Free Trade Agreements & CECA

in Relation to BOP/Current a/c

Presented By:

 131-Keyur Shah
 133-Nirav Shah
 121-Nilabh Ranjan
 162-Pankaj Vaidya
 159-Pankaj Tripathi
 152-Ramnath S
 180 –Nikhil Talreja
 161- Nikhil Vaithy
 Definition of Free Trade Agreement

Free trade agreements (FTAs) are generally made between

two countries.

Many governments, throughout the world have either signed FTA, or

are negotiating, or contemplating new bilateral free trade and
investment agreements.
 Benefits of Free Trade Agreements

Reduce Barrier to Trade

FTAs
FTAs
Facilitate cross border movement of Goods and Services between
signatories Territories

 Towards international integration into a global

Stepping stones free market economy.

 Reducing poverty and increasing standards of

Economic Growth living and generating employment
opportunity.

More freedom to TNCs  To exploit workers shaping the national and

global economy to suit their interests. In
simple terms it removes all restrictions on
businesses.
 Features of Free Trade

 Trade of goods/services without taxes

(including tariffs) or other trade barriers
Help Businesses (e.g., quotas on imports or subsidies for
strong their producers)
Cross Border Trades

 Absence of "trade-distorting" policies

(such as taxes, subsidies, regulations,
or laws) that give some firms,
Tariff Reduced/Zero households, or factors of production an
Tariff Rates
Savings advantage over others

 Free access to markets:

Make Exports  Free access to market information
More Price  Inability of firms to distort markets
Competitive through government-imposed monopoly
or oligopoly power
 Free movement of labour between and
within countries
 Free movement of capital between and
within countries
Currently FTA in force between Countries
 Current FTAs for India

FTA signed Indo-Thailand (9 October, 2003)

Indo-Sri Lanka (28 December, 1998)

FTA by 2011 Brunei

Indonesia
Malaysia

FTA by 2016 Philippines

Cambodia
Laos
Myanmar
Vietnam

FTA Ongoing China

Singapore

At the third ASEAN-India summit, the India Prime Minister, Man Mohan Singh came out
with a bold vision of an Asian economic community which will include ASEAN, China,
Japan, Korea and India.
 FTA with Thailand

 Signed on 9th October, 2003, with four other accords for

enhancing cooperation in agriculture, tourism and science.
 Signed in the presence of the then Prime Minister Atal Bihari
Agreement Vajpayee and the Thai counterpart Thaksin Shinawatara, in
Bangkok.
 Validity of five years from the date of signing.

 MoUs on Agricultural cooperation :Agricultural and forestry

research, biotechnology soil and water conservation, watershed
management, land use planning and horticulture.
 MoU on Tourism cooperation: Establishment of representative
offices of the tourism department of the India as well as
Thailand.
 Agreement on visa exemption for diplomatic and official
passport holders and programme of cooperation in
biotechnology.
 Agreement also contains a provision regarding emergency
Salient Features measures to protect domestic producers in case of sudden
surges in imports.
 The fifth agreement upon biotechnology envisages the
establishment of an India-Thailand biotechnology panel for
formulation, approval, monitoring and review of action plans.
 FTA with Sri Lanka

 28 December 1998 - Signing of the Free Trade Agreement in

New Delhi by the Prime Minister of India and the President of Sri
Lanka.

Agreement  2 February 2000 - Letters of Exchange to finalize the annexure.

 1 March 2000 - Full implementation of the Free Trade

Agreement.

 Establishment of a Free Trade Area through complete or phased

elimination of tariffs.

 The FTA does not remove all tariffs on all goods at once.

 Negative Lists to protect national interests of both countries.

Salient Features
 The Rules Of Origin (ROO) criteria to ensure a minimum local
content.

