs. 1,50.0.. Marine Loading Rs. 50.0.. FOB Cost Rs. 22,0.0.0.. Add 10.% Profit Rs. 2,200. Rs. 24,20.0.. FOB Revenue DBK 10.% of FOB Price. (Ans :- FOB Price =$550.) Compute the Break -even point and profit if the exporter intends to produce and export 1,50.,0.0.0. units: FOB cost Rs. 14 per unit. Duty Drawback 15% of FOB price. FOB Price Rs. 15 per unit. Rs. 3,25,00.0. Fixed Cost (Ans :- Break-even point 1,00,000 unit, Profit 1,65,500)

=

=

Export Finance ~

Export Finance.

~

Pre-shipment Finance :Meaning. (Mar.2006) Importance. Features. (Mar.2006) Procedure. (Mar.2005, Oct.2004) Documentary Evidence. Types.

~

Post-shipment Finance :Meaning. Importance. Features. Procedure. (Mar.2004) Documentary Evidence. Types.

~

Short Notes :Deferred Credit.

~

Distinguish Between:Pre-shipment finance and Post-shipment finance.

~

Objective Questions.

~

Question Bank.

Export Marketing.~_ __

156. C"\l

Meaning of Export Finance

5G)

Credit and finance are the life-blood of business whether domestic or international. The financial requirements of exporters can be of two types :(a) Pre-shipment Finance :- Pre-shipment finance refers to the credit extended to the exporters prior to the shipment of goods for the execution of an export order. (b) Post-shipment Finance :- Post-shipment finance refers to the credit extended to the exporters after the shipment of goods for meeting working capital requirement. While giving such assistance, financial institutions are mainly governed by the guidelines issued by :(a) The Reserve Bank of India; (b) The Trade and Exchange Control Regulations and; (c) The International Conventions and Codes of the International Chamber of Commerce. C"\l

Meaning of Pre-shipment Finance

5G)

Pre-shipment finance refers to the credit extended to the exporters prior to the shipment of goods for the execution of the export order. It is also known as 'Packing Credit'. It refers to any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods as defined by the Reserve Bank of India. Exporters can get pre-shipment credit from :(a) The Indian commercial banks. (b) The branches of foreign commercial banks in India. C"\l

Importance of Pre-shipment Finance

5G)

Pre-shipment finance is generally granted for the following purposes :(a) To acquire raw materials, components, machinery, equipments and technology required for export production. (b) To improve quality of the goods so as to conform to international standards. (c) To adapt product to the requirements of foreign markets, making improvements in the existing products, product addition and product extension.

_________ ExportFlnance __________________________ 157.

(d) To conform to international packing and packaging standards, labelling and marking, etc. (e) To procure goods from domestic market in case of merchant exporters. (0 To store the goods in warehouses before shipment. (g) To pay for internal transportation and marine freight. (h) To fulfil customs formalities, excise clearance and preshipment inspection. (i) To open and maintain foreign offices for export promotion abroad. G) To pay for export documentation. (lQ

Features of Pre-shipment Finance

~

The features of pre-shipment finance are as under :(a) Eligibility :- It is available to all ca-tegories of exporters, such as:~ Merchant exporters; ~ Manufacturer exporters; ~ Export houses; ~ Trading houses; ~ Star Trading houses; ~ Super Star Trading houses and; ~ Manufacturers supplying goods to EH/TH/STH/SSTH or merchant exporters. (b) Documentary Evidence :- The following documents are required to be submitted by the direct exporter for availing pre-shipment finance :~ A confirmed export order and/or; ~ An irrevocable letter of credit opened in the favour of the exporter. Indirect exporters are also eligible for the packing credit on the production of the following documents :~ A letter from the concerned export house/trading house certifying the portion of export order allotted in their favour; and ~ An undertaking from the concerned export house/trading house stating that they do not wish to obtain packing credit facility against the same transaction for the same purpose.

