Managing a Business/INTERNATIONAL BUSINESS ENVIRONMENT
1. a) Elaborate the practical difficulties in India's export trade during the last 10 years.
b) Explain the importance of ECGC in export promotion.
FACTORS AFFECTING EXPORTS
Exports are influenced through many channels, as explained in figure 1. These
channels can be classified broadly into two groups. One channel refers to demand-side
factors, which can lead to a sudden turnaround in growth, while the other channel refers to
supply-side factors. If supply-side factors are not favourable, this may prevent a quick
revival of exports and may also act as an obstacle to maintaining high growth for a long
Major factors affecting Indian exports
Competitors domestic price
Relative exchange-rate adjustment
Some important demand- and supply-side factors are considered below.
(a) Demand-side factors
(i) Price competitiveness
India’s merchandise export profile (comprising mostly low technology products) is
quite similar to those of South-East Asian nations. Box 1 provides a list of the major trade
items of some Asian countries. Country names in parentheses denote the leading producers,
although other countries in the region also have a comparative advantage in producing these
Box 1. Main tradables of India and some of its competitors
Rice (Viet Nam)
Electronics (Republic of Korea)
Motor vehicles (Japan)
Gems and jewellery (India) Transport equipment (Indonesia)
Iron and steel (China)
Dairy products (India)
Crude oil and natural gas
Textiles and apparel (China)
Beverages and tobacco
Corn and vegetables (Cambodia)
(Hong Kong, China)
Air travel (Thailand)
Health care (Singapore)
Many of the tradables comprise low-technology products, such as leather footwear, dairy products, iron and steel, beverages, corn and vegetables, textiles and
apparel, and so forth. Because highly differentiated products are being considered that are
nevertheless close substitute products, demand for these products is price-sensitive. Firms
offering a lower relative price would be able to sell more than their competitors. Therefore,
it makes sense to examine the importance of the price factor to compare changes in India’s external competitiveness relative with those of its neighbours. To measure lower relative price, it is necessary to look at price and exchange rate data of India vis-à-vis those of its
competitors. The volume of exports depends on nominal exchange rates after adjusting for the domestic level of inflation.
Empirical evidence suggests that India’s exports react favourably to devaluation or depreciation. Following the devaluation in 1949, there was an increase in export volume between 1950/51 and 1951/52. Similarly, export growth between 1993/94 and 1995/96 was
due to the rupee devaluation in 1991. In considering the period from 1961 to 1987, Joshi
and Little (1994) found that the price elasticity of demand for exports is about 1.1 in the
short run and 3 in the long run, with 80 per cent of the long run effect being realized in two
years. Again, in considering the export performance of India during the period from 1963
to 1994, concluded that the price competitiveness of India’s exports is an important determinant of the volume of exports and that rupee depreciation
can have a significant positive effect on its current account balance. While comparing India’s exports performance with that of Sri Lanka during the 1980s and early
1990s, also found price competitiveness to be a statistically significant factor. These
estimates are similar to those of Arize (1990), who estimates export demand and supply
functions using quarterly data for the period 1973 to 1985 for seven Asian countries: India,
Indonesia, Republic of Korea, Malaysia, Pakistan, Philippines and Thailand. These
estimates show that a fall in the price of exports of any country relative to that of its
competitors will create favourable growth in exports at the expense of competitors’ exports.
India’s external competitiveness. It should be noted that, although
India’s overall merchandise exports have increased, its external competitiveness has fallen
relative to that of its competitors. This is true even when taking into account the fact that
some competitors have also lost competitiveness in recent years. This finding is in contrast
to the findings of the studies noted in the previous paragraph. The apparent contradiction
may reflect a change in the composition of India’s exports from price-sensitive items to less
price-sensitive items. Indeed, the recent robust performance is due to the rise in exports of
value items such as chemicals, engineering goods and petroleum products.
Real exchange rate (R) = nominal exchange rate (e) x foreign price (p*)/domestic price (p). The nominal
exchange rate is measured as domestic currencies per unit of foreign currency. Using the law of one price:
e x p*/p = 1, which, after slight modification, yields: de/e = dp/p – dp*/p*. That is, if the inflation rate in
India is higher than that of its foreign competitor by 3 per cent, the Indian rupee should depreciate by 3 per
cent to ensure that its exports remain competitive.
a A negative sign indicates the depreciation of India’s exchange rate.
b Lower values indicate a rise in competitiveness.