 Adequate safety clauses to protect domestic and national

interests of both countries.
 FTA with Sri Lanka (Contd…)

 Duty free access for 1351 items

 25% tariff reduction for 528 Textile items

 Other than the 429 items in the Negative List of India,

India’s Commitments 50% reduction of tariffs for the balance 2799 items,
(upon entry into force of the Agreement followed by phased out
(For Duty Concessions) removal of tariffs up to 100% in 2 stages
within 3 years. )

 Tea and Garments come under a special quota regime.

 A 50% fixed tariff concession for imports of Tea from Sri

Lanka on a preferential basis
(subject to an annual maximum quota of up to 15 million kg)

 A 50% fixed tariff concession for imports of Garments

from Sri Lanka
(subject to a maximum annual quota of 8 million pieces of
which a minimum of 6 million pieces should contain Indian
fabrics. No category of Garments could exceed 1.5 million
pieces per annum.)
 FTA with Sri Lanka (Contd…)

 Duty free access for 319 items

 50% reduction of tariffs for 889 items by 6 - digit

HS Code (raw materials)
Sri Lanka's Commitments (upon entry into force of the Agreement followed
by phased out removal of tariffs as follows
(For Duty Concessions)  up to 70% at the end of the 1st year
 up to 90% at the end of the 2nd year
 up to 90% at the end of the 2nd year
 100% at the end of the 3rd year

 For 1180 items in Sri Lanka's Negative List

there will not be any duty preference.

 For the remaining 2724 items by 6-digit HS Code

(upon entry into force of the Agreement, the removal of tariffs
will be phased out within 8 years as follows:
 Not less than 35% before the end of the 3rd year
 Not less than 70% before the end of the 6th year
 Not less than 100% before the end of the 8th year)
 Comprehensive Economic Cooperation Agreement
(CECA) with Singapore

Establishment of Joint Study Group:

 Study the benefits of an India-Singapore CECA by the Prime Minister of India,
Shri Atal Bihari Vajpayee, and Prime Minister of Singapore, Mr. Goh Chok
Tong, in their Singapore meet on 8th April, 2002.

Conclusion of Joint Study Group Report suggested that a CECA between India
and Singapore would:
 Provide significant benefits in terms of the potential for increased trade and
investment, and through economic cooperation
 To strengthen ties between India and Singapore,and to form a bridge between
India and the Association of Southeast Asian Nations (ASEAN) region.
 Serve as a pathfinder for the India-ASEAN Free Trade Agreement, and to
connect Singapore to one of the world's most dynamic emerging economies
 Strengthen and catalyze the multilateral trading system.

Signing of CECA:
 Agreement was signed in New Delhi on 8th April, 2003.
 Brief of ASEAN Free Trade Agreement (AFTA)

Launched in 1992 to eliminate Tariff Barriers

among the member states of ASEAN namely About 99% of Tariff Lines
Brunei Darrusalam, Cambodia, Indonesia, Lao covered by AFTA are 0-5%
PDR, Malaysia, Myanmar, Philippines, and More than 60% of these
Singapore, Thailand, Vietnam. items are duty Free. These
show the border less trade in
Aim to integrate Economies in to Single this region.
production base and creating a regional
market of more than 500 million People.
 Qualification of the Product for FTA

Product originated from ASEAN

Meeting with requirements of “Rule of Origin”

FTA
approved
Validated through “Preferential certificate of Origin” Products
Rule of Origin

Regional Value content requirement of 40%

Change in Tariff classification

Specific Manufacturing or Processing Operations

 How to Obtain Preferential Certificate of Origin

In order to apply for Preferential CO (Which serves as validation that

product meets ROO) the following documents are to be prepared and
submitted.

