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Subject: External Sector

  • Service Exports from India Scheme (SEIS)

    The Directorate General of Foreign Trade has imposed a cap on the total entitlement under the Services Exports from India Scheme (SEIS) at Rs 5 crore per exporter for shipments done in 2019-20 (FY20). The move is expected to benefit small businesses in the services sector.

    About SEIS

    • Service Exports from India Scheme (SEIS) aims to promote export of services from India by providing duty scrip credit for eligible exports.
    • Under the scheme, service providers, located in India, would be rewarded under the SEIS scheme, for all eligible export of services from India.
    • SEIS was earlier termed as Served from India Scheme (SFIS).

    Eligibility

    • Service Providers of notified services, located in India are eligible for the Service Exports from India Scheme.
    • To be eligible, a service provider (Company / LLP / Partnership Firm) should have a minimum net free foreign exchange earnings of USD 15000 in the preceding financial year to be eligible for duty credit scrips.
    • For proprietorships or individual service providers, minimum net foreign exchange earnings of USD10,000 in the preceding financial year is required to be eligible for the scheme.
    • Also, in order to claim reward under the SEIS scheme, the service provider shall have to have an active Import Export Code (IE Code) at the time of rendering such services for which rewards are claimed.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
    • It intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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  • Container shortage and its impact on international trade

    The government is in talks with exporters to help them deal with an international container shortage that has led to freight rates rising by over 300 per cent in the past year for key shipping routes.

    Why is there an international container shortage?

    • The reduction in the number of shipping vessels operating as a result of the Covid-19 pandemic has led to fewer empty containers being picked up.
    • This has left many containers in inland depots and stuck at ports for long durations.
    • Long waiting times at key ports such as those in the US due to congestion are also contributing to lengthening turnaround time for containers.
    • A sustained global economic recovery has added to the impetus to trade.
    • Some countries are willing to pay a premium for empty containers and that this was further adding to the container shortage.

    Freight rate impact

    • The lack of availability of containers and the faster than expected recovery in international trade has pushed up freight rates significantly over the past year.
    • Some key international routes are seeing an increase in freight rates of over 500 per cent compared to September last year.
    • Structural problems such as the high turnaround time for ships in India also add to the container shortage issue that exporters are currently facing.

    How is the container shortage impacting Indian exporters?

    • Delay: Indian exporters are facing major delays in their shipments and consequent liquidity issues as they have to wait longer to receive payment for exported goods.
    • Liquidity crunch: Exporters noted that shipments that used to take 45 days are now taking 75-90 days leading to a 2–3-month delay in payments leading to liquidity crunch particularly for small exporters.

    How can the government help address this issue?

    • Exporters are calling on the government to regulate the export of empty containers.
    • Exporters have asked the government to curb the export of empty containers at all Indian ports in line with a move by the Kolkata port which restricted the number of empty containers permitted to be exported to 100 per vessel for a three month period.
    • Exporters are also calling on the government to release about 20,000 containers that have been abandoned or are detained by government agencies so that they can augment supply.
    • Indian exporters has also called on the government to notify a freight support scheme for all exports till the end of the fiscal when freight rates are expected to normalise.
    • They are also asking the government to push back on a move by shipping lines to offer priority bookings at higher rates, asking that shipping lines revert to taking bookings on a first come first serve basis.
    • In the medium term, exporters have called on the government to take steps to boost the manufacturing of containers in India.

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  • [pib] Transport and Marketing Assistance (TMA) scheme for Specified Agriculture Products

    The Centre has revised “Transport and Marketing Assistance” (TMA) scheme for Specified Agriculture Products’.

    What is the TMA Scheme?

    • The TMA Scheme was introduced in 2019 to provide assistance for the international component of freight, to mitigate the disadvantage of higher freight costs faced by the Indian exporters of agriculture products.
    • All exporters, duly registered with relevant Export Promotion Council as per Foreign Trade Policy, of eligible agriculture products, shall be covered under this scheme.
    • The assistance, at notified rates, will be available for the export of eligible agriculture products to the permissible countries, as specified from time to time.
    • Assistance would be provided in cash through a direct bank transfer as part reimbursement of freight paid.

    Following major changes have been made in the revised scheme:

    • Dairy products, which were not covered under the earlier scheme, will be eligible for assistance under the revised scheme.
    • Rates of assistance have been increased, by 50% for exports by sea and by 100% for exports by air.

    List of ineligible products

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  • Why India’s Steady Exports Are At A Record High?

    Context

    First-quarter growth in India’s gross domestic product (GDP) stands at 20.1 %. This however still means that GDP in the first quarter was 9.2 % below its level two years ago.

