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Subject: External Sector

  • ECGC to seek RBI nod for payment in forex to exporters

    ECGC Ltd., the government enterprise that provides export credit insurance, will soon approach the Reserve Bank of India for approval to deal in foreign currency for the benefit of exporters.

    What is ECGC?

    • ECGC is an acronym for Export Credit Guarantee Corporation of India Ltd.
    • It is a government owned export credit provider.
    • It is under the ownership of Ministry of Commerce and Industry and is based in Mumbai.
    • It provides export credit insurance support to Indian exporters.
    • Its topmost official is designated as Chairman and Managing Director who is a central government civil servant under ITS cadre.
    • The GoI had initially set up Export Risks Insurance Corporation (ERIC) in July 1957.
    • It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee Corporation of India in 1983.

    Functions of ECGC

    • ECGC provides a range of credit risk insurance covers to exporters against loss in export of goods and services as well.
    • It offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.
    • It provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan and advances.

    Facilities by ECGC

    • It offers insurance protection to exporters against payment risks.
    • It provides guidance in export-related activities.
    • It makes available information on different countries with its own credit ratings.
    • It makes it easy to obtain export finance from banks/financial institutions.
    • It assists exporters in recovering bad debt.
    • It provides information on the creditworthiness of overseas buyers.

    Why need export credit insurance?

    • Payments for exports are open to risks even at the best of times.
    • The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world.
    • An outbreak of war or civil war may block or delay payment for goods exported. Ex. Ukraine War.
    • Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. Ex. Sri Lankan Crisis.
    • In addition, the exporters have to face commercial risks of insolvency or protracted the default of buyers.
    • Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

     

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  • How Indonesia’s ban on Palm Oil exports will hurt India?

    The abrupt ban on palm oil exports by Indonesia, its biggest exporter, is expected to rock household economics globally.

    Indonesia curbs palm oil export

    • Indonesia has clamped down on exports starting 28 April primarily because of soaring inflation in the country.
    • This is not the first time the South East Asian country decided to arrest local prices by banning exports—it had announced limited curbs in January too.
    • However, brokerages suggest that the ban will probably be a temporary measure of two to three weeks, as Indonesia cannot afford to lose out on exports for long.
    • Indonesia’s president Joko Widodo has stated that he would ensure that the availability of cooking oil in the domestic market becomes “abundant and affordable”.

    How will this ban affect India?

    • Palm oil is among the world’s most-used cooking oils, and India’s dependence on Indonesia is expected to deal a supply-side shock.
    • The export ban could send food inflation soaring as India is the largest importer of palm oil from Indonesia.
    • It imports about 8 million tonnes of palm oil annually; the commodity accounts for nearly 40% share of India’s overall edible oil consumption basket.
    • Edible oil prices could surge as much as 100-200% in India if the government fails to find a new source of palm oil.
    • Cooking oil prices are already at record levels as the Ukraine war disrupted shipments of sunflower oil.
    • Prior to the war, the Black Sea region made up over 75% of global sunflower oil exports.

    How could it impact packaged goods firms?

    • Since palm oil and its derivatives are used in the production of several household goods, the impact of the ban could eat into the margins of Indian packaged consumer goods players.
    • Analysts said listed firms such as Hindustan Unilever Ltd, Godrej Consumer Products Ltd, Britannia Industries Ltd, and Nestle SA could feel the impact of the ban in the near term.

    What are India’s import options?

    • India is most likely to turn to Malaysia, the second-biggest palm oil exporter, to plug the gap.
    • But Malaysia is also facing a labour shortage owing to the pandemic which has resulted in a production shortfall.
    • Hence Malaysia is unlikely to be able to plug the gap.
    • Also the bilateral ties have soured since few years due to unwarranted comments by its former PM Mahathir Mohammed on Kashmir.
    • India could also explore importing from Thailand and Africa—they produce three million tonnes each.

    How can India mitigate the impact of the ban?

    • Palm oil prices rose by nearly 5% over the weekend after the announcement of the export ban. Finding an immediate solution is going to be a challenge.
    • Even if India manages to find an alternative source, prices will be high as a major exporter is now out of the calculation.
    • The industry expects India to engage with Indonesia on an urgent basis, before the ban comes into effect on 28 April.
    • Besides, the Centre is likely to negotiate with other oil-supplying nations in Latin America and Canada.