Form D

Supporting Documents like Invoices

and Bill of Landing

Other Documents as needed by

Importing state
 Differences of Opinion on FTA

Expensive: Competition:
– May end up being expensive due to – Domestic industries may face
complicated Rules and contract unsustainable competition as:
conditions to protect the interests of • Not all international markets are on
countries involved the same level as that of domestic
(e.g.NAFTA Agreement was more than ones; and
1000 pgs long with more than 25 • International markets may be able to
committees involved) produce such commodities at way
below cost and flood the local market
at a much cheaper rate

Domestic Instability:
– Local Markets may become dependent
on global imports
– May decrease the self-sufficiency of a Expensive
Expensive
nation
– a crisis in a significant trade partner Competition
Competition
country can directly affect the economy
of the home country Instability
Instability
 Understanding Balance of Payment (BOP)

 When countries trade there are financial transactions among

businesses or consumers of different nations

 Money constantly flows into and out of a country

 The system of accounts that records a nation’s international

financial transactions is called its balance of payments (BOP)

 It records all financial transactions between a country’s firms, and

residents, and the rest of the world usually over a year

 The BOP is maintained on a double-entry bookkeeping system

 Balance of Payments (BOP)

The BOP is the difference between RECEIPTS and PAYMENTS

BOP Receipts BOP Payments

 merchandise export sales.  costs of goods imported.
 money spent by foreign tourists.  spending by INDIA. tourists
 transportation. overseas.
 payments of dividends and interest  new overseas investments.
from FDI abroad.  cost of foreign military and
 new foreign investments in the economic aid.
INDIA.
 Balance of Payments (BOP)

BOP includes Three Accounts

Balance of Payment

Current Capital Official

A/C A/C Reserve A/C

A record of all A record of direct A record of exports

merchandise investment, and imports of
exports, imports, portfolio gold, increases or
and services plus investment, and decreases in
unilateral short-term capital foreign exchange,
transfers of funds movements to and and increases or
from countries decreases in
liabilities to foreign
central banks
 Balance of Payments (BOP) – The Current A/C

 The balance of the current account tells us if a country has a deficit or a

surplus.
 If there is a deficit, does that mean the economy is weak? Does a surplus
automatically mean that the economy is strong? Not necessarily.
 But to understand the significance of this part of the BOP, we should start
by looking at the components of the current account: goods, services,
income and current transfers

Credit (Receipts) (INR) Debit (Payments) (INR)

Goods exported xxx Goods imported xxx

Services exported xxx Services imported xxx

Incomes to Foreigners on
Incomes from Investment in the
xxx Investment in the Reporting xxx
Foreign country
country

Unilateral receipts xxx Unilateral payments xxx

 Balance of Payments (BOP) – The Current A/C

Calculating Current A/C DEFICIT

The following variables go into the calculation of the Current Account Balance (CAB):

x Exports of Goods & Services

M Imports of Goods & Services

NY Net Income abroad

NCT Net Current transfers

CAB = X – M + NY + NCT
 Balance of Payments (BOP) – The Current A/C

Analyzing Current A/C DEFICIT

 Reflection of an economy that is a net debtor to the rest of the world.

 Investments > Savings: An economy that uses resources from other economies to
meet its domestic consumption and investment requirements.
e.g. Let us say an economy decides that it needs to invest for the future (to receive investment
income in the long run), so instead of saving, it sends the money abroad into an investment
project. This would be marked as a debit in the financial account of the balance of payments at
that period of time, but when future returns are made, they would be entered as investment
income (a credit) in the current account under the income section.

 Usually accompanied by depletion in foreign-exchange assets because those

reserves would be used for investment abroad.

 May signify increased foreign investment in the local market, in which case the local
economy is liable to pay the foreign economy investment income in the future.

It is important to understand from where a deficit or a surplus is stemming because

sometimes looking at the current account as a whole could be misleading.
 Balance of Payments (BOP) – The Current A/C

Insights in to Current A/C DEFICIT

 A deficit is not necessarily a bad thing for an economy, especially for an economy in
the developing stages or under reform.

