Ramesh Singh Summary: External Sector in India- 2 | Indian Economy for UPSC CSE PDF Download

SEZ

Special Economic Zones (SEZs) in India were introduced with the SEZ Act of 2005, building on earlier concepts like Export Processing Zones (EPZs) and Export-Oriented Units (EOUs). Here are the key points about SEZs:

1. Objectives: SEZs aim to create dedicated "export hubs" within India to stimulate economic growth and development.

   • They facilitate increased economic activity, promote exports of goods and services, attract investment (both domestic and foreign), generate employment, and develop infrastructure.

2. Setup and Structure: SEZs can be established by the Government of India, state governments, or private sector entities across agriculture, industry, and services sectors.

   • Initially, SEZs enjoyed significant tax benefits, but over time, these benefits have been phased out with the introduction of Minimum Alternate Tax (MAT) and sunset clauses.

3. Regulatory Framework: SEZs operate under a regulatory framework that treats them as foreign territories for customs purposes, facilitating ease of doing business.

   • Units within SEZs were exempt from income tax on export income for a specified period, with phased reductions in tax benefits.

4. Recent Developments: In the Union Budget 2022—23, the government proposed a new law to replace existing SEZ laws, allowing states to collaborate on developing Enterprise and Service Hubs.

   • There is a focus on IT-driven customs administration to enhance operational efficiency and ease of doing business within SEZs.

5. Performance and Impact:

   • As of January 2021, 425 SEZ developers were licensed, although only 268 were operational by end-December 2021.
   • SEZs have attracted substantial investments totaling INR 6.28 lakh crore (USD 84.09 billion) and employed 25.60 lakh people by September 2021.
   • Exports from SEZs increased by 25% to INR 26.89 lakh crore (USD 92.83 billion) in 2021—22 (April-December), highlighting their role in enhancing export competitiveness.

GAAR

• The GAAR (General Anti-Avoidance Rules), originally proposed in the Direct Taxes Code 2010, are targeted at arrangements or transactions made specifically to avoid taxes.
• The objective of the GAAR provisions is to codify the doctrine of 'substance over form ' where the real intention of the parties and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure of the concerned transaction or arrangement.
• The proposal to apply this rule will be vetted at two stages— first by the Principal Commissioner or Commissioner of Income Tax and the second by an Approving Panel headed by a judge of High Court.
• The stakeholders have been assured by the Government of adequate procedural safe guards to make it a uniform, fair and rational tax — aimed at certainty and clarity in tax rules.

Foreign Investment

• The importance of foreign investment in the economy was realised by the Government by late 1980s it was only liberalised after the country commenced the process of the economic reforms in 1991.
• In 1991 itself India opened up to inflows of direct and indirect forms of foreign investments— more emphasis being on the former for being more durable and beneficial to the economy.
• Since then much water has flown in the area and today India is among the highest recipients of FDI in the world — in 2016 - 17 being the top most recipient in the world.

ECB Liberalised

• With the changing dynamics of economy India's needs for foreign loans have also gone for a change. Though, the RBI has been quite careful about higher exposure to the external loans, its overall policy stance regarding it has been liberal. Following this stance, the external commercial borrowing (ECB) norms were further liberalised by the RBI— by April 2020.
• In place of putting sectoral cap, the RBI decided to set an overall prudential limit on the ECB at 6.5 per cent of the GDP. It was for the first time that the RBI put such an open idea in the public domain — till now it was managed through its internal bench mark which never used to be available in the public domain.
• An increase in net ECBs improves the BoP position but it worsened the BoP by turning negative during 2014-19 (US$ 4.24 billion), from a healthy positive level in 2009 - 14 (US$ 42.80 billion). However, in 2018 - 19 and the first half of 2019-20, the net ECB inflows were US$ 9.77 billion and US$ 9.76 billion respectively.

RISKS IN FOREIGN CURRENCY BORROWINGS
Corporate borrowers in India and other emerging economies are keen to borrow in foreign currency to benefit from lower interest and longer terms of credit. Such borrowings how ever, are not always helpful, especially in times of high currency volatility. During good times, domestic borrowers could enjoy triple benefits of
1. Lower interest rates,
2. Longer maturity, and
3. Capital gains