    Back2Basics:

    National Edible Oil Mission (OP)

     

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  • UK to issue Open General Export Licence (OGEL) to India

    In the backdrop of the rapid geopolitical turmoil, PM Modi and his British counterpart Boris Johnson agreed on a new and expanded India-UK defence partnership and vowed to seal an ambitious free trade agreement by the end of the year.

    What is the news?

    • The UK is creating an Open General Export Licence (OGEL) for India to reduce bureaucracy and slashing delivery times for defence procurement.
    • It will partner with India on new fighter jet technology as well as in the maritime sphere to detect and respond to threats.

    What is OGEL?

    • The open General Licence is a type of license that is used for the export license that is issued by the government for domestic suppliers.
    • The items that are to be exported in India are categorised into three types. They are prohibited items, restricted items, and freely importable items. These classifications are made based on the nature and use of the products.
    • The application processing and grant of OEGL will be taken care of by the Department of Defence Production. The process will vary for each case.
    • The primary aim of the OEGL is to give a boost to the defence exports of India. This will also improve the ease of doing business and imports and exports.
    • The countries allowed under the OGELs are: Belgium, France, Germany, Japan, South Africa, Spain, Sweden, UK, USA, Canada, Italy, Poland and Mexico.

    Items to be exported

    • The items permitted under OGEL includes components of ammunition & fuse setting device without energetic and explosive material; firing control & related alerting and warning equipment & related system; and body protective items.
    • Complete aircraft or complete unmanned aerial vehicles (UAVs) and any components specially designed or modified for UAVs are excluded under this license.

     

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  • The Process of Cartelisation

    This newscard is an excerpt from the original article published in TH.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid-rigging, or share customers, etc. But when prices are controlled by the government under law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivize a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.

    Philosophy behind

    • Cartels, which involve a group of businesses colluding to keep prices high, have been viewed by economists as a significant threat to the market economy.
    • When businesses cooperate with each other rather than compete against each other, there could be many adverse consequences to consumers.
    • For one, consumers will have to pay higher prices for goods and services.
    • It should be noted that the way cartels keep prices high is by limiting the supply of their output. Further, in the absence of any threat from competition, cartels also have very little reason to innovate or cater to consumers in better ways.
    • In other words, they essentially act like a monopoly.
    • The Organization of the Petroleum Exporting Countries (OPEC) is the most well-known international cartel that influences the price of oil globally through coordinated efforts to limit supply.

    How do they work?

    • Four categories of conduct are commonly identified across jurisdictions (countries). These are: price-fixing, output restrictions, market allocation and, bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigors of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • They not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in the purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    What is the penalty for cartelization?

    • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
    • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

    How might cartels be worse than monopolies?

    • Monopolies are bad for both individual consumer interests as well as society at large.
    • Monopolist completely dominates the concerned market and, more often than not, abuse this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel and it is not always easy to ascertain the exact gains from cartelization.
    • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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  • Addressing Duty Anomalies in Trade Deals

    India has long suffered the anomaly of imported raw material being taxed more than the finished product. Economists call it the inverted duty structure. A spate of free trade agreements (FTAs) in the past have not helped. Are the new ones any better?

    What is the inverted duty structure?

    • An inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods.
    • In other words, the GST rate paid on purchases is more than the GST rate payable on sales.

    Why is it a problem?

    • When manufacturers cannot set off the taxes paid on raw materials against the tax on the final product, the excess tax paid on inputs gets built into the price of the product.
    • This makes an Indian-made product more expensive than the imported finished product, affecting the competitiveness of Indian makers.
    • The issue is acute in sectors like textiles and apparels.
    • Correcting duty anomalies is key to attracting investments in manufacturing.

    Will new FTAs worsen the problem?

    • Looks unlikely. The FTAs under negotiations are structurally very different from those signed a decade ago.
    • The FTAs signed in the early 2000s were with manufacturing hubs like the 10-nation ASEAN which includes the Philippines, Vietnam, South Korea, and Japan.
    • Most of these countries directly compete with India in a host of manufacturing sectors including apparel, electronics, and engineering goods.
    • They largely produced the same goods as India.
    • By contrast, the new FTAs being signed by India are with countries like the United Arab Emirates (UAE) that share complementarities with India with respect to trade interests.

    How is India addressing duty anomalies?

    • India has been increasing import duties since 2014-15 to correct the inverted duty structure for non-FTA countries and the average tariff rose from 13.5% in 2014 to 15% in 2020.
    • In fact, the last two budgets sought to correct it by removing duty exemptions and lowering the duty on raw materials.

    How did the earlier FTAs impact India?