Exports of price-sensitive items, such as agricultural and textile products, have witnessed a fall in recent years. For example, between 2004 and 2005, the growth of
agricultural and textile products, including ready-made garments, fell from 11.9 per cent to
7.4 per cent, and from 21.5 per cent to -2.2 per cent, respectively. The corresponding trend
for chemicals, engineering goods and petroleum products was an increase from 22.7 per
cent to 25.1 per cent, 30.2 per cent to 31.8 per cent, and from 38.1 per cent to 90.5 per cent,
respectively (India, 2006).
(ii) Potential demand
Apart from relative prices, the GDP of importing economies is also considered to
be an important variable for estimating export demand functions . Since imports by India’s major trading partners are based on derived
demand (that is, as a function of their GDP), demand for Indian exports refers to potential
rather than actual demand. In table 2, the import growth of India’s major trading partners is
considered. As can be seen, import figures for these nations have shown a positive trend.
Hence, the growth in India’s exports can be partly explained by the growth in imports by its
To determine the reasons these countries began increasing imports, world trade
figures were analysed. Like any other economic indicator, trade follows cycles, with
countries trading more during times of economic expansion than in times of recession.
Agrawal and others (2000) examined compound annual growth rates of India along with
those of other Asian countries for four periods: 1970 to 1975, 1975 to 1980, 1980 to 1985
and 1985 to 1990. They found that the export growth of Asian countries followed the
booms and slumps in world trade, but that the exports of Asian countries always change
faster than the world average. For India, the case was little different. During the first three
periods, India’s export growth was close to that of the world average, and increased
significantly above the world average only in the final period. Similarly, Tendulkar (1999),
while analysing the export performance of 10 Asian economies (Bangladesh, China, India,
Indonesia, Malaysia, Pakistan, Philippines, Republic of Korea, Taiwan Province of China
and Thailand), found that rapid economic growth is associated with the rapid volume
growth of exports and that, in a period of higher world trade, this association becomes
There has been some change in the direction of trade for India. India’s major
trading partners continue to be the same countries listed in table 2, and among those, China
is fast emerging as one of India’s most important trading partners. One reason for the fast
growth of India’s exports (comprising both merchandise and services items) is the
remarkable growth in India’s services sector. Since the early 1990s, both merchandise and
services exports originating from India have grown at a rate higher than the world exports
average. However, growth in services exports has been much more spectacular, especially
since the mid-1990s. India’s share in global services exports has increased from 0.53 per
cent in 1992 to 2.32 per cent in 2005 (table 3).
(iii) Trade barriers
There are two ways to restrict the movement of goods and services: tariff barriers
and NTBs. However, NTBs have recently become more dominant than tariffs in restricting
market access. Repeated rounds of multilateral trade negotiations under WTO have led to
a steady fall in industrial tariffs. Due to WTO commitments, it is not easy for a country to
increase tariffs without substantive negotiations with, and compensation to, affected parties,
and many countries are therefore now using NTBs to protect their economy.3 During the
pre-liberalization period (that is, before 1991), NTBs were not important given India’s tiny
share in world trade and the relatively small contribution of trade to GDP. However, since
liberalization, when India became more outward-oriented, the use of NTBs has gained
significance. Some NTBs that are adversely affecting the country’s exports are anti-
dumping procedures, countervailing procedures, sanitary and phytosanitary sanctions,
import licensing, rules of origin, tariff quota and government procurement. The major
export items of India that face these restrictions in the United States, European Union and
Japan primarily fall under four categories. Using the two-digit Harmonized System, these items are: HS Code 52 (cotton textiles; facing anti-dumping restriction); HS Code 23
(residues and waste from the food industry prepared animal fodder; facing sanitary and
phytosanitary sanctions); HS Code 84 (nuclear reactors, boilers, machinery, mechanical
appliances and parts thereof; facing problems because of import licensing and government
procurement); and HS Code 08 (edible fruits and nuts, peel or citrus fruit or melons; facing
problems associated with rules of origin and countervailing measures) (India, 2004).
