Indian Economy (Part I) - FTA, PTA, CECA, CEPA etc..

International Trade, FTA, PTA, ASIDE, E-BRC, CEPA vs CECA Difference Explained Baltic Dry Index (BDI)
London based Baltic Exchange, releases this index number on daily basis. It measures changes the cost to transport raw materials by sea. If Baltic Dry index number increases = more raw material is getting shipped= world economy is doing good (and will do good). If Baltic Dry index number decreases = there is decrease in export of raw material / pre-production items= something bad is about to happen with world economy. In the recent times, BDI was highest in 2008 and then started falling. There was a small rise in BDI index during Nov.2012, but still it is nowhere near to the high level of 2008. Meaning, world economy hasnt yet recovered from the fallout in US and EU.

Indias Chief import exports

Import 1. Petroleum 2. Gold 3. Electronic goods 4. Pearls, precious stones 5. Machinery except electronics Export 1. Petroleum (crude and products) 2. Gems and jewelry 3. Transport equipment, machinery 4. Drugs, pharmaceuticals, chemicals

^As per Commerce chapter India 2013 (Yearbook.) Compositional changes in Indias export basket have been taking place over the years. The share of manufacturing exports fell drastically, mainly due to the fall in shares of traditional items like textiles and leather and leather manufactures even though the share of engineering goods and chemicals and related products increased. The rise or fall in Indias export depends mainly on following factors World growth Trading partners growth Exchange rates

Market Diversification

 India has been fairly successful in diversifying its export markets from developed countries like the US and Europe to Asia and Africa This has helped us get reduce the damage from global crisis of 2008 and the recent global slowdown. Region-wise, while Indias exports to Europe and America have declined, its exports to Asia and Africa have increased

Top three trading partners

In recent years, the top three trading partners of India = US, UAE, China (whoever their rank /position keeps changing like in the game of musical chairs). For 2011-12: first is China, second is UAE and third is USA. (2012-13 data yet to come)

Trade surplus / deficit?

Indias trade deficit = 10% of GDP. This is one of the highest in the world, and hence very disturbing. As per 2011-12 data, Countrywide, India has

Trade surplus with 1. UAE (this turned negative in 2012 though) 2. USA, 3. Singapore 4. Hong Kong.

Trade deficit with 1. China 2. Switzerland (mainly due to gold imports)

WTO Negotiations and India

Pascal Lamy= Chief of WTO. In 2001, WTO started Doha Round of trade negotiations. (Doha is the capital and chief port of Qatar) Doha negotiations are still unfinished due to differences among members on various issues. Since multilateral trade negotiations (WTO) are stalled/pending, the regional trading agreements are on rise.

Trade agreements
What?

Level of integration shallow

PTA

Preferential trade agreements

Lower customs duty on the originating from the member countries.

products

FTA

Free Trade Agreements It is a special case of PTA where all tariff and non-tariff barriers are abolished Free access is allowed to the products of Shallow member countries. Example NAFTA (among Mexico, US andCanada).

A Customs Union moves beyond a free trade area by establishing a common external tariff on all Customs trade between, members and non-members. Customs Unions typically contain mechanismsShallow Union to redistribute tariff revenue among members Example: Mercosur
Free flow labour, capital, and Common (goods/services) among the members. Market Example, SICA (in Central America)

output Deep

Members share a common currency and Economic macro-economic policies (Example European Union). deep union Example, European Union.

CEPA vs CECA
Both are examples of Free trade agreements.

CECA Comprehensive Economic Cooperation Agreement Reduce the tariffs (custom/import duties). Countries sign CECA first and then gradually move towards CEPA like agreement. Example, India has CECA with

CEPA Comprehensive Economic partnership Agreement Reduce tariffs + cooperation in trade in services, investment. = wider scope. Example, India has CEPA With

1. 2. 3.