158.

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(c) Purpose :- Packing credit is granted for specific purposes such as purchase, processing, manufacturing or packing of goods as defined by the Reserve Bank of India.

(d) Form of Finance :- Packing credit is extended in different forms :~ Extended Packing Credit Loan; ~ Packing Credit Loan (Hypothecation); ~ Packing Credit Loan (Pledge); ~ Secured Shipping Loan. (e) Amount of Finance :- The amount of packing credit IS based on:~ The amount of export order; ~ The credit rating of the exporter done by the bank and; ~ The exporter's receivables on account of incentives like International Price Reimbursement Scheme (IPRS), duty drawback (DBK), etc. Generally, the amount of packing credit does not exceed the FOB value of the goods to be exported or their domestic value whichever is less. (jj Period of Credit :- The packing credit can be granted for a

maximum period of 180 days from the date of disbursement. However, it can be further extended for a period of 90 days with a prior permission of the RBI. (g) Rate of Interest :- The interest payable on pre-shipment finance is usually lower than the normal rate, provided the credit is liquidated from the export proceeds received from abroad within the period specified. (h) Loan Agreement and Disbursement of the Loan:- Before the disbursement of loan, the bank requires the exporter to execute a formal loan agreement. Though, the entire amount of packing credit is sanctioned at one time, it is generally released in instalments. (i) Maintenance of Accounts :- As per the RBI directives, the

banks are required to maintain a separate account in respect of each packing credit. However, running accounts are permitted in case of exporters situated in FTZs, EPZs and the 100% EOUs.

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159.

(j) Monitoring the Use of Loan :- Packing credit should be used strictly for the purposes for which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest.

(k) Repayment of Loan :- The exporter should repay the amount of packing credit out of the export proceeds within the specified period. The use of loeal funds is not permitted for the repayment of packing credit. (\Q

Procedure for Obtaining Pre-shipment Finance ro

The following is the procedure for obtaining pre-shipment finance :(a) Submission of Application :- The exporter is required to make an application in a specific format, as provided by the bank, for availing packing credit. The application should be accompanied by the relevant documents as specified in the application form. (b) Processing of the Application :- On recelvmg the application, the bank scrutinizes the application and necessary documents. If the bank is satisfied regarding the documentary evidence submitted and credit-worthiness of the exporter, it goes ahead with the sanctioning of loan. (c) Sanctioning of Loan :- The bank sanctions the appropriate amount of loan based on :~ The amount of export order; ~ The credit-rating of the exporter done by the bank and; >- The exporter's receivables on account of incentives like IPRS, duty drawback, etc. Generally, the amount of packing credit does not exceed the FOB value of the goods to be exported or their domestic value whichever is less. (d) Loan Agreement and Disbursement of the Loan:- Before the disbursement of loan, the bank requires the exporter to execute a formal loan agreement. Though, the entire amount of packing credit is sanctioned at one time, it is generally released in instalments.

Export Marketing.;....... _ __

160.

(e) Maintenance of Accounts :- As per the RBI directives, the banks are required to maintain a separate account in respect of each packing credit. However, running accounts are permitted in case of exporters situated in FTZs, EPZs and the 100% EOUs. (f) Monitoring the Use of Loan :- Packing credit should be

used strictly for the purpose for which it is granted. Hence, the lending bank monitors the use of finance by the exporter. Any default on the part of exporter is charged with a higher rate of interest. (g) Repayment of Loan :- The exporter should repay the amount of packing credit out of the export proceeds within the specified period. The use of local funds is not permitted for the repayment of packing credit. GIl