    • In old FTAs, India agreed to lower or eliminate duties on finished goods. But import duty on raw materials remained high.
    • That made it cheaper to import the final product than make them in India, hurting domestic manufacturers.
    • This can be seen from the fact that the share of ASEAN in India’s total imports has grown from 8.2% in FY11 to 12% in FY21, while exports have stagnated at 10%.
    • The share of South Korea rose from 2.83% in FY11 to 3.23% in FY21, while exports are up marginally from 1.5% to 1.6% during the same period.

    And how are the new FTAs different?

    • The UAE, for example, is a services, oil, and gold-led economy rather than a manufacturer. India benefits from duty-free access for mobile phones, which the UAE does not make.
    • Australia, which signed a pact with India last week is again not a major manufacturing economy, but a services one with key interests in wines and minerals, pears, oranges, etc.
    • Besides, this time around, the government is holding consultations with the industry during the FTA talks, doing a SWOT analysis to ensure FTAs benefit India’s exports.

     

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  • Exports in India

    India’s annual goods exports crossed the $400-billion mark for the first time ever.

    The achievement of $400 billion in merchandise exports represents a growth of over 21 per cent from $330 billion achieved in FY2019 prior to the Covid-19 pandemic.

    Do you know?

    China’s total exports stood at $3.3 trillion ($3300 Billions) in 2021! Almost eight times of what we are celebrating!

    How did India achieve this?

    • The milestone was achieved due to increase in shipments of merchandise, including engineering products, apparel and garments, gems and jewellery and petroleum products.
    • The agriculture sector too had recorded its highest-ever export during 2021-22 with the help of export of rice, marine products, wheat, spices and sugar.

    Reasons behind the surge

    • One of the major reasons for jump in exports is rise in pent up demand, which had fallen as the Covid pandemic forced nations to remain under strict lockdown, thereby impacting global trade.
    • Beside, boost in domestic manufacturing due to production-liked incentive (PLI) schemes and implementation of some interim trade pacts have also led to surge in exports.
    • The Centre implemented a series of steps to promote exports of both goods and services and that includes the introduction of Refund of Duties and Taxes on Exported Products (RoDTEP) and Rebate of State and Central Levies and Taxes (RoSCTL) Schemes.

    External factors

    • One of the key factors driving the surge in exports is pent up demand that was not met during major waves of the Covid-19 pandemic.
    • Expansionary monetary policy by developed economies in response to the economic impact of the pandemic has also boosted demand for Indian exports.

    Where has been the increase in imports?

    • While exports have grown sharply, merchandise imports have grown even faster reaching $550 billion in the first 11 months of the fiscal.
    • It has seen sharp growth in imports of crude oil, coal, gold, electronics and chemicals.
    • Rising prices of commodities including crude oil and coal have played a significant role in adding to India’s import bill and taking the trade deficit for the first 11 months to a record high of $176 billion.

    Why exports are important?

    • Exports are one of the fundamental drivers of growth for any economy.
    • It can influence a country’s GDP, exchange rate, level of inflation as well as interest rates.
    • A robust export data is beneficial as it leads to increase in job opportunities, enhances foreign currency reserves, boosts manufacturing and also increases government’s revenue collection.
    • It is also a good means by which a country can bring itself out of the recession phase.
    • Besides, it also plays a key role in strengthening the domestic manufacturing units by scaling up their quality to make India made products compete and stand out against global peers.

     

  • Russia’s offer of cheaper oil is tempting, but India must be cautious

    Context

    With oil above $100, the government now has to spend twice as much to import oil as it did earlier. Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.

    Issues in buying oil from Russia

    1] Impact on India’s export due to threat of the secondary sanction by the US

    • The demise of the Soviet Union made it easier for India to abandon the Soviet-influenced ideology of a planned economy and veer towards the American version of a market economy.
    • Now, in the reverse ideological direction, Russia’s offer of cheaper oil has hidden and direct costs that India will have to deliberate upon.
    • Whenever global crude oil prices have risen above $100 in the past, India was able to cushion that shock primarily through growth in exports.
    • When oil prices were similarly high, exports rose to nearly 25 per cent of nominal GDP, which helped India withstand the shock.
    • However, exports now have fallen dramatically to 18 per cent of GDP, which must be revived.
    • The US is India’s biggest export market.
    • The US has already cautioned India about abetting Russia by buying Russian oil.
    • It remains to be seen if the US will impose secondary sanctions against India for buying discounted Russian oil, but that threat looms large.

