Dibrugarh University B.Com 6th Sem: International Business Solved Papers (May' 2017)

a) 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.

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.

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Commodity-wise exports data available upto March 2012, shows that the share of manufacturing sector in total merchandise exports declined marginally from 62.9% in 2010-11 to 61.3% in 2011-12. However, the respective share of petroleum products and primary products increased during the period (Table 2). Within exports of manufacturing sector, the share of engineering goods and textile & textile products declined while that of chemical and related products improved marginally.

Among the major sectors, growth in exports of manufacturing sector seems to have been affected significantly during 2011-12. Within manufacturing sector, growth in exports of engineering goods and textile products was lower as demand conditions in key markets like the US and Europe were sluggish. These two markets account for nearly 60% and 50% of total exports from engineering and textile sector. Within engineering sector, growth in exports of transport equipment, iron & steel, electronic goods and manufactures of metals was significantly hit while that of machinery and instruments moderated marginally. However, growth in exports of leather & manufactures and chemicals & related products witnessed higher growth during 2001-12 as compared with 2010-11.

An analysis of the shift in the composition of India’s commodity exports reveals some interesting facts. Before the reforms, India’s exports were significantly driven by exports of primary agricultural commodities and a few manufacturing commodities such as textiles, and gems and jewellery; whole the commodity composition at the global level was shifting to technology-intensive manufacturing commodities such as engineering goods and chemicals. The reforms and favourable trade policy brought a shift in the composition of India’s commodity exports. Technology-intensive exports comprising engineering goods such as metals, machinery and transport equipment, and chemicals, including pharmaceuticals emerged as the leading export sector for the country, signifying rising prominence of exports in India’s GDP growth. Besides a shift towards technology-intensive exports, exports of petroleum products (which showed spectacular growth) emerged as a major contributor to total exports, reflecting the impact of India becoming the sixth largest refinery in the world.

Exchange control is exercised either by regulating international movements of goods through various devices or by the purchase and sale of foreign currency at specified rates in order to maintain a particular range of exchange fluctuations. Exchange control can be exercised by influencing demand for, and supply of, currencies in the exchange market. This can be done indirectly by devices like tariffs, quotas, bounties, changes in interest rates, etc. Imposition of import duties and of import quotas will reduce imports, cut down the demand for foreign currency, lower its value or raise the value of the domestic currency. Export duties, which are not so common, will have the opposite effect. There are various methods of exchange control which may be broadly classified into:

(1) Unilateral Methods: Unilateral measures refer to those methods which may be adopted by a country unilaterally i.e., without any reference to or understanding with other countries. The important unilateral methods are outlined below:

(a) Influencing Exchange Rate: Exchange control is exercised either by regulating international movements of goods through various devices or by the purchase and sale of foreign currency at specified rates in order to maintain a particular range of exchange fluctuations. Exchange control can be exercised by influencing demand for, and supply of, currencies in the exchange market. This can be done indirectly by devices like tariffs, quotas, bounties, changes in interest rates, etc. Imposition of import duties and of import quotas will reduce imports, cut down the demand for foreign currency, lower its value or raise the value of the domestic currency. Export duties, which are not so common, will have the opposite effect.

(b) Regulation of Foreign Trade: The rate of exchange may be controlled by regulating the foreign trade of the country. For example, by encouraging exports and discouraging imports, a country can increase the demand for, in relation to supply, its currency in the foreign exchange market and thus bring about an increase in the rate of exchange of the country’s currency.

(c) Controlling Exchange Rate. There are two methods generally adopted for controlling exchange:

(1) Intervention. In this case, the government enters the exchange market either to purchase or to sell foreign exchange in order to bring the rate up or down to the desired level. This method has been called intervention and leads to exchange pegging.

(2) Restriction. In this case, the government can prevent the existing demand for, or supply of, the country, in which they are interested, from reaching the exchange market. This method has been called restriction. The second method has been more popular because intervention proved a weak weapon and was also expensive.

(d) Exchange Control Proper. Exchange restriction is exchange control proper. For this three things are done: (a) all foreign dealings are centralised, usually in the central bank; (b) the national currency cannot be offered for exchange without previous permission, and (c) it is made a criminal offence to enter into an unauthorised foreign exchange transaction.

