Dibrugarh University B.Com 6th Sem: International Business Solved Papers (May' 2016)

b) Export-Import Bank of India: The Export-Import (EXIM) Bank of India is the principal financial institution in India for coordinating the working of institutions engaged in financing export and import trade. It is a statutory corporation wholly owned by the Government of India. It was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India. Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament “THE EXPORT-IMPORT BANK OF INDIA ACT, 1981” for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for co-ordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade and for matters connected therewith or incidental thereto.

d) Export Credit Insurance: Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. ECGC provides a range of export credit risk insurance covers to exporters against loss in export of goods and services, and also offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them.

Export credit insurance is a policy offered by ECGC and private entities to business houses who wants to their assets from the credit risk of importers. These risks include non-payment risk, currency risks and political risk.  Exporters have a lot to benefit from export credit as it provides:

Most countries have managed the political process of keeping protectionism at bay despite growing unemployment and shrinkage of employment opportunities. Over the past few years, the number of restriction on international trade has dropped sharply. Member countries of the WTO have resorted to emergency measures to block imports on fewer occasions. Such measures included anti-dumping levies, recourse to special safeguards mechanism, and imposition of countervailing duties. However, cities of the report contend that protectionism exists but in less traditional forms. For instance, the bailout of financial institutions and car companies, and “Buy American” procurement rules in the US are cited as examples of protectionism. The failure to move ahead with the Doha round of trade talks is perhaps the most relevant example of lack of commitment among industrialized countries to free trade.

The international environment is very important from the pint of view of certain categories of business. It is particularly important for industries directly depending on imports or exports and import-competing industries. An international marketer is required to understand, evaluate and work out various parameters before venturing into any country. These Parameters are called environmental factors and they determine the direction and purpose of the international business operation. Many decisions depend upon environmental factors right from selection of the country, location of the plant liaison with the government, and entry of investment from local bodies, product launch, channel management, promotion and opening of outlets. The first challenge for an organization is to navigate from its home country to the host country. Thereafter it has to develop a proper system so that the venture is successful in the host country; learn all about the regulatory bodies both in the host country and home country; understand the customer’s changing tastes and attitude towards foreign goods and finally obtain revenue and make the business effective with right people.

The severity of economic crisis of 1991 provided an opportunity to the Government to make far-reaching changes in macroeconomic policy. There was liberalisation of domestic investment by removing direct controls on private sector and adopted fiscal and monetary policies to promote growth. Besides, the New Economic Policy pursued since 1991 also liberalized foreign trade and investment. The growth strategy was made export-oriented. Not only quantitative restrictions on imports have been removed but also customs duties have been drastically reduced.

Thus efforts have been made to integrate the Indian economy with the global economy. Rupee was devalued in 1991 and from 1993 exchange rate of rupee was made market-determined. It is, therefore, important to know how India’s foreign trade sector has performed in response to these important changes in economic policy framework.

The performance of foreign trade since 1991 is shown in Table 27.6 which reveals that after a transition period of 2 years, merchandise exports grew at about 20 per cent a year in dollar terms for three successive years during 1993-94 to 1995-96. Then due to slowdown in world trade and recession in the USA which is India’s major trade partner, annual growth of exports slowed down from 1996-97 to 1999-2000.

However after 2000 up till 2007-08 with the exception of year 2001 -02 there was more than 20 per cent annual growth of exports on sustained basis for over eight years (2000 to 2008) and in 2007-08 average annual growth rate of our exports was around 29 per cent.

Despite the sluggish performance of exports from 1996-97 to 1998-99 deficit in trade balance remained below 4 per cent of GDP (See Col. IV of Table 27.8) due to the equally subdued growth in imports during this period. During the four-year period, 2004-05 to 2007-08, India’s imports grew at a much higher rate due to robust industrial growth relative to growth in our exports and as a result deficit in our trade balance greatly increased; as a percentage of GDP it was 4.8 per cent in 2004-05, 6.8 per cent in 2006-07, and 7.8 per cent in 2007-08.