    Export: Challenges

    • The key driver of growth in the coming quarters will be exports riding on the rapidity of recovery in major markets.
    • There are two serious worries here.
    • 1) Bullwhip element: This could cause an immediate ramp-up in demand for steel and other such upstream elements in global supply chains, with a corresponding damp down in the months to come.
    • In this connection, although the rates under the scheme for remission of duties and taxes on exported products (RODTEP) were finally notified in mid-August.
    • Steel, pharma and chemicals get no rebate at all, although many products using these inputs do.
    • The scheme looks like a subsidy to selected sectors disguised as duty rollback, which can get India into trouble at the World Trade Organization (WTO).
    • These excluded products need the rebate if they are to survive in a fiercely price-competitive global market in the months to come.
    • 2) Container shortage: A crippling shortage of sea-borne containers has afflicted key large-volume products in the Indian export basket (tea, basmati rice, furniture, garments).
    • Sea-freight subsidy: At a time when container rates have shot up, there is surely a case for a sea-freight subsidy (for a limited period).
    • Even more urgently, the estimated 25,000-30,000 containers locked up at different ports owing to customs disputes need to be unloaded into warehouses and these containers freed.

    Can National Monetisation Pipeline (NMP) spur growth?

    • Even if the expected ₹88,000 crore of revenue under NMP is realized during the current year, it is intended to feed only a small part of the infrastructure expenditure budgeted for the year.
    • It is the latter that will have to drive growth. Monetization is merely a funding source.
    • The scheme offers a participation incentive to states with a 33% matching transfer from the Centre for revenues that states realize under the scheme.
    • This matching transfer could well have the perverse consequence of states under-achieving the potential value realizable. 
    • Volume II of the NMP document refers to the Scheme for Special Assistance to States for Capital Expenditure announced in October 2020.
    • It offered states an interest-free loan with bullet repayment after 50 years to complete stalled capital projects, or settle the outstanding bills of contractors.
    • The NMP demands clear and well-thought-through processes, with sufficient transparency and safeguards in the form of regulatory structures.

    Conclusion

    For now, the need of the hour is export facilitation.

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  • India becomes 4th largest forex reserves holder globally

    India’s foreign exchange reserves rose by $835 million to touch a record high of $612.73 billion in the week ended July 16, 2021, the Reserve Bank of India (RBI) data showed.

    Forex Reserves

    India’s forex reserves cover:

    • Foreign Currency Assets (FCAs) (rose by $463 million to $568.748 billion)
    • Special Drawing Rights (SDRs) (up by $1 million at $1.548 billion)
    • Gold Reserves (up by $377 million to $37.333 billion)
    • Reserve position with the International Monetary Fund (IMF) (up by $1 million at $1.548 billion)

    (Note the descending order of the shares of various components of forex reserves. UPSC can go factual here.)

    What is Foreign Exchange Reserve?

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    Countries with the highest foreign reserves

    Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves.

    1. China – $3,349 Billion
    2. Japan – $1,376 Billion
    3. Switzerland – $1,074 Billion
    4. India – $612.73 Billion
    5. Russia – $597.40 Billion

    Why are these reserves so important?

    • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
    • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
    • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
    • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

    Initiatives taken by the government to increase forex

    • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
    • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
    • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

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  • [pib] International Bullion Exchange

    The International Financial Services Centres Authority (IFSCA) has inaugurated the pilot run/soft launch of the International Bullion Exchange scheduled to go live on October 1, 2021.

    What is Bullion?

    • Bullion is gold and silver that is officially recognized as being at least 99.5% and 99.9% pure and is in the form of bars or ingots.
    • Bullion is often kept as a reserve asset by governments and central banks.
    • To create bullion, gold first must be discovered by mining companies and removed from the earth in the form of gold ore, a combination of gold and mineralized rock.
    • The gold is then extracted from the ore with the use of chemicals or extreme heat.
    • The resulting pure bullion is also called “parted bullion.” Bullion that contains more than one type of metal, is called “unparted bullion.”

    The Bullion Market

    • Bullion can sometimes be considered legal tender, most often held in reserves by central banks or used by institutional investors to hedge against inflationary effects on their portfolios.
    • Approximately 20% of mined gold is held by central banks worldwide.
    • This gold is held as bullions in reserves, which the bank uses to settle the international debt or stimulate the economy through gold lending.
    • The central bank lends gold from their bullion reserves to bullion banks at a rate of approximately 1% to help raise money.
    • Bullion banks are involved in one activity or another in the precious metals markets.
    • Some of these activities include clearing, risk management, hedging, trading, vaulting, and acting as intermediaries between lenders and borrowers.