Malaysia Singapore ASEAN (under negotiation)

1. Japan 2. South Korea 3. Sri Lanka (under negotiation)

Indias trade agreements

So far, India has signed 10 free trade agreements (FTAs) and 5 preferential trade agreements (PTAs) and these FTAs/PTAs are already in force.

10 FTA with 1. Sri Lanka 2. SAFTA (India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan and Maldives) 3. Nepal 4. Bhutan 5. Thailand, + early harvest Scheme (EHS) 6. Singapore (CECA) 7. ASEAN (CECA) 8. South Korea: CEPA 9. Japan: CEPA 10. Malaysia: CEPA

5 PTA with

1. Asia Pacific Trade Agreement (APTA):Bangladesh, China, India, South Korea,Sri Lanka 2. Global system of trade preferences (GSTP) 3. Afghanistan 4. MERCOSUR 5. Chile

^as per commerce chapter, India 2013 (Yearbook). Further, India is currently negotiating 17 FTAs, including review/expansion of some of the existing ones. Issue: Government needs to review the inverted duty structure under the India- Thailand FTA. Because finished jewelry imports from Thailand are cheaper than primary gold (raw material) available in India!

SAFTA

Signed and came into force. South Asia Free Trade Area Under SAFTA,India has granted zero basic custom duty to all LDCs, viz. Afghanistan,Bangladesh, Bhutan, and Maldives, on all items, except alcohol and tobacco products.

IndiaThailandFTA Signed but negotiations still on. India-ASEAN CECA Signed, broader framework already in force. Minor details remain to be negotiated.

RECP among ASEAN+6

Regional Comprehensive Economic Partnership (RCEP) Agreement among ASEAN + 6 (Australia, China, India, Japan, Korea, and New Zealand). During 20th ASEAN summit in Phnom Penh Cambodia (in 2012), the ASEAN states agreed to move towards this agreement. Itll provide economic partnership among ASEAN + its FTA partners. RCEP will cover trade in goods, services, IPR, dispute settlement etc. Broad based trade and investment agreement. Negotiations still going on. Global System of Trade Preferences among Developing Countries (GSTP) It is a preferential trade agreement to increase trade between developing countries in the framework of the UNCTAD (United Nations Conference on Trade and Development). India has unilaterally offered special concessions to Least developed countries under this agreement. Cabinet approved implementing Indias schedule of concessions under GSPT. India has also unilaterally offered special concessions to LDC In Nov. 2012, India and Japan signed a pact to enable Japan to import rare earth minerals from India. (This will help reduce Japans reliance on China for rare earth minerals). Rare earth minerals are important for high-tech electronics, mobile phones and hybrid cars, missile guidance systems etc.

India-EU

GSTP

Japan

Problem Areas: Export

Jawaharlal Nehru Port Trust (JNPT) Port at Mumbai, entry gates closing prematurely resulting in export consignments being dumped in the buffer yard at a very high cost and delay in shipments

Problem Areas: Ease of Doing business

Ease of doing business index is an index created by the World Bank. India ranks 132. (Singapore at first) India requires 9 export documents to be cleared, while China needs 8, with good practice economies like France needing 2. Time to export is 16 days for India and five for Denmark. On an, average an Indian exporter is required to sign at about 130 places to complete an export transaction! If we want to increase our exports, then Government must reduce these procedures and costs need to the barest minimum.

Measures to improve trade?

Indias foreign trade policy covers the period of 2009-14. Under that, Commerce Ministry (and not finance ministry) releases Annual supplement to foreign trade policy every year. 2012: Government has reduced the import duty on various capital goods/ machinery required for fertilizer, mining, infrastructure, horticulture projects etc. Support for export of green technology products Incentives for labour intensive industries, North East, agriculture etc.

ASIDE, E-BRC, CEPA vs CECA Foreign Trade Policy annual supplement 2013
Released in April 2013, by Ministry of Commerce, Industry and Textiles Although Government did not launch any new scheme in it But the existing schemes were modified to provide for more relaxations and benefits to importers who are also exporters.