Similarly, NTBs are affecting services exports as well. There is significant
opposition from labour unions in Europe and North America towards procuring BPO-type
services from India. In Europe, there are legal norms, known as transfer of undertakings
and protection of employees, that are designed to protect workers in outsourcing deals.
There are also many other barriers, such as the burdensome visa formalities of H-1B visa
quotas and different taxation standards, for people willing to provide software-related
services.4 In the United States, during the time of the dot-com boom, the number of H-1B
visas rose from 65,000 in 1997 to 115,000 in 1999, but declined to 65,000 in 2002 (“Bill
Gates is for big raise in H-1B Visas”, Hindustan Times, 21 March 2006). More recently, the
United Kingdom of Great Britain and Northern Ireland introduced a medical bill that will
require work permits for non-European Union doctors if they want to complete National
Health Service training. For decades, graduates from overseas medical and dental schools
have come to the United Kingdom to complete two years of training in junior National
Health Service posts. Some of these posts were specifically reserved for overseas doctors.
From now on, trainee doctors and dentists will not be able to get a training place work
permit at a hospital without the hospital proving that it has not been able to recruit
a doctor from the United Kingdom or the European Union. The Government of the United
Kingdom was open about this, saying, “it is protecting posts for UK graduates as supply of
doctors outstrips demand” (Casciani, 2006).
Hence, looking at the demand-side factors, the positive impact on exports has
come mainly from reforms in the domestic economy and in the external sector. Besides
reforms, other factors, such as growth in world trade since 2003 and the change in the
composition of trade towards value items, have complemented growth in India’s exports.
NTBs, however, are harming India’s exports.
(b) Supply-side factors
(i) Factor productivity
From the supply-side perspective, growth in exports can be an outcome of
improved factor productivity. A recent paper by Bosworth, Collins and Virmani (2006)
found that labour productivity has increased since 1991. As is evident in figure 2, output
The H-1B is a non-immigrant visa category in the United States that allows employers in that country to seek
temporary help from skilled foreign workers.
per worker grew the most during the period following reforms. What is more interesting is
that the sharpest improvement in output per worker was witnessed in the services sector.
Incidentally, it is the services sector that has been the star performer, outshining both
manufacturing and agricultural exports. Output per worker in the services sector grew at
a rate of 7 per cent from 1993 to 1999, compared with only 2.7 per cent during the previous
decade. Labour productivity in the manufacturing sector was more modest, growing from
3.1 per cent during the previous decade to 4.5 per cent in the period 1993-1999. The
agricultural sector lagged behind, with output per worker rising to only 2.4 per cent from
1993 to 1999, compared with 1.5 per cent during the previous decade.
(ii) Procedural bottlenecks
Although reforms in India are taking place, they are far from complete. There is
scope for further reform. Exporters face a maze of government orders, regulations, rules
and procedures, which raise the cost of production and hence affect exports. The World
Bank places India in the 116th position out of a sample of 154 countries, which is far worse
than China (91st), Sri Lanka (75th), Bangladesh (65th) or Pakistan (50th), when it comes to
the convenience of doing business in India. Enforcing a contract in India takes an average
of 1,420 days and involves 56 different procedures. Importing goods takes an average of
41 days and 15 documents. Tax payments have to be made on average 59 times per year
and the process takes 264 hours (World Bank, 2006).
To sustain the rapid growth of exports, it is necessary to have a well-functioning
infrastructure, including electric power, road and rail connectivity, telecommunications, air
transport, and efficient ports. India lags behind East and South-East Asia in these areas.
A recent survey by the World Economic Forum places India in 62nd position (out of a total
sample of 125 countries) when competitiveness is measured in terms of infrastructure
development (World Economic Forum, 2006). India, however, performed well in terms of
overall competitiveness (43rd position), which takes into account other factors, such as
a country’s institutions, infrastructure, macroeconomy, health, primary education, higher
education and training, market efficiency and technological readiness.