Documentary Evidence for Pre-shipment Finance

M

The various documents required to be submitted for obtaining pre-shipment finance are :(a) Confirmed export order or LlC in original. Where it is not available, an undertaking that it would be submitted within a reasonable time. (b) An undertaking that the advance will be utilized for the specific purposes for which it has been procured. (c) Copies of income tax and wealth-tax assessment orders for the past two to three years in case of a sole proprietorship and partnership firm. (d) In the case of indirect exporters, an undertaking from the concerned export house/trading house stating that they do not wish to obtain packing credit facility against the same transaction. (e) Partnership deed in case of partnership firm, Memorandum and Article of Association and certificate of incorporation and of commencement of business in case of a company. (£') Copy of Board resolution, in case of a company, to open a bank account. (g) Letter of authority to operate the account. (h) Audited financial statements of the past three to 5 years. (i) Copy of Registration-cum-membership certificate (RCMC). G) Appropriate policy or guarantee from the ECGC (k) Any other document required by the bank.

_________ ExportFlnance __________________________ 161. ('iQ

Methods or Types of Pre-shipment Finance

JJO

The various types of pre-shipment finance are :(a) Extended Packing Credit Loan :- It is extended to those exporters who are rated as first class exporters by the commercial banks on the basis of their creditworthiness. It is granted for making advance payment to the suppliers for acquiring goods to be exported. Such advance is generally clean, i.e., granted without. any documentary evidence for a very short period of time. (b) Packing Credit Loan (Hypothecation) :- It is extended for the acquisition of raw materials, work-in-process or finished goods meant for exports. The goods so acquired are treated as security for sanctioning of loan. Under this facility, the exporter is required to execute a hypothecation deed in favour of the bank, while the possession of goods remains with the exporter. (c) Packing Credit Loan (Pledge) :- It is extended for the

acquisition of seasonal raw materials or raw materials in odd or bunched lots. The export takes place in due course after processing as per the shipping and delivery schedule agreed upon by the overseas buyer. The documents relating to raw materials are pledged with the bank while the possession remains with the exporter. (d) Secured Shipping Loan :- Secured shipping loan can be obtained once the goods are handed over to the transport operator or clearing and forwarding agent for the shipment. It is released against lorry receipt or railway receipt. It is extended for a very short duration considering the time taken for dispatch of goods to the port and completion of shipping and customs formalities. (e) Advances against Red Clause IlC :- If the exporter desires to obtain packing credit then he should request the importer to open red clause UC. Red clause UC authorises the local banks to grant advances to exporters to meet working capital requirement for the processing of e~port order. The issuing bank guarantees such advances.

The procedure for obtaining MDA assistance is as follows :(a) Intimation of Activities :- The exporter is required to submit the intimation duly completed and signed in a specific format to the concerned organisation, viz., FlEa, EPC, Commodity Boards, APEDA, MPEDA, etc., giving a clear 14 days advance notice. (b) Processing of the Application and Issue of the Approval Letter :- The concerned agency on receipt of the intimation examines the application and checks the relevant details. If satisfied, such agency issues an approval letter to the exporter preferably within 5 working days of the receipt of the application.

(d Filing Claim for MDA :For Sales Cum Study Team & Participation in Trade Fairs and Exhibitions The exporter is required to submit the claim in a prescribed format along with under mentioned documents immediately on return to India after but positively within 3 months of the return to India :~ Details of sale-cum -study tour undertaken earlier. ~ Self-certified copy of the export house or trading house certificate or SSI registration certificate, if applicable. ~ Photocopy of passport highlighting the entries of departure from and arrival into India and also the countries visited. For Production of Publicity Material The exporter is required to submit the claim in a prescribed format along with under mentioned documents within 3 months of the production of publicity materials :~ A self-certified copy of the publicity material. ~ A self-certified copy of the invoice. ~ A self-certified copy of receipt or bank advice as an evidence of payments made. ~ Self-certified copies of quotations from printers. ~ Self-certified FOB value export figures during the last 3 financial years.

