Export Assistance and Incentives

Topics: International trade, World Trade Organization, Export Pages: 10 (3013 words) Published: December 4, 2010
Export incentives Devices used by countries to encourage exports. These can include tax incentives for exporters, allowing them exemptions from the normal provisions of anti-monopoly legislation, preferential access to capital markets, priority Developing countries have started manufacturing industries only recently. As a result, their cost of production generally tends to be high because of the following reasons: Total market availability within the country is small with the result that the economies of large-scale production cannot be reaped. Productivity of labor is low because the level of mechanization as compared to that in the developed countries is low. Manufacturing units in developing countries, being small and new, have considerably less expertise in the field of international marketing and because the volume of exports is low, the per unit cost of trade promotion expenditure tends to be high. India has to raise higher resources for development which has to be done through a number of indirect levies which tend to push up the overall cost of production. Most developing countries have, therefore, resorted to a number of export promotion measures. India has also been providing export assistance to Indian exporters. However, the WTO Agreement on Subsidies and countervailing duties does not allow specific types of export subsidies. The Government of India is, therefore, removing those export incentives which are not WTO compatible. NEW SYSTEM OF EXPORT ASSISTANCE:

From 1992, export incentive system in India has been made simple. There are essentially three major incentives. These are: (1) Market-based Exchange Rate; (2) Fiscal Concessions, and (3) Facilities under the Export-Import Policy. These are discussed in detail below: MARKET BASED EXCHANGE RATE:

For long, external value of the rupee was managed by the Reserve bank of India (RBI) by pegging the value of the rupee to a basket of currencies. RBI used to keep the value of the rupee at a level which was higher than the real value. In the post-Economic Reforms period, the Government of India decided to abolish all direct incentives to exports and promote exports through the exchange rate mechanism. Accordingly, the Liberalized Exchange Rate Management System (LERMS) was introduced. Under this system, there were two exchange rates: one official rate which was determined by the RBI as was the practice earlier; and second, a rate which was quoted by the banks based on the demand-supply position. Exporters had to surrender 40 per cent of their foreign exchange earnings to banks and could sell the residual 60 percent at the market rate which was normally expected to be more attractive than the official rate. Through this mechanism the Government hoped to achieve two objectives: First the difference between the market rate and the official rate would provide enough incentives to the exporters. Second, this would introduce a self-balancing mechanism for the balance of trade, because only that much imports could be made which could be financed through the market i.e. the resources available through the 60 percent account. One year’s experience revealed that rupee remained stable in the international market. This gave to the Government for full convertibility on the trade account. Accordingly, rupee was made fully convertible for export-import transactions in March 1993.This would provide more financial benefit to the exporters as under the LERMS, they had to surrender 40 per cent of their receivables at a discount which averaged about 15 per cent when LERMS was in operation. Since March 1993, the exchange rate of the rupees is fully determined by the demand supply conditions in the market. Under such a system, exporters will get benefit when rupee depreciates while importers will lose. When rupee appreciates, the balance of benefits will be just the reverse. TAX CONCESSIONS:

(a)In the computation of total income, Section 80-HHC allows a deduction of...
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