 An economy sometimes has to spend money to make money. To run a deficit

intentionally, however, an economy must be prepared to finance this deficit through a
combination of means that will help reduce external liabilities and increase credits
from abroad.
e.g.: A current account deficit that is financed by short-term portfolio investment or borrowing is
likely more risky. This is because a sudden failure in an emerging capital market or an
unexpected suspension of foreign government assistance, perhaps due to political tensions, will
result in an immediate cessation of credit in the current account.

It is advisable for a developing country to run a current a/c deficit with in limits which
will help it to grow utilizing the resources of other countries but this deficits have to be
measured strictly and on ongoing basis otherwise it may have serious implications on
the currency of the country.
 Balance of Payments (BOP) – The Current A/C

Analyzing Current A/C SURPLUS

 A surplus is indicative of an economy that is a net creditor to the rest of the world.

 It shows how much a country is saving as opposed to investing.

 This means that the country is providing an abundance of resources to other

economies, and is owed money in return.

 By providing these resources abroad, a country with a CAB surplus gives other
economies the chance to increase their productivity while running a deficit. This is
referred to as financing a deficit.
 Balance of Payments (BOP) – The Capital A/C

Credit (Receipts) (INR) Debit (Payments) (INR)

Short Term Borrowings xxx Short Term Lending xxx

Long Term Borrowings xxx Long Term Lending xxx

Sale of Gold/Assets xxx Purchase of Gold/Assets xxx

- xxx Errors & Omissions xxx

 Causes of Disequilibrium in the BOP

 Business Cycles  Inflation

 Economic Development  Flight of Capital

 Population Pressure  Changing Market

Demand
 Demonstration Effect
 Non Tariff Barriers
 Heavy External
Borrowing  Globalization
 Excerpts from recent Economic Review

“GDP Back with a Bang”

Annual 2009-10 2010-11

Growth
“On Balanced Growth”
Q1 Q2 Q3 Q4 Q1 Q2
Agriculture 1.9 0.9 -1.8 0.7 2.5 4.4
Industry 5.7 8.4 11.1 13.3 11.3 8.9
Services 7.9 10.5 7.2 8.4 9.3 9.8
 Excerpts from recent Economic Review

3 “Even as Domestic Demand 4 “And Domestic Investments too

Powers the Economy” Picks up”

Gross 2009-10 2010-11

Capital
Formation Q1 Q2 Q3 Q4 Q1 Q2
(%)
3.1 4 8.4 17.3 18.9 11.5
 Excerpts from recent Economic Review

5 “And Investments including 6 "High Imports widen Trade

the one coming from abroad” Deficit”

450
400 385

350
307.6
300 278.7
257.6
250 Exports
189
200 166.1
176.5 185
Imports
150
100
50
0
2007-08 2008-09 2009-10 2010-11 (till
now)
 Excerpts from recent Economic Review

7 “Which has contributed to 8 " Which co-exists with high

Record Current a/c Deficit” deficit in Govt.Finances”

Deficit as % of GDP

8
7 6.7
5.9
6 5.3 5.5

5 4.4
4 Revenue
4
3 2.6 Fiscal
2 1.1
1
0
2007-08 2008-09 2009-10 2010-11
(Budgeted)
Major points of India’s EXIM Policy to promote
Exports

 Service:
 Duty free import facility for having a minimum foreign exchange
earning of Rs.10 lakh.
 Duty free entitlement shall be 10% of the average foreign
exchange earned in the preceding 3 licensing years.

 Agro:
 Corporate sector with proven credential will be encouraged to
sponsor Agri Export Zone and to provide services such as
provision of pre/post harvest treatment and operations, plant
protection, processing, packaging, storage and related R&D.

 Hardware & Software:

 To promote growth of exports in embedded software, hardware
duty free import for testing and development purposes allowed.
 Hardware upto a value of US$ 10,000 shall be allowed to be
disposed off. 100% depreciation to be available for 3 years
 Major points of India’s EXIM Policy to promote
Exports (Contd…)

 Gem & Jewelry Sector: Diamond & Jewelry Dollar Account for exporters dealing
in purchase/sale of diamonds and diamond studded jewelry.
Gem & Jewelry units in SEZ and EOUs can receive precious metal i.e. Gold/silver/platinum
prior to exports or post exports equivalent to value of jewelry exported.

