New Trade Policy (1991)

You must understand that the new policy substantially removes licensing, quantitative restrictions, and other regulatory and discretionary controls. The chief characteristics of the new trade policy are:

1. Free Import and Export: The new trade policy made main alternatives in the import licensing system by substituting a large portion of administered licensing of imports by import entitlements connected to export earnings. The system of advance license, designed to offer exporters with duty free access to inputs, was reinforced further by simplifying and speeding up the process of granting these licenses.

The procedure of import of capital goods was simplified pursuing the Industrial Policy of 1991. New units and units undergoing considerable expansion would be automatically granted licenses for import of capital goods without any clearance from the indigenous availability angle, offered their import is entirely covered by foreign equity or the import requirement was till 25% of the worth of plant and machinery subject to a maximum of Rs. 2 crore.

Import of OGL capital goods, non-OGL capital goods and limited goods would be permitted without a particular license, provided clearance was provided by the RBI and foreign exchange, as their imports are fully covered by foreign equity.

2. Rationalisation of Tariff Structure: On the suggestion of Chelliah Committee, import duty was drastically decreased to set parity in prices of goods produced domestically and internationally. The 1993-94 Budget decreased the maximum rate of duty on all goods from 110% to 85%, except for few goods, which was additionally decreased to 40% in 1998-99 and further to 35% in 2000-01.

3. DE canalisation: The latest trade policy targeted at progressive DE canalisation. The government decontrolled 116 items permitting their exports without any licensing formalities. Another 29 items were moved to OGL. It also decanalised 16 export items and 20 import items involving new print, non-ferrous metals, natural rubber, intermediate and raw material for fertilizers. But, eight items (petroleum products, fertilisers, etc.) stayed canalised.

4. Exchange Rate Reforms: The government devalued the rupee in July 1991, which resulted in depreciation in the value of the rupee against the five main international currencies by approximately 22%. It also made the rupee convertible:

(i) Partial Convertibility of Rupee: In the Budget of 1992-93, the then finance minister declared Liberalised Exchanged Rate Management Systems (LERMS) under which 40% of the foreign exchange receipts were to be exchanged via the RBI at the official exchange rate and remaining was permitted to be converted at market exchange rate. The official exchange rate was lesser than the market exchange rate.

(ii) Fully Convertible on Current Account: The rupee was made entirely convertible. Current account convertibility depicts the freedom to purchase or sell foreign exchange for the following international transactions:

(a) all payment due in relation with foreign trade, recent business, and usual short-term banking and credit amenities,

(b) payment due as interest on loans and as net income from other investments,

(c) payments of moderate quantity of amortisation of loans or for depreciation of direct investment, as well as

(d) moderate remittances for family living expenses.

5. Phased Manufacturing Programme: PMP, as per which organisations were needed to substitute all the imported portions with Indian parts in a stated period, was abolished.

6. Trading House: In 1991, the policy permitted export houses and trading houses to import a broad range of items. The government also allowed the setting up of trading houses with 51% foreign equity for the reason of promoting exports. Under the 1992-97 trade policy, export houses and trading houses were offered the advantage of self-certification under the advance license system, which allows duty free imports for exports.

7. Export Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTP), Software Technology Parks (STPs) and Bio-Technology Parks (BTPs): The units undertaking to export their whole production of goods and services (excluding permissible sales in Domestic Tariff Area {DTA}), may be establish under the Electronics Hardware Technology Park (EHTP) Scheme, Export Oriented Unit (EOU) Scheme, Software Technology Park (STP) Scheme or Bio-Technology Park (BTP) Scheme for manufacture of goods, involving repair, reconditioning, re-making, reengineering and rendering of services. Trading units are not included under these schemes.

An EOU/EHTP/STP/BTP unit may import and/or procure, from Domestic Tariff Area (DTA) or bonded warehouses in DTA/international exhibition organised in India, without payment of duty, all kinds of goods, involving capital goods, required for its activities, offered they are not banned items of import in the ITC (HS). Any permission needed for import under any other law shall be applicable to these goods. Units shall also be allowed to import goods including capital goods needed for sanctioned activity, free of cost or on loan/lease from clients. Import of capital goods will be on a self-certification basis.