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(d) Approval of Under Secretary (MDA) :- The concerned

agency examines the claim on priority basis and sends the verification note alongwith a copy of the claim form on fortnightly or monthly basis to the Under Secretary (MDA) , Department of Commerce for perusal and taking approval of the MDA Committee. (e) Reimbursement of MDA :- If the proposal is approved by the MDA Committee then due MDA assistance is released in full to the exporting company on reimbursement basis by the concerned agency preferably within 10 days of the receipt of approval letter. (1Q

Export Promotion Capital Goods (EPCG) Scheme

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EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporters to import machinery and other capital goods for export production at concessional or no customs duties at all. This facility is subject to export obligation, i.e., the exporter is required to guarantee exports of certain minimum value, which is in multiple of the value of capital goods imported. Eligibility The scheme covers manufacturer exporters with or without supporting manufacturer(s)/vendor(s), merchant exporters tied to supporting manufacturer(s) and service providers. Export Obligation (a) The scheme allows import of capital goods for pre production, production and post production at 5% customs duty subject to an export obligation equivalent to 8 times of duty saved on capital goods imported to be fulfilled over a period of 8 years reckoned from the date of issuance of licence. Capital goods would be allowed at 0% duty for exports of agricultural products and their value added variants. (b) However, in respect of EPCG licences with a duty saved of Rs.100 crore or more, the same export obligation shall be required to be fulfilled over a period of 12 years.

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(c) The

(d) (e)

(fj

(g)

capital goods shall include spares (including refurbished/reconditioned spares), tools, jigs, fixtures, dies and moulds. EPCG licence may also be issued for import of components of such capital goods required for assembly or manufacturer of capital goods by the licence holder. Second hand capital goods without any restriction on age may also be imported under the EPCG scheme. Spares (including refurbished/reconditioned spares), tools, refractories, catalyst and consumable for the existing and new plant and machinery may also be imported under the EPCG scheme. However, import of motor cars, sports utility vehicles, all purpose vehicles shall be allowed only to hotels, travel agents, tour operators or tour transport operators whose total foreign exchange earning in current and preceding three licencing years is Rs 1.5 crores. Spares (including refurbished/ reconditioned spares), tools, spare refractories, catalyst and consumable for the existing plant and machinery may also be imported under the EPCG Scheme subject to an export obligation equivalent to 8 times of duty saved to be fulfilled over a period of 8 years reckoned from the date of issuance of licence. (lQ.

Deemed Exports

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Deemed exports are transactions in which goods supplied do not leave the country and the payment for such goods is made in India by the recipient of the goods in Indian rupees. In other words, products of import substitution are entitled to deemed export benefits. This is based on the theory that foreign exchange saved is foreign exchange earned. Categories of Supply The following categories of supply of goods are considered "Deemed Exports" provided the goods are manufactured in India: (a) Supply of goods against Advance Licence and Duty Free Replenishment Certificate (DFRC) under the Duty Exemption Scheme. (b) Supply of goods to :~ Export Oriented Units

Deemed export suppliers are eligible for the following benefits subject to the specific conditions as attached to different categories of deemed export supplies :(a) Advance Licence for Intermediate Supply or Deemed exports or Duty Free Replenishment Certificate (DFRC); (b) Deemed Exports Drawback; (c) Refund of terminal excise duty. The deemed export benefits. viz., refund of duty drawback. refund of terminal excise duty. etc .. are available only to the Manufacturer Exporters for the supply of goods manufactured in India. Hence, the merchant exporters are not entitled to these benefits.

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Blanket Exchange Permit Scheme