    What is International Bullion Exchange?

    • This shall be the “Gateway for Bullion Imports into India”, wherein all the bullion imports for domestic consumption shall be channelized through the exchange.
    • The exchange ecosystem is expected to bring all the market participants to a common transparent platform for bullion trading.
    • It would provide efficient price discovery, assurance in the quality of gold, enable greater integration with other segments of financial markets and help establish India’s position as a dominant trading hub in the World.

    Answer this PYQ:

    What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with India households into the economy
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

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  • What is RoDTEP Scheme?

    The Centre has notified the rates and norms for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme asserting that it would put ‘direct cash in the pockets of exporters’ soon.

    RoDTEP Scheme

    • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has been kicked in from January 2021, replacing the earlier Merchandise and Services Export Incentive Schemes (MEIS and SEIS) that were in violation of WTO norms.
    • The new RoDTEP Scheme is a fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Answer this PYQ:

    Q.With reference to the international trade of India at present, which of the following statements is/are correct?

    1. India’s merchandise exports are less than its merchandise imports.
    2.  India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.
    3.  India’s exports of services ye more than its imports of services.
    4.  India suffers from an overall trade/current account deficit.

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 2 and 4 only

    (c) 3 only

    (d) 1, 3 and 4 only

     

    [wpdiscuz-feedback id=”48pumhx6rn” question=”Please leave a feedback on this” opened=”1″]Post your answers here (You need to sign-in for that).[/wpdiscuz-feedback]

    Why need such a scheme?

    • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
    • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

    Coverage of the scheme

    • It covers about 75% of traded items and 65% of India’s exports.
    • To enable zero-rating of exports by ensuring domestic taxes are not exported, all taxes, including those levied by States and even Gram Panchayats, will be refunded under the scheme.
    • Steel, pharma, and chemicals have not been included under the scheme because their exports have done well without incentives.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
    • It intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

  • [pib] India improves score in Ease of Cross-Border Trade

    As per the latest UN Global Survey on Digital and Sustainable Trade Facilitation, India’s rank moved up from 78.49% in 2019 to 90.32% in 2021.

    About the Survey

    • The Global Survey on Digital and Sustainable Trade Facilitation is conducted every two years by UNESCAP.
    • The 2021 Survey includes an assessment of 58 trade facilitation measures covered by the WTO’s Trade Facilitation Agreement.
    • The Survey is keenly awaited globally as it evidences whether or not the trade facilitation measures being taken have the desired impact and helps draw comparison amongst countries.
    • A higher score for a country also helps businesses in their investment decisions.

    Global performance

    • Among developed countries, Australia, New Zealand, Netherlands, Japan, and Belgium have scored more than 93%.
    • In South Asia, Bangladesh and Sri Lanka were behind India with a score of 64.5% and 60.2%, the survey showed.

    India’s improvement

    • India has scored 90.32% in United Nation’s Economic and Social Commission for Asia Pacific’s (UNESCAP) latest Global Survey on Digital and Sustainable Trade Facilitation.
    • The Survey hails this as a remarkable jump from 78.49% in 2019.

    India’s significant improvement in the scores on all 5 key indicators, as follows:

    1. Transparency:100% in 2021 (from 93.33% in 2019)
    2. Formalities: 95.83% in 2021 (from 87.5% in 2019)
    3. Institutional Arrangement and Cooperation: 88.89% in 2021 (from 66.67% in 2019)
    4. Paperless Trade: 96.3% in 2021 (from 81.48% in 2019)
    5. Cross-Border Paperless Trade: 66.67% in 2021 (from 55.56% in 2019)
    • The Survey notes that India is the best-performing country when compared to the South and southwest Asia region (63.12%) and the Asia Pacific region (65.85%).
    • The overall score of India has also been found to be greater than many OECD countries including France, UK, Canada, Norway, Finland etc. and the overall score is greater than the average score of EU.
    • India has achieved a 100% score for the Transparency index and 66% in the “Women in trade” component.

  • [pib] Authorised Economic Operators

    Central Board of Indirect Taxes & Customs (CBIC) has inaugurated the online filing of Authorised Economic Operators (AEO) T2 and T3 applications.

    Who are Authorised Economic Operators?