Due to global financial crisis and consequent economic slowdown in the US and European countries, the growth rate of our exports fell to 13.6 per cent in 2008-09, whereas imports grew at 26.7 per cent. As a result deficit in our trade balance rose to 12 per cent of GDP.

Bolstered by the measures taken by the government to help exports in the aftermath of the world recession of 2008 and also the low base effect, India’s export growth of 40.5 per cent in 2010-11 reached an all time high since Independence. Though it decelerated in 2011 -12 to 21.3 per cent, it was still above 20 per cent and higher than the compound annual growth rate (CAGR) of 20.3 per cent for the period 2004-05 to 2011-12.

After registering very high growth of 56.5 per cent in July 2011, export growth started decelerating with a sudden fall to single digits in November 2011 as a result of the emerging global situation and then to negative figures from March 2012. Export growth rate in 2012-13 was negative and equal to – 1.8%. For three months in 2012-13, exports declined YOY by double digits with the largest decline recorded in July 2012 at – 15.1 per cent.

Export growth in dollar terms was negative at-1.8 per cent in 2012-13, compared to 21.3 percent growth in 2011-12 (full year). In rupee India’s export growth has almost continuously been above world export growth in the 2000s decade and in 2011. One issue that has been a topic of debate is whether India’s export growth rate is dependent on world growth/trade or exchange rate. There is a strong correspondence between India’s export growth and world export growth.

Banking section plays important role in international business. Today almost all major banks have offices in major cities around the world. Many banks have formed collaboration with banks in other countries to better serve their international business community. Banks form a bond of trust between buying and selling transactions in international market. For individual banks offer services like foreign exchange, traveler’s check, electronics transfer. For businesses bank plays a role of trusty agent by offering services like ‘Documentary Collection’ and ‘Letter of Credit’. Significance of commercial banks in international trade are outlined below:

(a) Creating trust between international buyers and sellers by issuing letter of credit: One of the problems of international business houses doing business internationally is lack of trust. With the help financial devices commercial banks are able for a bond of trust between international buyers and sellers. In commercial methods like ‘Commercial Collection’ and ‘Letter of Credit’ banks act as agents to handle payments as well as relevant documents. Letter of Credit is most wide acceptable and used method of doing international transactions. Some banks and government agencies offer export credit insurance to businesses. In some cases, exporter has to forgo a letter of credit, in such cases banks offer export credit insurance. 

(b) Advising Bank: After the bank of the buyer approves the issuance of the letter of credit, the issued letter of credit is sent to the advising bank who establishes the authenticity of the instrument and informs the beneficiary of receipt.

(c) Final Payment: After all of the terms and conditions for shipment and quality standards have been checked via the presentation of proper documentation, the issuing bank pays the seller for the goods.

(d) Foreign exchange services: Foreign exchange market is another area where international commercial banks play vital role. Foreign exchange market serves two main functions, convert the currency of one country into the currency of another and provide some insurance against foreign exchange risk. Multinational corporations constantly need various currencies for their operations and to hedge against foreign exchange risk. International banks provide foreign exchange services to their commercial business clients to complete their business transactions. These banks act as a broker between commercial customer and foreign exchanges around the world. International businesses receive payments in foreign currencies for their export, the income it receives from foreign investments and income received from licensing agreements with foreign firms. International business use foreign exchange market to pay foreign firms for its products and services and when it makes direct investment in foreign country. International banks play major roles in these transactions.

(e) Short term and long term finance to the international trader: Many commercial banks offers short as well as long term loan financing to international businesses. Many countries have form banks backed by government funding to provide funds for exporters and importers. In India, Export-Import bank, an independent agency of the Indian government, provides financial aid to facilitate export and import of goods.

(f) Catalysts in international trade: Banking sector plays vital role of catalysts in international market. Due to technology advances in banking sector, communication gap and delays in international business have really narrow down a lot.