Notes: Goods imported by a unit shall be in actual user condition and shall be utilized for export production. State Trading regime shall not apply to EOU manufacturing units.

EOU/EHTP/STP/BTP units may import/procure from DTA, without payment of duty, certain specified goods for creating a central facility. Software EOU/DTA units may use such facility for export of software.

8. Free Trade & Warehousing Zones: The Free Trade & Warehousing Zones (FTWZ) shall be an exclusive category of Special Economic Zones with an emphasis on trading and warehousing. The goal of FTWZ is to create trade-related infrastructure to enable the import and export of goods and services with freedom to conduct trade transactions in free currency. The scheme envisions the creation of world-class infrastructure for warehousing of several products, state-of-the-art equipment, transportation and handling amenities; commercial office-space, water, power, communications as well as connectivity; with one-stop clearance of import and export formality and to help the integrated zones as ‘international trading hubs’. These Zones would be set up in the adjacent regions to seaports, airports or dry ports so as to provide easy access by rail and road.

9. Deemed Exports: Deemed Exports depict those transactions in which goods supplied do not leave country, and payment for such supplies is gained either in Indian rupees or in free foreign exchange. Below mentioned categories of supply of goods by main/subcontractors shall be considered as “Deemed Exports” under FTP, offered goods are manufactured in India:

(i) Supply of goods against Advance Authorisation/Advance Authorisation for annual requirement/DFIA;

(ii) Supply of goods to EOU/STP/EHTP/BTP;

(iii) Supply of capital goods to EPCG Authorisation holders;

(iv) Supply of goods to projects financed by multilateral or bilateral Agencies/Funds as informed by the Department of Economic Affairs (DEA), MoF under International Competitive Bidding (ICB) consistent with procedures of those Agencies/Funds, where legal agreements provide for tender evaluation without involving customs duty; supply and installation of goods and equipment (single responsibility of turnkey contracts) to projects financed by multilateral or bilateral Agencies/Funds as informed by DEA, MoF under ICB, consistence with procedures of those Agencies/Funds, which bids may have been invited and assessed on the basis of Delivered Duty Paid (DDP) prices for goods manufactured overseas;

(v) Supply of capital goods, involving goods in unassembled/disassembled condition as well as plants, accessories, machinery, tools, dies and such goods which are utilised for installation purposes till the stage of commercial production, and spares to the degree of 10% of FOR value to fertilizer plants;

(vi) Supply of goods to any project or purpose with relation to which the MoF, by a notification, allows import of such goods at zero customs duty;

(vii) Supply of goods to power projects and refineries not included in the point above;

(viii) Supply of marine freight containers by 100% EOU (Domestic freight containers-manufacturers) offered said containers are exported out of India within six months or such extra period as allowed by customs;

(ix) Supply to projects financed by UN Agencies.

It is important to note that apart from all these, various concessions and exemptions were issued during the nineties to liberalise imports and promote exports. Liberalisation also permitted FDI in many sectors. Foreign companies are permitted to open branch offices, foreign technology agreements were permitted, and the Foreign Investment Promotion Board (FIPB) was set up to process and give speedy approvals for foreign investment proposals. Automatic approval was permitted for technical collaboration and foreign equity participation till 51% in Indian companies in 34% high priority industries.

In totality, we pursued a policy of globalisation after 1991 as far as foreign trade is involved. This may appear like a threat to the domestic industry, but it only assisted Indian industry. Now, domestic industry has to confront competition at an international level, which only enhances their competitive position. It also permits them to import raw material and machines that enhance the quality of their products and decrease the cost.

You must understand that due to the abolition of Phased Manufacturing Programme (PMP), the domestic industry now doesn’t have to go for Indianisation. It decreases their cost and releases the R&D budget for something new rather than investing on that which is accessible in the international market at competitive prices.

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