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List the major changes effected in India’s EXIM Policy in the 90s and its implications.

List the major changes effected in India’s EXIM Policy in the 90s and its implications.

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1 Answer

Important trade policy changes implemented in India in the 90s are:

Rupee Depreciation and Convertibility:

The Government of India abandoned the system of fixed exchange rates and pegged Indian rupee to a basket of currencies to the countries which are her major trading partners. Under the new system, the rupee started to slide against the dollar and other major currencies of the OECD countries. In early June 1991, the Government devalued the rupee in two stages.

Partial Convertibility of Rupee:

In the budget for 1992-93, the Finance Minister announced the Liberalized Exchange Rate Mechanism System (LERMS). This system introduced partial convertibility of rupee. Under this system a dual exchange rate was fixed under which 40 percent of foreign exchange earnings were to be surrendered at the official exchange rate while the remaining 60 percent were to be converted at a market determined rate. The foreign exchange surrendered at official rates was to be used for the import of essential items and the foreign exchange converted at the market rate was to be used to finance all other imports. Since the official exchange rate was lower than the market rate, this system meant taxing the importers to subsidize the government’s bulk imports.

Full Convertibility on Trade Account:

In the budget 1993-94, the dual exchange rate system was dispensed with and a unified exchange rate system was introduced. Under this system, the 60:40 ratio was extended for (i) for export and import of goods,. (ii) all receipts, whether on capital or current account of balance of payments, but not all payments.

Full Convertibility on Current Account:

The Articles of IMF stipulates that members accepting current account convertibility should (i) have no restrictions on current payments and (ii) avoid discriminatory currency practices. Current account convertibility has been defined as the freedom to buy or sell foreign exchange for the following international transactions.

  • All payments due in connection with foreign trade, current business, including services and normal short-term banking and credit facilities.
  • Payments due as interest on loans and as net income from the investments.
  • Payments of moderate amount of amortization of loans or depreciation of direct investments.
  • Moderate remittances for family living expenses.

Liberalization of exchange control regulations announced by Reserve Bank are related to exchange earners foreign currency accounts, basic travel quota, studies abroad, gift, remittance, donations and payments of certain service rendered by foreign parties.

When more relaxation on current account payments were announced, interest accrued under foreign currency, non-repatriable, rupee deposit scheme (FCON) was made eligible for repatriations and repatriations of investment income by non-resident Indians was allowed in a phased manner over a 3 year period. After the country moved to single market determined exchange rate system in March 1993, the rupee exhibited good stability and for over two year after March the rupee dollar-rate remained steady. As a result, India’s competitiveness in international markets. was substantially eroded.

Abolition of CCS:

It was argued that the Cash Compensatory Scheme (CCS) had become redundant, in view of the devaluation and substantial liberalization of the trade regime.

EXIM Scrips:

The import replenishment system was enlarged and restructured and renamed as EXLM scrip. EXIM scrips were made freely trade able and the premium on the scrips, set by the market, was to represent a further incentive for all exporters and a means of allocating imports according to market forces. The system of EXIM scrips was abolished and replaced by LERMS.

Simplification of Import Procedures:

The five year EXIM Policy, 1992-97, made a major attempt at simplification of import procedures. Now import licenses will remain against several licenses including the Open General License under the earlier regime.

Free Imports and Exports:

The 1992-97 EXIM policy allowed the free import of all items including capital goods, except those on the negative list, which included consumer goods. The number of items whose import has been banned was reduced to just three.

Decanalization:

A large number of exports and imports used to be canalized through the public sector agencies in India. The 1992-97 policy decanalise imports of a number of items including news print, non-ferrous metals, natural rubber, intermediates and raw materials for fertilizers. However, 8 items were to remain canalized.

Duty Exemption Scheme Enlarged:

The duty exemption scheme has been strengthened under which imports are provided at two concessional rates of 15 percent and 25 percent subject to appropriate export obligation.

Deemed Exports:

The 1992-97 policy gives a number of benefits in the deemed exports which includes. duty exemption schemes, duty drawback schemes, exemption from terminal excise duty and special import licenses.

More Facilities to EOUS and EPZS:

The 1992-97 policy confers higher benefits to 100 percent Export Oriented Units (EOUs) and units in export processing Zones (EPZs) over those exporting from the Domestic Tariff Area (DTAs).

More Facilities to Export Houses and Trading Houses:

Under the 1992-97 trade policy, trading houses and star trading houses have been provided the benefit of self-certification under the advance license system, which permits duty free import for exports.

Wide Ranging Reduction in Custom Tariffs:

Import duty cuts have been proposed in the case of goods like ferrous and non-ferrous metals, raw materials and inputs used in manufacturing synthetic yarn, fibers and fabrics, chemicals used widely in industry, electronic goods, medical equipment, paper etc. Export duty on finished leather has been abolished.

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November 5, 2019
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