India needs to invest over $320 billion in infrastructure. This figure includes
$130 billion for power, $66 billion for railways, $49 billion for national highways,
$11 billion for seaports and $9 billion for civil aviation.5 However, this level of investment
requires resources that are not available to the public sector and, hence, there is a need for
private participation. Unfortunately, private participation has fallen in recent times due to
problems associated with regulatory constraints (World Bank, 2004). Except for
telecommunications, sectors such as power, ports, aviation, railways and roads are
witnessing slow progress in growth. Below, the nature of bottlenecks is discussed in brief
for each one of these sectors.
Power. The power sector is approaching a crisis. Average power supply shortages
are approximately 12 per cent of total demand, power supply is irregular and variable in
quality, and the power costs for the industry are considerably higher than those of most
Asian developing nations. The power shortage rose from 10.5 per cent in 2005/2006 to
a 14 per cent peak during the first nine months of the financial year 2006/2007. Electric
power transmission and distribution losses (as a percentage of total output) stood at 26 per
cent in 2004 (World Bank, no date). The irregular power supply hurts manufacturing
activities, although, in recent times, large manufacturing units have depended on their
captive power plants.
Ports. Indian ports are overutilized. Major ports, such as Chennai, Mumbai,
Tuticorin and Visakhapatnam, have consistently handled more cargo than their capacity
allows. As a result, these ports are less efficient than other Asian ports, such as Singapore;
Hong Kong, China; and Colombo. In Singapore, for example, the average turnaround for
a container ship is only six to eight hours compared with an average of 3.47 days in India
(Ray, 2005). Cargo ships from Indian ports are therefore not cost-efficient, incurring high
detention costs of approximately $15,000-20,000 per day. According to an estimate by the
World Bank, container delays at Indian ports cost about $70 million per year. Port capacities are also not increasing (Ray, 2004). The capacity-constraint nature of Indian ports increases free on board and cost, insurance and freight prices of exports. Exporters
have to bear detention costs for warehouse facilities, higher insurance charges and other
related costs. As a way out, investors have recently established some private ports and
cargo facilities throughout the country. There has been a dramatic increase in private sector
participation in building ports and port-related infrastructure at Jawaharlal Nehru Port Trust,
Mumbai; Mundra (private port in Gujarat); Pipavav (private port in Gujarat); and Chennai.
Railways. In the railway sector, high freight-user charges to compensate or
cross-subsidize low passenger traffic are a common complaint. There are also problems
associated with connectivity between broad-gauge and metre-gauge railway lines. For
example, there is no simple way to transfer goods from Kolkata, India, to neighbouring
Dhaka. In the border town in Bangladesh, the trains run on metre-gauge, while in India
they run on broad-gauge. There is a need to bridge this connectivity. Recently, in the 2006/
2007 railway budget, rail-based container operations were scheduled for privatization, and
it is hoped that this will benefit exporters.
Roads. India has begun strengthening its road connectivity. Although some work
has been done in building four-lane highways connecting four main cities (Kolkata,
Chennai, Mumbai and Delhi), very little has happened with respect to rural road networks.
The major arterial routes have low capacity (just two lanes in most cases) and suffer from
poor maintenance. Private participation in developing the road infrastructure is permitted
with few restrictions on FDI.6
Aviation. To handle the growing air traffic, there is a need to expand existing
airports or, wherever possible, build new ones. The Government has airport privatization
on its reform agenda, and the private sector has been successfully involved in at least two
major airport modernization programmes (Delhi and Mumbai airports). Two additional
private-sector developed airports (at Hyderabad and near Bangalore) are nearing
Telecommunications. Telecommunications are a success story in India.
Tele-density, which had doubled from 0.3 lines per 100 population in 1981 to 0.6 in 1991,
increased about nineteenfold in the ensuing 15 years to reach 11.32 lines per 100 in 2006
(Ministry of Communications and Information Technology, Government of India, 2007).