Salient Features FTP Annual Supplement 2013

1. Reduced Minimum land area requirement for SEZ, by half 2. No minimum land requirement for setting up IT SEZ 3. Permitted sale and transfer of units inside SEZ. 4. Zero Duty Export Promotion Capital Goods Scheme 5. Government will give 2% Interest Subvention Scheme for more sectors. (upto 31st March 2014) 6. Duty Credit Scripts issued under Focus Market Scheme, Focus 7. Product Scheme and Vishesh Krishi Gramin Udyog Yojana(VKGUY) can be used for payment of service tax. 8. Import of cars/vehicles is permitted through designated ports only. Now import of cars/vehicles would also be allowed at Faridabad and Ennore Port (TN) 9. System for online issuance of Registration Certificate for export of Cotton, Cotton Yarn, Non Basmati Rice, Wheat and Sugar.

E-BRC
The exporter will not be required to make any request to the bank for issuance of a bank export and realization certificate (BRC). Thus their time and money will be saved.

 For electronic transmission of foreign exchange realization from the respective banks to the Directorate General of Foreign Trade (DGFT) server on a daily basis.

ASIDE scheme
Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) Scheme It provides assistance to State and union territories to create infrastructure for export Development. Top 5 exporter states in India (also top-5 in terms of ASIDE allocation): Gujarat,Maharashtra, Tamil Nadu, Karnataka, and Andhra Pradesh. (Why? Think about the geographical, social, political, economic factors).

Towns of Export Excellence

These get more attention / funds under ASIDE scheme and other schemes of commerce ministry for boosting exports. yea Place r 1. 201 2 2. 3. ur 4. 5. Abad Kolhapur Shaharanp Morbi Gurgaon Textiles Sector

Handicraft Ceramic Apparel

201 3

^this list in not exhaustive. only listed the new towns of export excellence under 2012 and 2013s annual supplements to foreign trade policy. But if and when preparing for UPSC interview, dig all the export excellence towns in the respective home state.

Interest Subvention
Earlier Government gave 2% interest subvention on handlooms, handicrafts, carpets, and SMEs This scheme has been extended to labor-intensive sectors viz. toys, sports goods, processed agricultural products, and readymade garments. Scheme is applicable upto 31 March 2014.

Special Economic Zones

Asias first Export processing zone (EPZ) was setup in Kandla, Gujarat, 1965

Special Economic Zones (SEZ) Act, enacted in 2005 and Rules were notified in February 2006. Government has given formal approvals to setup 579 SEZs, of which 384 have been notified. As a whole, SEZs have provided employment to more than 9 lakh people. 100 per cent FDI is allowed in SEZs through the automatic route

Problem area: land acquisition. (Some of that is addressed under the 2013s annual supplement to Foreign trade policy.)

VKGuy
Vishesh Krishi and Gram Udyog Yojana (VKGUY) To promote the export of produce from agro, minor forest, gram udhyog etc.

RBIs measures
RBI increased ceilings for External Commercial Borrowings (ECBs) RBI allowed the banks to determine their interest rates on loans to exporters (in foreign currency).

Anti-Dumping
Directorate General of Anti-dumping and Allied Duties (DGAD) has initiated 10 fresh cases. Against China PR, the European Union, South Korea, Malaysia, Mexico,Taiwan, Thailand, Turkey, Saudi Arabia, and the USA. DGAD falls under Commerce Ministry.

Chidambarams budget speech (2013): Foreign Trade CAD worrysome

India is part of the global economy: our exports and imports amount to 43% of GDP But my greater worry is the current account deficit (CAD). The CAD continues to be high mainly because of 1. 2. 3. 4. our excessive dependence on oil imports, the high volume of coal imports, our passion for gold slow down in exports.

This year, and perhaps next year too, we have to find over USD 75 billion to finance the CAD. (To finance Current Account deficit) , there are only three ways before us: 1. 2. 3. FDI FII External Commercial Borrowing (ECB).