(e) Exchange Pegging: This device is usually adopted during war in order to minimize exchange fluctuations. The internal value of a currency may depreciate due to inflation but the government may seek to keep its external value at a higher level than warranted by the purchasing power parity in order to facilitate international transactions.

(f) Exchange Equalisation Account: Exchange funds were the outgrowth of the transformation of the international gold standard convention into an international gold settlement system under which gold came to be used as a balancing item in international trade.

(g) Blocked accounts: When foreign debts paid in domestic currency to the central bank cannot be remitted abroad without the permission of the government, blocked accounts are said to arise. Since idle funds in the country lead to contraction of credit, the foreign creditors are not altogether prevented from using them. But they have to be used in manner prescribed by the government. Usually, they are allowed to be sold in the open market. In most cases, they are sold at a heavy discount.

(2) Bilateral/Multilateral Methods

(a) Private Compensation Agreement: Under this method, which closely resembles barter, a firm in one country is required to equalize its exports to the other country with its imports from that country so that there will be neither a surplus nor a deficit.

(b) Clearing Agreements: Under a clearing agreement between two countries, importers in both countries pay into an account at their respective central banks the purchase price of the goods imported. This money is then used to pay off exporters. The rate between the currencies is usually fixed by the terms of agreement. The object is to regulate imports according to the wishes of the government, to ensure equilibrium in the balance of payments and to prevent uncertainties of fluctuating exchanges. The system tends to encourage bilateral trade at the expense of multilateral trade and thus has a restrictive effect on international trade. On the other hand, it discourages dumping and currency depreciation.

(c) Standstill agreement: A standstill agreement is a device to prevent the movement of capital through a moratorium on outstanding short-term foreign debts of a country and to give her time to put her house in order. Either the short-term debt is converted into long-term debt or provision is made for its gradual repayment.

(d) Payments Agreement: Under the payments agreement, concluded between a debtor country and a creditor country, provision is made for the repayment of the principal and interest by the debtor country to the creditor country. The creditor country refrains from imposing restrictions on the imports from the debtor country in order to enable the debtor to increase its exports to the creditor. On the other hand, the debtor country takes necessary measures to encourage exports to and discourage imports from the creditor country.

(e) Transfer moratoria: It is another device of the same kind. Under this system, importers or others pay their foreign debts in their domestic currency to a specified authority. When the moratorium is concluded these funds are remitted abroad. A foreign creditor is sometimes allowed to use his funds in the country imposing the moratorium in a way specified by the government.

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As per the information technology agreement which is part of the world trade organisation zero duty the agreement on I. T. sector, 217 I. T. components would attract a zero duty by 2005.  Therefore, foreign companies can import these products into the country while Indian manufacturers who did the same had to meet export obligations on their imports.  Now, the new EXIM policy states that domestic sales will be considered as a fulfillment of the export obligation, thereby freeing the domestic manufacturers from exports completely.

Ans: Role of EXIM Bank: 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.

The bank introduced the “cluster of Excellence” programme for up gradation of quality standards and obtaining ISO certification.

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Ans: 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:

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(Old Course)

Pass Marks: 32

2. Write short notes on:                                                4x4=16

3. (a) Explain the direction of foreign trade of India during last ten years.                               12

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(b) Discuss the commodity composition and direction of India’s foreign trade.                    12

4. (a) What is exchange control? Explain the objectives of exchange control.                       2+9=11

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(b) Analyze the Export-Import Policy of the Government of India.                                            11

5. (a) What is deferred payment system? Explain the procedures of export under deferred payments.      2+9=11

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(b) Describe the benefits and facilities provided to the units setup in export processing zone (EPZ).                         11

6. (a) Discuss the functions of Export Promotion Council.                                               11

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(b) Discuss the role of commercial banks in Indian foreign trade.                               11

7. (a) Discuss the importance of bilateral agreement in promoting foreign trade.                               11

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(b) Examine the role of State Trading Organizations in the context of India’s export promotion. 11