Trade Facilitation

• e-Filing and e-Payment : Applications for various trade services can be filed online and application fees paid through electronic transfer. The number of mandatory documents required for exports and imports has also been cutdown to just three each.
• Single window for Customs : Under this project that importers and exporters electronically submit their customs clearance documents at a single point with customs. Permissions required from other regulatory agencies (such as animal quarantine, plant quarantine, drug controller and textile committee) could be obtained online without the having to separately approach these agencies.
• 24 x 7 customs clearance : The facility of '24 x 7 customs clearance' has been made available at 18 seaports and 17 air cargo complexes. This move is aimed at faster clearance of import and export, reducing dwell time and lowering the transaction cost.
• Paperless environment : The government aims to move towards a paperless 24 x 7 working trade environment.
• Simplification : Attention has also been paid to simplifying various 'aayat niryat' forms, bringing in clarity in different provisions, removing ambiguities and enhancing electronic governance.
• Training / Outreach : 'Niryat Bandhu Scheme', a training/outreach prog-ramme is aimed at Skill India— organised at MSME (micro, small and medium enterprises) clusters with the help of export promotion councils (EPCs) and other willing 'industry partners' and 'knowledge partners'.

Export Promotion Schemes

• MEIS (Merchandise Exports from India Scheme) : Launched in April 2015, its objective is to offset infrastructural inefficiencies and associated costs involved in exporting products produced in India. The scheme incentivizes exporters in terms of Duty Credit Scrips at the rate 2, 3, 4, 5, 7 per cent of 'Free on Board' (FOB) value of exports realized. These scrips are transferable and can be used to pay certain central duties and taxes.
• SEIS (Services Exports from India Scheme) : Under this scheme, rewards are given to the exporters of services on their net foreign exchange earnings. The scrips are transferable and can be used to pay certain central duties and taxes. The service exporters are eligible for SEIS at the rate of 5 per cent and 7 per cent of the net foreign exchange earnings (NFEE).
• EPCG (Export Promotion Capital Goods Scheme) : This Scheme allows exporters to import capital goods for pre-production, production and post-production at zero customs duty. In return, the exporters are required to fulfil the export obligation to the tune of six times the import duties, taxes and cess saved amount on capital goods. These imports are also exempt from the IGST till March 2020.
• AAS (Advance Authorization Scheme) : Advance Authorization (AA) is issued to allow duty free import of inputs (such as fuel, oil and catalyst), which are physically incorporated in export products.
• DFIA (Duty Free Import Authorization) : This is issued on post export basis for products for which Standard Input Output Norms (SION) have been notified. One of the objectives of the scheme is to facilitate transfer of the authorization or the inputs imported as per SION, once export is completed. Provisions of DFIA Scheme are similar to Advance Authorization Scheme.
• IES (lnterest Equalization Scheme) : Launched for a period o f 5 years (2015-20), the scheme is being implemented by the DGFT (Directorate General of Foreign Trade) through RBI for pre and post- Shipment Rupee Export Credit— eligible exporters avail interest equalization at the rate o f 3 per cent per annum (increased to 5 per cent in November 2018 for MSME sector).
• EOU/EHTP/STP/BTP Scheme : The objectives o f these four schemes, i.e., Export Oriented Units (EOU), Electronic Hardware Technology Park (EHTP), Software Technology Parks (STP) and Bio- Technology Parks (BTP) Scheme are to promote exports, enhance foreign exchange earnings, attract investment for export production and employment generation.
• DES (Deemed Exports Scheme) : Deemed Exports refer to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange. Under the scheme, exemption (or refund) of duties on manufactured products are given to ensure a level playing field to domestic manufacturers.
• TMA (Transport and Marketing Assistance for Specified Agriculture Products Scheme) : Launched in February 2019, it aims to mitigate the disadvantage of higher cost of transportation of export of specified agriculture products due to trans-shipment and to promote brand recognition for Indian agricultural products in specified overseas markets (for the period between March 2019 and March 2020).
• TIES (Trade Infrastructure for Export Scheme) : The scheme has the objective to assist Central and State Government Agencies for creation of appropriate infrastructure for growth of exports from the States. The Scheme provides financial assistance in the form of grant-in-aid to Central / State Government owned agencies for setting up or for up-gradation of export infrastructure as per the guidelines of the Scheme.

India's Trade

• Global trade tensions and slowdown had a negative impact on India's trade. As per the IMF (World Economic Outlook), in 2019, the global economy and trade were estimated to grow by 2.9 per cent and 1.0 per cent respectively.
• This was a big fall in comparison to a global trade growth of 5.7 per cent in 2017. For 2020, the projected trade growth is 2.9 per cent and India also expects to benefit out of this surge in the global trade.
• However, there was heightened uncertainty regarding the future structure of global value chains and the repercussions of trade tensions on technology, which may continue to weigh down the growth in world trade.
• The slowdown of world trade was caused by many factors such as—slowdown in investment; reduced spending on heavily traded capital goods; and a sizable decline in trade in car parts.