 Export Clusters: Upgradation of infrastructure in existing clusters/industrial

locations under the Department of Industrial Policy & Promotion (DIPP) scheme to
increased.

 Rehabilitation of Sick Units: Steps for revival of sick units and extension of
export has been modified.

 Removal of Quantitative Restrictions :Import of 69 items covering animal

products, vegetables and spices, antibiotics and films removed from restricted list.
 Major points of India’s EXIM Policy to promote
Exports (Contd…)

 Special Economic Zones: Sales from Domestic Tariff Area (DTA) to SEZs to be
treated as export. Foreign bound passengers will now be allowed to take goods
from SEZs to promote trade, tourism and exports.
Export/import of all products through post parcel/courier by SEZ units will now be allowed.
SEZ units will now be allowed to sell all products including gems and jewelry through
exhibitions and duty free shops or shops set up abroad.

 EOU of Exim Policy India:

 Agriculture/Horticulture processing EOUs will now be allowed to provide inputs and
equipments to contract farmers in DTA.
 Period of utilization of raw materials prescribed for EOUs increased from 1 year to 3
years.
 Export/import of all products through post parcel/courier by EOUs will now be allowed.
 EOUs will now be allowed to sell all products including gems and jewelry through
exhibitions and duty free shops or shops set up abroad.
 Major points of India’s EXIM Policy to promote
Exports (Contd…)

 EPCG of Exim Policy India:

 Shall allow import of capital goods for pre-production and post-production facilities also.
 To facilitate Upgradation of existing plant and machinery, import of spares shall also be
allowed.
 To facilitate diversification into the software sector.

 DEPB of Exim Policy India:

Facility for provisional DEPB rate introduced to encourage diversification and
promote export of new products.

 DFRC of Exim Policy India:

Duty Free Replenishment Certificate scheme extended to deemed exports to
provide a boost to domestic manufacturer. Value addition under DFRC scheme
reduced from 33% to 25%.
 Major points of India’s EXIM Policy to promote
Exports (Contd…)

 Advance License:
Standard Input Output Norms for 403 new products notified in Exim Policy India.
Anti-dumping and safeguard duty exemption to advance license for deemed
exports for supplies to EOU/SEZ/EHTP/STP.

 Transaction Cost Reduction:

Applications filed online shall have a 50% lower processing fee as compared to
manual applications is notified in Exim Policy India.

 Other benefits extended by new Exim Policy India are:

 Actual user condition for import of second hand capital goods upto 10 years old
dispensed with.
 Reduction in penal interest rate from 24% to 15% for all old cases of default under Exim
Policy.
 Export of free of cost goods for export promotion @ 2% of average annual exports
 Current/Capital a/c Convertibility

 Capital A/C convertibility means Rupee can now be freely

convertible into any foreign currencies for acquisition of
assets like shares, properties and assets abroad.
 Further, the banks can accept deposits in any currency.
 At present, Indian rupee was partly convertible on current a/c.
 It provided flexibility to buy or sell foreign exchange for specific activities like payments for
trade related activities, interest payments, remittances, business expenses etc.
 Further, an individual was allowed to buy shares worth $ 25,000 per annum only.

 India has come a long way from the FERA, 1947 to FERA,1973 and now to FEMA,2000.
 It has seen the days from non-convertibility of money to partial convertibility of money.
Now, after the instructions from the PM, the finance minister said that RBI and centre
shall announce steps for greater convertibility of rupee.
 This reform shall mean a lot for our country's development and growth plus it shall mark
a new era in terms of globalization and liberalization.
 For an economy which was so close, such a step is indeed a landmark – a mile stone
achieved.
THANK YOU