Waiting periods for telephone connections have shrunk dramatically. Telephone rates were
heavily distorted in the past, with very high long-distance charges cross-subsidizing local
calls and covering inefficiencies in operation. They have been rebalanced by the regulatory
authority, leading to a 60 per cent reduction in long-distance charges. Interestingly, the
With the idea of providing better road infrastructure, multilateral agencies, such as the World Bank and ADB,
have joined hands with the Indian Central and state governments to fund significant road infrastructure
projects. Foreign companies can also bid for these contracts.
erstwhile public-sector monopoly supplier has aggressively reduced prices in a bid to retain
market share. Mobile phone services have by far outnumbered landline services. As of
March 2007, there were 121,431,166 mobile phone users in India. During the fiscal year
2005/2006, while the mobile phone subscriber base shot up by 20 million, the landline base
increased just by 1.6 million.7
Hence, although productivity growth has helped to increase the competitiveness of
the country’s exports, a lot needs to be done with respect to removing infrastructural and
procedural bottlenecks. In the next section this issue is addressed, along with other
plausible options to improve exports.
WHAT NEEDS TO BE DONE?
(a) Negotiations in multilateral forums
Enhancing market access is possible by reducing tariffs and phasing out NTBs.
However, repeated negotiations in WTO have seen wide failures. This is because of widely
divergent trade interests among WTO member countries. In general, developing countries
want the removal of government subsidies on agricultural products exported by various
developed countries. They also want the removal of NTBs imposed on their manufacturing
exports by developed countries. On the other hand, developed countries want greater
market access for their services in developing countries. As a result, the current Doha
negotiations have not led to any significant result in terms of greater market access for
goods and services.
Unfortunately, within developing countries as a group, individual bargaining
interests vary. Regarding agriculture, for example, India is unlike many other developing
countries in that it is rather passive when it comes to negotiating for greater market access.
India still maintains relatively high tariffs on most agricultural products, and its justification
for this is that it needs to protect the interests of marginal farmers. The actual difference
between the world price and the domestic price of staple agricultural commodities is small
in India. A reduction in agricultural tariffs would help the domestic consumers but not
benefit the marginal farmers. Cheaper agricultural imports may jeopardize the income of
the majority of the 68 per cent of the rural Indian population earning their livelihood from
agriculture and the agriculture-related informal sector. Hence, India has maintained
a defensive stance on reducing tariffs on agricultural items. In contrast, countries such as
Brazil, Mexico, Chile and South Africa, which are net agricultural exporters, want to reduce
tariffs on agricultural items.
Compared with its policy on agriculture and manufactured items, India has been
more aggressive in negotiating market access in services. But this is not surprising as the
country’s comparative advantage lies in this sector. Trade in services accounts for 30 per
cent of exports; its BPO sector is a $7.7 billion industry, which is seven times the figure of
China’s BPO sector (Hummels and Klenow, 2005). In addition, the movement of natural
persons, mostly in the IT sector (that is, Mode 4 type services) and BPO-type activities
(that is, Mode 1 type services) contribute significantly to the export earnings of India.
Although India accounts for 1.9 per cent of world trade in commercial services, its share in
offshore IT services and the global BPO market are 65 per cent and 46 per cent,
respectively (India, 2006). Hence, promoting the growth of the services sector and
improving market access for services have priority over improving market access for
To achieve better market access, therefore, there is a need for more aggressive
negotiations and policy dialogue among developing nations. Since multilateral negotiations
are all about give and take, demands for better market access abroad need to be matched by
better market access at home, especially in the agricultural and services sectors in India. It
is worth noting that, since reducing agricultural tariffs might not be politically viable in the
short run, India can consider expanding market access for Mode 2 and Mode 3 type
services, where its comparative advantage is lower.8 Alternatively, India can try to become
a member of an active RTA.9
There is a popular perception that India cannot enter into a meaningful RTA with
its South-East Asian neighbours because these countries also have, more or less, similar
export profiles to those of India. The perception that countries with similar export profiles
will trade less among themselves is incorrect, however. On the contrary, the literature
suggests that there are actually greater opportunities for trade between countries that are at
a similar level of economic development and share similar export profiles (Helpman and
Krugman, 1985; Leamer, 1984). Another study has found that, in the sample countries
comprising some South-East Asian countries, China and India, two thirds of the growth in
Mode 2 relates to consumption abroad, where consumers or firms of one country make use of services in
another country. Examples in this category include medical care, education and tourism. Mode 3 refers to
commercial presence, where foreign companies set up subsidiaries or branches to provide services in another
country. Examples include banking, financial and telecommunication services.