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Blanket Exchange Permit Scheme is a part of assistance provided by the World Bank to India for the Export Development Fund (EDF). The Government of India has signed an agreement with the World Bank for a line of credit for US $ 295 million for the Export Development Project which will strengthen efforts made in the earlier Industrial Export Project to motivate firms to draw up and implement systematic export plans resulting in incremental exports. This project includes a term loan component (US $ 275 million) and an Export Development Fund component (US $ 20 million). Export Development Fund covers not only market development but also productivity improvement measures at the firm level. The EDF will be operated by four agencies namely:(a) EXIM Bank (US $ 7 million); (b) ICICI (US $ 7 million); (c) Bank of Baroda (US $ 3 million; and (d) Canara Bank (US $ 3 million). Exporters eligible under the aforesaid Export Development Fund and term loan component would also be considered eligible for issue of blanket permit by the Reserve Bank. Such exporters would be permitted to draw exchange against the blanket permit issued to them by the Reserve Bank for expenditure towards various purposes approved under EDF on the basis of and subject to the terms and conditions laid down in the original letter issued to them by the respective institutions viz. Exim Bank, ICICI, Bank of Baroda and Canara Bank. 01

Duty Entitlement Passbook Scheme (DEPB)

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The objective of DEPB is to neutralise the incidence of customs duty on the import content of the export product. The neutralisation shall be provided by way of grant of duty credit against the export product. The DEPB scheme will continue to be operative until it is replaced by a new scheme, which will be drawn up in consultation with exporters.

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(a) Under the DEPB, an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. The credit shall be available against such export products and at such rates as may be specified by the Director General of Foreign Trade (DGFT) by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts, packaging material etc. (b) The holder of DEPB shall have the option to pay additional customs duty, if allY, in cash as well. Features of DEPB (a) Validity :- The DEPB shall be valid for a period of 24 months from the date of issue. (b) Transferability:- DEPB and/or the items imported against it are freely transferable. The transfer of DEPB shall however be for import at the port specified in the DEPB, which shall be the port from where exports have been.made. (c) Applicability of Drawback :- Normally, the exports made

under the DEPB Scheme shall not be entitled for drawback. (d) Fixation of DEPB Rate :- 'Aayaat Niryaat Form' prescribes the form regarding fixation of DEPB rates. All applications for fixation of DEPB rates shall be routed through the concerned Export Promotion Council, which shall verify the FOB value of exports as well as the international price of inputs. (e) Provisional DEPB Rate :- To encourage diversification and to promote export of new products, the DEPB Committee would be empowered to notify provisional DEPB rates. However, such DEPB rates would be valid for a limited period of time during which the exporter would furnish the data on export and import for the regular fixation of rates. (£) Port of Registration :- Only the export/import made from

the specified ports shall entitled for DEPB. Some of these seaports are Mumbai, Kolkata, Cochin, Kandla,

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Mangalore, (etc. Similarly, some of the registered air ports are Agra, Ahmedabad, Bangalore, Coimbatore, etc. Export/ import from all SEZs are eligible for DEPB benefits. GIll

Tax Relief for Exporters & Foreign Exchange Earners

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The following exemptions and deductions at specified rates are available to the exporters and other foreign exchange earners under the Income Tax Act, 1961. (a) G) Deduction of part of the profits derived from export of specified goods or merchandise, of exporters and/or the supporting manufacturers (and supporting processors as well w.eJ. 1.4.91) of Export/Trading Houses, etc. (in Manufacturing units in Domestic Tariff Area (outside any Special Economic Zone) and selling to SEZs shall be eligible for deduction of profits under See. 80RHC. (b) Deduction of the specified amount of profits of companies engaged in the business of hotel or of a tour operator or a travel agent; (c) Partial tax relief on export of computer software and for import of system. The tax benefit can also be claimed by a supporting software developer from 1/4/99; (d) Partial deduction of the profits from export or transfer of film/TV software, TV news software, telecast rights; (e) Tax relief to an Indian company or resident tax, payer by giving a specified deduction of 50% of the profits from project exports in computing the taxable income; (f) Ten year partial tax holiday to units in Free Trade Zones/Export Processing Zones ending with the A.Y. 20102011; (g) Ten year partial tax holiday to 100% Export Oriented Units ending with the A.Y. 2010-2011. (h) Tax exemption of plantation subsidy; (i) Rebate on royalties, commissions, dividends, etc., from certain foreign enterprises; G) Tax relief on remuneration received from broad by teachers, professors, etc.; (k) Tax relief to playwrights, artists, sportsmen, etc.;

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(1) Tax rebate on remuneration received on services rendered outside India; (m) Double Taxation Relief under DTAAs; (n) Exemption for Handmade articles/things using wood as main raw materials; (0) Deduction of Royalty on' patents. (p) Deduction of income ofOBUs (Offshore Banking Units)., Ci8.