That is why I have been at pains to state over and over again that India, at the present juncture, does not have the choice between welcoming and spurning foreign investment.

If I may be frank, foreign investment is an imperative.

What we can do is to encourage foreign investment that is consistent with our economic objectives.

To boost trade
Peak rate of basic customs duty = 10% (for non agro products) Normal excise duty = 12% Normal service tax= 12%

What?

Duty Chidambaram said Increase/decrease? Leather and leather goods are a thrust sector for exports. I propose to reduce the duty on specified machinery for manufacture of leather and leather goods and footwear.

Import Machinery for Decrease leather factory

Taxation: Export
Precious stones exporting Decrease To encourage exports, I propose to reduce the duty on pre-forms of precious and semi-precious stones from 10 percent to 2 per cent.

oil cake

Eliminated

Export duty on de-oiled rice bran oil cake has made our exports uncompetitive. Hence, I propose to withdraw the said duty.

Ilmenite

Increased

Prices of unprocessed ilmenite have gone up several fold in the export market. Considering the need to conserve our natural resources, I propose to impose a duty of 10 percent on export of unprocessed ilmenite. Ilmenite is the primary ore of titanium. Found in Tamil Nadu, Odisha and Kerala. Titanium dioxide is used in paint and coating industry. Titanium is used in aircraft, tank, weapons, artificial joints, sporting equipment and high performance alloys.

Coal

Streamlined

At present both Steam coal and Bituminous coal

are used in thermal power stations, but attract different rates of customs duty and counter veiling duty. I propose to equalize the duties on both kinds of coal and levy 2 per cent customs duty and 2 per cent CVD. There is an affluent class in India that consumes imported luxury goods such as high end motor vehicles, motorcycles, yachts and similar vessels. I am sure they will not mind paying a little more. Hence, I propose to increase the duty on such vehicles.

Luxury vehicle

Increased

Coal dependence
Despite abundant coal reserves, we continue to import large volumes of coal. If the coal requirements of the existing and future power plants are taken into account, there is no alternative except to import coal and adopt a policy of blending and pooled pricing. In the medium to long term, we must reduce our dependence on imported coal. One of the ways forward is to devise a PPP policy framework to increase the production of coal. Coal ministry will announce the policies in this regard.

IT
The Rangachary Committee was appointed to look into tax matters relating to Development Centres & IT sector and Safe Harbour rules for a number of sectors. By the way, Rangachary was also a member of Shome Panel (for GAAR).

What is countervailing duty (CVD)?

Suppose we imported xyz thing from USA. And that xyz thing is also manufactured by Indian producers as well. But the American Government provides some subsidies to their exporters, hence the price of imported XYZ item is less than the locally produced desi variety for India. And or The Indian producers are required to pay more taxes hence desi variety has become more expensive than the American product. In such case, Indian Government can imposes addition tax on the imported item to protect the domestic industry. This is known as countervailing duty (CVD). In 2013, US Department of Commerce started investigation a countervailing duty (CVD) investigation against India and six other countries on export of shrimp. Because the (domestic) American shrimp industry had complained that Indian Government provides lot of incentives, subsidies and tax reliefs to Indian shrimp exporters, so US Government should impose a CVD on the shrimps imported from India.

Conclusion
Gold and CAD
While the supply of gold through organized channels can be constricted, there is need to be vigilant regarding gold inflows through unauthorized channels (= Smuggling). Ultimately, the best way to reduce gold imports in a sustainable way will be to offer the public financial investment opportunities that generate attractive returns. This means bringing down inflation as well as expanding the range of investments investors have easy access to. (e.g. Rajiv Gandhi Equity savings scheme RGESS).