    • The AEO concept is one of the main building blocks within the WCO SAFE Framework of Standards (SAFE).
    • The latter is part of the future international Customs model set out to support secure trade.
    • The growth of global trade and increasing security threats to the international movement of goods have forced customs administrations to shift their focus more and more to securing the international trade flow and away from the traditional task of collecting customs duties.
    • Recognizing these developments, the World Customs Organization, drafted the WCO Framework of Standards to Secure and Facilitate global trade (SAFE).
    • In the framework, several standards are included that can assist Customs administrations in meeting these new challenges.
    • Developing an Authorized Economic Operator programme is a core part of SAFE.

    AEOs in India

    • AEO is a voluntary programme.
    • It enables Indian Customs to enhance and streamline cargo security through close cooperation with the principal stakeholders of the international supply chain viz. importers, exporters, logistics providers, custodians or terminal operators, customs brokers and warehouse operators.

    Back2Basics: World Customs Organization (WCO)

    • WCO is an intergovernmental organization headquartered in Brussels, Belgium.
    • The WCO is noted for its work in areas covering international trade facilitation, customs enforcement activities, combating counterfeiting in support of Intellectual Property Rights (IPR), drugs enforcement, illegal weapons trading, integrity promotion, and delivering the sustainable capacity building to assist with customs reforms and modernization.
    • The WCO represents 179 Customs administrations that collectively process approximately 98% of world trade.
    • As the global centre of Customs expertise, the WCO has the tools and expertise to assist implementation of all legal, policy, procedural, technological, and human resource aspects related to trade facilitation.
    • The WCO maintains the international Harmonized System (HS) goods nomenclature and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.

  • Where is the Indian rupee headed?

    The article explains the factors affecting the Indian rupee’s value against the dollar in implications of change in value for the Indian economy.

    Factor’s affecting rupee’s value

    • First, India’s foreign exchange reserves need to be considered, which have been increasing quite rapidly.
    • Second, there are daily fluctuations caused by foreign portfolio investment (FPI) flows.
    • Third, there is the external factor of the dollar, when the US currency strengthens against the euro, the rupee tends to decline and vice-versa.
    • Fourth, there is the concept of the real effective exchange rate (REER), a construct of economists in which relative inflation comes into play.
    • If inflation in India is higher than in countries associated with its export basket of currencies, then the rupee is overvalued and will correct through depreciation.
    • Fifth, at what stage will the RBI intervene by buying or selling dollars to stabilize the Indian currency also matters.

    Let’s look at some of these factors in detail.

    Impact of the U.S. economy and Fed

    • The dollar is driven by the US economy as well as its Federal Reserve’s policies.
    • The Fed’s recent indication that it would raise its policy rate of funds in the years ahead was enough to strengthen the dollar and weaken the rupee.  As an increase in US rates could see global investor money flocking back to the US, the dollar gained in relative value.
    • The dollar should logically be strengthening, given improving US growth, now reinforced by the Fed.

    Inflation factor

    • The inflation factor, however, has been curious.
    • Indian inflation will be high in India and hence also the rupee’s REER.
    • To the extent the market understands this concept and uses it for valuation, it should be pushing the rupee downwards.
    • But the pressure will be less this time as global inflation is also being raised by rising commodity prices.
    • Indian inflation may not be so much higher as to warrant a deep depreciation.

    Increase in Forex reserves

    • An increase in forex reserves is an indication that India is getting in more dollars than we are spending.
    • This also means that our combined current and capital accounts are in surplus zone.
    • However, India’s current account will go into a deficit this year, as imports will be greater than exports, but will not be very high. Maybe 0.5-1% of GDP.
    • The capital account can get tricky.
    • Inward foreign direct investment was high in 2020-21.
    • At $60 billion in equity and $80 billion overall, it was one of the world’s highest.
    • Therefore, capital flows should remain strong.
    • External commercial borrowings could slow down amid weak investment within India.
    • So the fundamentals suggest that the rupee should be stable, with a tilt towards depreciation.

    The RBI intervention

    • The RBI’s surplus liquidity and accommodative stance have not worked in favour of the rupee.
    • In response to its April policy, when RBI affirmed its dovish stance, the rupee began falling on expectations that if RBI kept rates low at a time of high inflation and excessive market borrowing by the government, investors will potentially move out.
    • This pushed the rupee towards the 75 level against the dollar, but reverted with time as RBI kept infusing liquidity and managed the yield curve.
    •  In April, RBI bought $4.2 billion worth of the US currency.
    • Exports have grown smartly in the first two months of 2021-22, and at this stage, the central bank would not want to that trend by stalling the rupee’s depreciation.

    Conclusion

    Taking all these factors into account, one can foresee the rupee moving in the range of ₹74-75 to the dollar, unless there’s a shock of some sort, though none looks likely at present.