(i) Merchandise trade

• Merchandise trade deficit is the largest component of India's current account deficit. On average, India's merchandise trade balance has improved from 2009-14 (-8.6 per cent) to 2014-19 (-6.3 per cent), although most of the improvement in the latter period was on account of more than 50 per cent decline in crude prices in 2016-17.
• India's top 10 trading partners jointly account for more than 50 per cent of India's total merchandise trade.

(ii) Services trade

• India's net services surplus has been steadily declining in relation to GDP between 2009-14 (3.3 per cent) and 2014-19 (3.2 per cent)—falling to 3.1 per cent in 2018-19 and 2.9 per cent during 2019-20. 
• The surplus on net services has been significantly financing the merchandise trade deficit. The financing reached its peak to about two-thirds of merchandise deficit in 2016-17 before declining to less than half in the last couple of years. Given a steady decline in net services to GDP ratio, the extent of financing will steadily fall unless merchandise trade deficit improves in relation to GDP.
• Service exports have consistently hovered between 7.4 per cent (2009-14) to 7.7 per cent (2018-19) of GDP reflecting the steadiness of this source in contributing to the stability of BoP.

Current Trade Opportunity

• Two factors have played very vital role in this change, one being the rise of protectionism in the world and the Sino-US trade tensions.
• By early April 2020, China was again in news for the pandemic COVID-19, in the wake of which several MNCs having production bases in the country were searching for alternative bases to continue their production.
• Thus, the current environment for international trade presents India an unprecedented opportunity to chart a China-like, labour-intensive, export trajectory and thereby create unparalleled job opportunities.
  (i) To tap this opportunity, India should act in the following direction—
  (ii) 'Assemble in India for the world' should be integrated into the 'Make in India'. By doing so, India can raise its export market share to about 3.5 per cent by 2025 and 6 per cent by 2030. Job creation out of this will be 4 crores by 2025 and 8 crores by 2030.
  (iii) The increased exports can contribute about 25 per cent for making India a $5 trillion economy by 2025.

EXCHANGE RATE MONITORING

• Indian currency has seen frequent exchange rate volatility in recent times. External variables have been changing more frequently than any time in past. This forces India to closely monitor the exchange rate dynamics of the world, its major trade partners and the emerging competitors in its export market.
• India needs to re think its exchange rate policy outlook and go for a shift in it— this becomes even more clear by considering the following points :
  (i) International trading opportunities are becoming scarcer in the aftermath of three major events— global financial crisis, the euro zone crisis and the stock market meltdown of China (2015). The world 'export-GDP ratio' has declined since 2011.
  (iii) To sustain high growth rate, India needs support of exports in the coming times. And this is only possible once rupee's exchange rate is able to maintains the competitive edge over its competitors in the export market.
  (iv) India's present exchange rate management policy gives untisually high weight to UAE (due to high oil imports and a trans-shipment point for India's exports). But this trade has almost nothing to do with India's export competitiveness.
  (v) Ever since the developed countries came under the grip Great Recession, we have seen 'unconventional monetary policy' being pushed by most of them — with effective interest rates running in negatives, too.

BIPA & BIT

• Attracting adequate amounts of foreign investments was one of the major aims of the process of economic reforms which commenced in 1991.
• Accordingly, a Model BIT (Bilateral Investment Treaty) was crafted by the Government in 1993.
• Since then India has signed 83 such treaties called the Bilateral Investment Promotion and Protection Agreements (BIPAs) with different countries— the first one with the UK in 1994 and the last with the UAE signed in 2018. They aim to increase foreign investments both way— inflows and outflows.
• Objective : These agreements aim to increase the comfort level and boost the confidence of investors by assuring — a level playing field, non-discriminatory treatment, and an independent forum for dispute settlement.

RTAS By India

• RTAs (Regional Trade Agreements) are efforts by nations aimed at deepening economic relations, usually with neighbouring countries, and tend to be largely political in nature.
• With the multilateral trade negotiations process under the WTO being a painfully slow one requiring broad-based consensus, RTAs have progressively assumed greater importance and a growing share in international trade.
• While RTAs are broadly compliant with WTO mandates and remain broadly supportive of the WTO process, they remain second-best solutions that are discriminatory in nature against non members and are in efficient as low cost producing non-members lose out to members.
• While bilateral RTAs have no equity considerations, mega-regional trading groups may not necessarily be equitable if membership is diverse and small countries may lose out either way — if they are part of it they may not have much say and if they are not, they may stand to lose.
• India has always stood for an open, equitable, predictable, non -discriminatory and rule-based international trading system and views RTAs as building blocks in the overall objective of trade liberalization as well as complementing the multilateral trading system under the WTO.