There are five different forms of RTAs, namely, the preferential trade agreement, FTA, customs union,
common market and economic union. In forming an FTA, members remove trade barriers among themselves
but keep their separate national barriers against trade with outside nations. In a customs union, members not
only remove trade barriers among themselves but also adopt a common set of external barriers. In a common
market, members allow the full freedom of factor flows (the migration of labour and capital) among
themselves in addition to having a customs union. In an economic union, members unify all their economic
policies, including monetary, fiscal and welfare policies, while retaining features of a common market.
exports have come from expansion in intra-industry trade rather than in inter-industry trade
(Hummels and Klenow, 2005). A steady increase in the per capita income levels of China,
India and some other Asian countries has also resulted in an increase in potential demand
for differentiated products.
India is not currently a member of any important RTA. Although RTAs such as the
South Asian Free Trade Area and the Bay of Bengal Initiative for Multi-Sectoral Technical
and Economic Cooperation FTA, both of which include India, look good on paper, these
agreements lack implementation for political reasons. There has also been little progress on
the framework agreement for CECA between the 10 member countries of ASEAN and India,
signed on 8 December 2003 in Bali, Indonesia. To jump-start the negotiations, in June
2006, India reduced the number of items on its “negative list” (items to be excluded from
tariff reductions) under CECA from 1,410 to 900 products (both industrial and agricultural),
but this reduction fell short of meeting the demand of ASEAN to reduce the negative list to
60 commodities. Two months later, in August 2006, the Government of India further
reduced the number of items on the negative list to 563 items. And very recently, in
January 2007, India further reduced the negative list to 490 items. However, the magical
figure of 60 items is far from being achieved. India has now offered a major reduction on
import duties on products such as refined palm oil (from 90 per cent to 60 per cent), crude
palm oil (from 80 per cent to 50 per cent), black tea (from 100 per cent to 50 per cent) and
pepper (from 70 per cent to 50 per cent).
Therefore, in order to achieve better market access for India’s goods and services,
there is a need for the Government to continue political dialogue with its neighbours and
offer better market access for Mode 2 and Mode 3 type services. If possible, it should also
reduce tariff rates on agricultural imports and the number of items included on the negative
list in its negotiations with ASEAN.
The lack of proper infrastructure facilities indirectly raises the costs of Indian
exports. Some studies have already commented on the importance of infrastructure in
explaining variations in income and export growth among countries (Hall and Jones, 1999;
Stiglitz, 1989). Another study, which was done more specifically in the context of India,
brings out the seriousness of infrastructural bottlenecks and explains how the lack of proper
infrastructure facilities is affecting Indian exports (Mishra, 1998). It is hardly surprising to
see why the country’s services exports (which are less dependent on infrastructure) are
outperforming its manufactured exports (which are more dependent on infrastructure).
There is a need for private participation in the infrastructure sector.
A major problem with infrastructure financing in India originates from regulatory
constraints. The Government uses the “force majeure” clause more often and, hence, does
not fulfil the promises it made to private providers at the beginning of infrastructure projects.10 Sometimes, the providers cannot challenge the Government in court because of
the force majeure clause, which allows for varying assurances of returns to investors
because of unexpected changes in the rules of engagement in the future. For example, if,
upon the completion of a road, the projected number of vehicles is not realized, the
Government can alter the agreement. Even appealing in the court is a lengthy procedure
and may take several years to settle. Some of the sector-specific recommendations are
In the power sector, there is a need to create a market for power where the
power-surplus Indian states can trade with the power-deficient Indian states. Although
private participation is allowed in power generation, not many responses have been
forthcoming because of lower power tariffs. Private investors are expected to produce
electricity for sale to the state electricity boards, which would control transmission and
distribution. These boards are however financially very weak, partly because electricity
tariffs for many categories of consumers are too low and also because very large amounts of
power are lost in the transmission and distribution. There is a need to privatize distribution
in the hope that this will overcome the corruption that leads to the enormous distribution
In railways, there is a need to correct the tilted fare structures, in which freight
rates have been set excessively high to subsidize passenger fares. There is also a need to
increase operational efficiency as there are problems with project execution. For example,
among the 300 projects in the Rs1 billion and above cost category, more than 130 projects
are encountering time overruns of up to 160 months. A comprehensive review of 78 such
railway projects has revealed that all suffer huge time and cost overruns due to various
problems related to land acquisition, litigation, rehabilitation, contractors and labour
As in the case of railways, there are problems with project execution in the road
sector. National highway development programmes are progressing slowly, hampered by
time overruns and budgetary constraints (table 4).