    2] Cascading de-dollarisation

    • With US sanctions against Russia, it will insist on payment in rubles.
    • If India is forced to accept trading in rubles with Russia, then it is very likely that China, which is India’s second-largest trading partner, may also insist on payments in Chinese yuan.
    • Saudi Arabia may also insist on trading in a currency other than the US dollar.
    • This cascading “de-dollarisation” phenomenon will further irk and antagonise the US, since it weakens the dollar’s status as the world’s reserve currency.
    • If India is forced to purchase Russian oil in rubles and potentially trade in yuan with China and others, it can catapult India into the centre of a geo-economic war that it can ill afford.

    Opportunity for India

    • The Russia-Ukraine conflict can be an opportunity for India to step up and capture global market share in goods and services.
    • There is already talk of India capitalising on wheat exports, albeit a tiny share of India’s overall exports, as a fallout of global sanctions against Russian wheat.

    Conclusion

    Exports remain India’s biggest hope for a long-term sustainable economic recovery with ample job creation. India cannot risk being isolated in future global trade for near-term discounted oil deals with Russia.

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  • India is amongst the world’s largest arms importers

    India is amongst the world’s largest arms importers, accounting for 11 per cent of global imports, according to the Stockholm International Peace Research Institute (SIPRI).

    India’s arm imports

    • India’s overall imports decreased by 21% between 2012-16 and 2017-21 but that it was still the world’s biggest importer of military hardware.
    • Russia, France and the US are India’s biggest suppliers of arms, accounting for 46%, 27% and 12% of the country’s imports in the last five years.
    • India’s share of global arms imports stood at 11% during 2017-21 compared to 14% in the previous five-year period.

    Dependence on Russia is declining

    • Russia’s arms exports to India fell 47% between 2012-16 and 2017-21 even though the deliveries of several platforms including air defence systems and warships are pending.
    • Russia was the largest supplier of major weapons and systems to India during the two comparative five-year periods.

    Significance of the report

    • The report has come at a time when India’s dependence on Russian military hardware, ranging from fighter jets to rifles and submarines to shoulder-fired missiles has come into sharp focus.
    • Though India has been procuring US military hardware in growing numbers about 60% of the weapons inventory of the three services continues to be of Russian-origin.
    • It is still unclear how the new sanctions against Russia could play out and the problems they could create for the armed forces in the short and long term.
    • The possible impact of Russia’s unprecedented economic isolation on India’s military preparedness and the serviceability of weapons and equipment is threatened.

    Is it a matter of relief?

    • India has major plans for arms imports because of perceived threats from China and Pakistan, and due to significant delays in indigenous production.
    • The drop in India’s arms imports is, therefore, probably a temporary result of its slow and complex procurement process as well as its shift in suppliers.

     

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  • India, UAE to sign Comprehensive Economic Partnership Agreement (CEPA)

    India and the United Arab Emirates will sign the first-ever bilateral Free Trade Agreement between the two countries.

    What is CEPA?

    • The partnership agreement or cooperation agreement is more comprehensive than an FTA.
    • CECA/CEPA also looks into the regulatory aspect of trade and encompasses an agreement covering the regulatory issues.
    • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment and other areas of economic partnership.
    • It may even consider negotiation in areas such as trade facilitation and customs cooperation, competition, and IPR.
    • India has signed CEPAs with South Korea and Japan.

    What is a Free Trade Agreement (FTA)?

    • An FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
    • Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
    • The concept of free trade is the opposite of trade protectionism or economic isolationism.

    Key benefits offered by FTA

    • Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
    • Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
    • Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
    • Fair treatment for investors: FTA provides treatment as favorably as the FTA partner country gives equal treatment for investments from the partner country.
    • Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

     

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  • What is Cartelization?

    The Competition Commission of India (CCI) issued its final order in an alleged case of cartelization involving four Japanese shipping firms, asking them to desist from avoiding competition with each other.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid-rigging, or share customers, etc. But when prices are controlled by the government under law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivize a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.

    How do they work?

    • Four categories of conduct are commonly identified across jurisdictions (countries). These are: price-fixing, output restrictions, market allocation and, bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigors of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • They not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in the purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    What is the penalty for cartelization?

    • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
    • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

    How might cartels be worse than monopolies?

    • Monopolies are bad for both individual consumer interests as well as society at large.
    • Monopolist completely dominates the concerned market and, more often than not, abuse this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelization?

    • Strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel and it is not always easy to ascertain the exact gains from cartelization.
    • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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