Trade Agreement
India always stood for open, unbiased, international trading system, but since WTO negotiations are not moving in positive direction, we need to focus on Regional Trade agreements (RTAs). Particularly for exporting our technology-intensive items. There is also need to address the inverted duty structure in sectors like electronics, textiles, and chemicals and the artificial inverted duty structure caused by some FTAs/RTAs.

Important Summits
2012 SAARC Addu, Maldives (2011) led to coup in that island country Kathmandu Brunei Durban, South Africa Los Cabos, Mexico St. Petersburg, Russia Brisbane, Australia 2013

ASEAN Phnom Penh, Cambodia BRICS Delhi G20

IMF: Advanced Economies in ASIA

1. 2. 3. 4. South Korea Hong Kong Singapore Taiwan

Trade Blocs/ Regional Groups

APEC (Asia-Pacific Economic Cooperation)

1. Australia 2. Brunei 3. Canada 4. Chile 5. China 6. Hong Kong 7. Indonesia 8. Japan 9. South Korea 10. Malaysia 11. Mexico 12. New Zealand 13. Papua New Guinea 14. Peru 15. Philippines 16. Russia 17. Singapore 18. Taiwan 19. Thailand 20. United States 21. Vietnam 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Bangladesh China India South Korea Sri Lanka Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

APTA (Asia Pacific Trade Agreement)

ASEAN (Association of South East Nation)

Bangladesh Bhutan Myanmar BIMSTEC India (Bay of Nepal Bengal Initiative for Sri Lanka Multi-Sectoral Technical Thailand and Economic Cooperation) 1. 2. 3. 4. 5. Brazil Russia India China South Africa

BRICS

CELAC (Community of Latin American and CaribbeanStates)

33 countries in that region.

CIS (Commonwealth of Independent States)

1. 2. 3. 4. 5. 6. 7. 8. 9.

Armenia Azerbaijan Belarus Kazakhstan Kyrgyzstan Moldova Russia Tajikistan Uzbekistan

COMESA (Common Market for Eastern and Southern Africa) ECOWAS (Economic Community of Western African States) EFTA (European Free Trade Association)

20 member states stretching fromLibya to Zimbabwe.

15 members in Western Africa.

1. 2. 3.

Iceland Liechtenstein Norway

4.

Switzerland

EU

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden UK Argentina Australia Brazil Canada China European Union France Germany India

G20

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 1. 2. 3. 4. 5. 6. 7. 8.

Indonesia Italy Japan Mexico Russia Saudi Arabia South Africa South Korea Turkey United Kingdom United States Canada France Germany Italy Japan Russia UK US

G8

GCC (Gulf Cooperation Council)

1. Bahrain 2. Kuwait 3. Qatar 4. Saudi Arabia 5. Oman 6. United Arab Emirates (UAE) 44 developing countries. 1. 2. 3. 1. 2. 3. 4. 5. 6. India Brazil South Africa Australia Bangladesh Comoros India Indonesia Iran

GSTP (Global System of Trade Preferences) IBSA IORARC/Ocean Rim (Indian Ocean Rim Association of Regional Cooperation)

7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 1. 2. 3. 4. 1. 2. 3. 1. 2. 3. 4. 5. 6. 7. 8. 1. 2. 3. 4. 5. 1. 2.

Kenya Madagascar Malaysia Mauritius Mozambique Oman Seychelles Singapore South Africa Sri Lanka Tanzania Thailand UAE Yemen Argentina Brazil Paraguay Uruguay Canada US Mexico Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Africa Botswana Lesotho Swaziland Namibia India Paki

MERCOSUR

NAFTA (North American Free Trade Agreement)

SAARC (South Asian Association for Regional Cooperation)

SACU (South African Customs Union)

SAFTA (South Asian Free

Trade Agreement)

3. 4. 5. 6. 7. 8. 1. 2. 3. 4. 5. 6.

Nepal Lanka Bangladesh Bhutan Maldives Afghanistan China Kazakhstan Kyrgyzstan Russia Tajikistan Uzbekistan

SCO (Shanghai Cooperation Organisation)