Both civil aviation and ports have problems related to labour issues. The
Government needs to introduce labour market reforms, something that is yet to happen in
India. The Government also needs to address the problems associated with encroachments,
where unutilized ports and aviation authority’s lands are gradually being taken over by local
The “force majeure” clause refers to exceptional matters or events beyond the control of either party, that is,
the Government and the providers. For example, while building the Bangalore-Mysore highway in India, the
promoter (Nandi Infrastructure Corridor Enterprises) was promised free land alongside the expressway to
recoup its investment cost. This promise was never fulfilled because of political factors. Delays in land
acquisition, red tape and a five-year legal battle have raised the estimated cost by Rs6 billion (KPMG, 2005).
In the case of telecommunications, there is a need to develop a uniform calling rate
throughout India. This would address the present problem relating to segmented markets,
where revenue shortfalls in rural areas are subsidized by higher tariffs on long distance
national calls and international calls.
The recent growth in Indian exports is primarily led by an increase in factor
productivity, growth in world trade, increase in intra-industry trade and external sector
reforms. While these factors certainly play an important role in explaining the surge in
exports, the removal of supply bottlenecks is necessary to sustain this high export growth.
Supply-side factors are extremely important and need to be addressed in this regard. As the
multilateral trade negotiations under WTO are stalled, India could strengthen its
involvement in meaningful RTAs to facilitate better market access for its exports.
Alternatively, India should be willing to take a more constructive approach, along with
other developing countries, at multilateral forums such as WTO. On the domestic front,
there is a necessity to put a proper infrastructure in place and eliminate the problems
associated with burdensome government regulations and procedural bottlenecks
b) Explain the importance of ECGC in export promotion.
What is ECGC?
Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.
Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.
ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.800 crores and authorized capital Rs.1000 crores.
What does ECGC do?
Provides a range of credit risk insurance covers to exporters against loss in export of goods and services
Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them
Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan
How does ECGC help exporters?
Offers insurance protection to exporters against payment risks
Provides guidance in export-related activities
Makes available information on different countries with its own credit ratings
Makes it easy to obtain export finance from banks/financial institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas buyers
Need for 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. A coup or an insurrection may also bring about the same result. 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. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. 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.
ECGC – An Export Promotion Institution :
1. Provides credit risk covers to Exporters against non payment risks of the overseas buyers / buyer’s country in respect of the exports made.
2. Provides credit Insurance covers to banks against lending risks of exporters
3. Assessment of buyers for the purpose of underwriting
4. Preparation of country reports
5. International experience to enhance Indian capabilities
6. An ISO organization excelling in credit insurance services
7. Rated “AAA” by CRISIL for claim paying ability
Need For Export Credit Insurance :
1. ECGC has seen raise in number of claims due to defaults and insolvencies.
2. In terms of numbers of claims developed countries have shown steep increase in numbers of claims paid.
3. Export credit insurance is a viable means of securing payment.
4. It is an effective sales tool.
5. It is also an effective financial tool.
Risks Covered :
1. Insolvency of buyer / LC opening bank
2. Protracted Default of buyer
3. Repudiation by buyer
1. War / civil war / revolutions
2. Import restrictions
3. Exchange transfer delay / embargo
4. Any other cause attributable to importing country
Products offered to Exporters :
1. Standard Policy
2. Small Exporters policy
3. Specific Shipment Policy (short term)
4. Export Turnover policy
5. Specific buyer wise policy
6. Consignment export ( Stock holding agent)policy
7. Consignment export (Global entity) policy
8. Single buyer exposure policy
9. Multi buyer exposure policy
10. Software project exports policy
11. IT enabled (single customer) policy
12. IT enabled (multi customer) policy
13. SME Policy
14. Customer specific policy (Tailor made)