NEW FOREIGN TRADE POLICY
Special features of the FTP 2015-20 are as follows :

• Two new schemes have been introduced, namely—
  (i) Merchandise Exports from India Scheme (MEIS) for export of specified goods to specified markets.
  (ii) Services Exports from India Scheme (SEIS) for increasing exports of notified services, in place of a plethora of schemes earlier, with different conditions for eligibility and usage.
• Measures have been adopted to nudge procurement of capital goods from indigenous manufacturers under the EPCG scheme by reducing specific export obligation to 75 per cent of the normal export obligation.
• Measures have been adopted to nudge procurement of capital goods from indigenous manufacturers under the EPCG scheme by reducing specific export obligation to 75 per cent of the normal export obligation.
• Measures have been taken to give a boost to exports of defense and hi-tech items. At the same time e-Commerce exports of handloom products, books/periodicals, leather footwear, toys and customized fashion garments through courier or foreign post office would also be able to get benefit of MEIS (for values upto INR 25,000).
• Niryat Bandhu Scheme has been galvanized and repositioned to achieve the objectives of Skill India.

TRANS PACIFIC PARTNERSHIP

• The TPP (Trans-Pacific Partnership) is a new mega-regional agreement. The 12 Pacific Rim nations (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam) signed the TPP agreement on 5 October 2015.
• It is likely to set higher standards for goods and services trade and is considered a mega regional FTA which can be a pioneer in many ways and is likely to be a game-changer for the world economy and global trade.
• The block accounts for around 40 per cent of global GDP and around 60 per cent of merchandise trade. In terms of economic size, it is larger than the existing NAFTA (North America Free Trade Area).
• Experts have highlighted serious impact on the current global trade pattern once this agreement comes into force. India has its own share of concerns regarding it. Mean while, by late January 2017, the USA (under its new President Mr. Donald Trump) pulled out from the ongoing negotiations of the TPP.

TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP

• The TPP (Trans-Pacific Partnership), the TTIP (Transatlantic Trade and Investment Partnership) is a newly proposed trade agreement (a regional trade agreement of different kind which includes investment also) between the Europe an Union and the United States.
• Planned to be finalised by 2014, the pact is still (by March 2017 ) under the negotiation process. This agreement touches three broad are as — market access; specific regulation and cooperation.
• NGOs and environmentalists across Europe. Critics have highlighted several apprehensions also related to it such as — the number of net job gains as there are chances of job losses, and low economic gains accruing at the household level.

DEGLOBALISATION AND INDIA

• Global factors are yet to stabilise since the financial crisis hit the developed economies. Recovery among these economies are getting tough job — even unconventional monetary policies have been tried (pursuing for negative interest rate regime).
• Meanwhile, several of these economies have signalled 'protectionist' rhetoric — the Brexit.
• The new government in the USA has already taken various protectionist measures by now and many more are supposed to come in the coming times.
• India's prospects of export growth depends on its trading partners' carrying capacity of globalisation to it.
• Today, for India, three external developments are of significant consequence -(i) In the short-run, global interest rates (as a result of the US elections and the implied change its fiscal and monetary policy) will impact on India's capital flows and exchange rates. Experts are already expecting high fiscal stimulus, more dependence on unconventional monetary policy, etc. to follow in the developed world.
  (ii) The medium-term political outlook for globalisation and in particular for the world's 'political carrying capacity for globalisation ' may have changed in the wake of recent developments.
• Developments in the US, especially the rise of the dollar, will have implications for China's currency and currency policy which will impact India and the world — if China is able to successfully re-balance its economy , the spill over effects will be positive; otherwise quite negative.

Way Forward

The future concerns and related policy actions should be in the following direction :

• Trade partners of India have been building pressure for custom cuts in recent years. In this regard, the Government need stokeep defending the custom regime as it is necessary for protecting its trade interests.
• The practice of 'inverted duty' structure (i.e., lower custom duties on finished goods and incomparison, higher on the intermediate goods to produce them) has been hampering India's trade interests, under which custom duties are higher on the intermediate goods rather than the finished goods.
• Improving supply chain of the economy and integrating it with the 'global value chain' will enable India to enhance its export competitiveness. In past, several of the free trade agreements signed by India could not benefit her due to disruptions of the value chain.
• Decreasing the delays related to clearances at ports and airports to speed up the movement of shipments. Several steps have been taken by the Government in this regard but still much needs to be done.
• The MSMEs should be getting healthy access to loans and structure of the GST regime should be streamlined for them.
• Macroeconomic environment should be made conducive for trade by signing suitable trade agreements, avoiding arbitrary taxes, restrictions and tariff.
• Attempting effective labour reforms and raising skills of the workforce will be giving an edge to India's exports.