A Note on Duty Drawback (DBK) ~

Duty Drawback Scheme is administered by the Directorate of Drawback in the Ministry of Finance. Duty Drawback is composed of the customs duty and central excise duty paid on raw materials, components and consumables utilized in the manufacture of goods meant for export. Duty Drawback is allowed as per :(a) The Customs Act, 1962; (b) The Central Excise Act, 1944; (c) Customs and Central Excise Duty Drawback Rules, 1995. Classification of DBK The rates of drawback are divided into three categories :(a) The All Industry Rates : These rates are expressed as a percentage of FOB value of the goods exported and are applicable to all exporters in general. These rates are published normally once in a year, based upon the duties of Customs and Excise in the Finance Act. (b) Brand Rates : Where the Central Government has not notified "All Industry Rate" in respect of an export product, any manufacturer orexporter of such goods may apply to the Central Government for the determination of Brand rates. (c) Special Brand Rates: The manufacturer or exporter may

apply for a special rate of DBK in Drawback Proforma - I, II and III to the Central Government if the amount of drawback is less than 4/ 5 of the duties paid on the materials or components used in the manufacture of goods for export. The Drawback Director, Ministry of Finance, New Delhi, verifies the proforma and fixes the rate of drawback.

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Note on Industrial Raw Materials Assistance Centres (IRMAC) Jl'o)

IRMAC stands for Industrial Raw Materials Assistance Centre. It is established by the Government of India as a subsidiary of STC. Such centres import raw materials in bulk and supply it to the registered exporters against valid import licence. This enables exporters to get timely supply of raw materials at reasonable prices. IRMAC has been further simplified by removing actual user clause. Eligibility for the Assistance IRMAC is available to the following categories of exporters :(a) Minera.ls & Metals Trading Corporation of India (MMTC), (b) Export houses, (c) Trading house, (d) Star trading houses, and (e) Super star trading houses. 01

Objective Questions

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Q.l Answer the following questions in brief: (1) What is duty drawback (DBK)? (Mar.2006,Oct.2005) Ans :- Duty drawback is compose d of the customs duty and central excise duty paid on raw materials, components and consumables utilized in the man ufacture of goods meant for export. (2). Explain the meaning of deemed export ? Ans :- Deemed exports are transactions in which goods supplie d do not leave the country and the payment of such goods are made in India by the recipient of the goods in Indian rupees. In other words, products of import substit ution are entitled to deemed export benefits. This is based on the theory that foreign exchange saved is foreign exchange earned. (3) List out any four export incentives available to an Indian exporter. Ans :- Four incentives available to Indian exporters are: (a) Duty Drawback. (b) Excise Duty Refund. (c) Octroi Exemption. (d) Exemption from Income Tax. (e) Sales Tax Exemption.

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(4) What is EPGC? (Mar.2004, 2005) Ans :- EPCG scheme was introduced by the EXIM policy of 1992 -97 in order to enable manufa cturer exporter to import machinery and other capital goods for export produ ction at concessional or no customs duties at all. This facility is subject to export obligation, i.e., the exporter is required to guarantee exports of ce rtain minimum value, which is in multiple of the value of capital goods imported. (5) What is meant by export promotion? (Oct.2004) Ans :- Export promotion means promoting production of those goods which have high export potentialities. Export promotion requires liberal import policy in order to enable exporters to improve the quality of their goods by import of machinery, raw materials, technical know-how and marketing them abroad. (6) What is IRMAC Scheme?