Trade policy review report by the secretariat

  TRADE AND INVESTMENT REGIME 2.1  General Framework

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2.1  General Framework

              1. There have been no changes to India's overall institutional and legal framework since the last Review. Under the Constitution of India, which entered into force on 26 January 1950, India is a union of its States and Union Territories. It has a Parliamentary system of Government with a bicameral Parliament, an independent Executive and Judiciary. Parliament comprises the President, the Council of States (Rajya Sabha or Upper House) and the People's House (Lok Sabha or Lower House). The Lower House is re-elected every five years through universal suffrage. The Upper House is not subject to dissolution but every two years one-third of its members shall retire. It has a federal system of Government with each State electing its own State legislature. There are currently 29 States and 7 Union Territories, with the most recent State of Telangana created on 2 June 2014.1

              2. The Head of State is the President of India who is elected for five years by the members of an electoral college comprising members of both houses of Parliament and the state legislative assemblies.2 The President appoints the Prime Minister and, on the advice of the Prime Minister, the other Ministers in the Council of Ministers. All members of the Council of Ministers must be members of Parliament.3 The role of the Council of Ministers is to aid and advise the President but in practice executive power is vested in the Council of Ministers.

              3. In addition to the Centre, each State elects a legislative assembly which, along with the State Government, enacts legislation as empowered to do so under the Constitution. The Seventh Schedule of the Constitution determines the division of legislative powers between the Centre, the States and issues for which both have concurrent power.4 The President appoints a Governor for each State, who is the Head of the State and exercises executive authority in that State.

              4. With the exception of money bills, a bill may originate in either House of Parliament. They must be passed by a simple majority of both Houses. Once a bill is passed by one House, it is transmitted to the other, which, subject to any amendments, is passed by the other House. Once it has been adopted by both Houses, the bill is sent to the President for approval. If both Houses are unable to agree on the bill within six months, the President may summon both Houses to meet, discuss and vote on the bill. If the bill is passed by a majority of members of both houses present at the joint session, it is deemed to have been passed by Parliament.

              5. Money bills may only be introduced in the House of the People (Lower House).5 Once they are passed by the Lower House, they are transmitted to the Council of States for any recommendations. If the bill is not returned within 14 days of receipt to the House of the People with any recommendations, it is deemed to have been passed by both Houses of Parliament. The recommendations of the Council of States may or may not be accepted by the House of the People. In both cases, once the House of the People passes the bill, it is deemed to have been passed by both Houses.

              6. Once a bill is passed by both houses of Parliament it must be signed by the President to become law. Except for money bills, the President may amend the bill and return it to either house for consideration. However, if the bill is approved by both houses with or without the amendments suggested, the President may not withhold assent a second time. The Act is then published in the Gazette of India and, unless a date of entry into force is indicated, becomes law on the date of assent by the President.

              7. Under Chapter III of the Constitution, the President also has the authority to promulgate ordinances when Parliament is in recess when it is deemed that it is necessary to do so immediately. The Ordinance shall have the same force and effect as an Act of Parliament but must be laid before both houses of Parliament and approved within six weeks of the reassembly of Parliament. If it is not approved by Parliament during this period, it ceases to exist. The Ordinance may also be withdrawn by the President at any time.

              8. The Indian legal system is based on common law. The Judiciary is headed by the Supreme Court of India, comprising a Chief Justice and 30 other judges appointed by the President in consultation with the Chief Justice. It is the highest appellate court with the power to take up appeals against decisions by the High Courts of the States and Union Territories, and has sole jurisdiction over disputes between the Government of India and the States, and between two or more States. Any law passed by the Supreme Court is binding on all other courts in India. The highest court in each State and Union Territory is the High Court. There are currently 24 High Courts with five having jurisdiction over more than one State. The States are further divided into districts, with district courts and subordinate courts of civil and criminal jurisdiction. Decisions taken by district courts may be appealed with the High Court with jurisdiction over that particular state or union territory.

2.2  Trade Policy Formulation and Objectives

2.2.1  Trade policy formulation

              1. Trade policy is formulated and implemented by the Department of Commerce in the Ministry of Commerce and Industry, with the assistance of other Ministries and agencies, including the Ministry of Finance, the Reserve Bank of India and other sectoral Ministries such as Agriculture, Consumer Affairs, Food and Public Distribution, Textiles, Petroleum and Steel. The role of the Department of Commerce, according to its Annual Report for 2012-13 is "to facilitate creation of an enabling environment and infrastructure for accelerated growth of exports". Its mandate is regulation, development and promotion of India's international trade and commerce through formulation of appropriate trade and commercial policy and implementation of its various provisions.6 The Department formulates, implements and monitors the Foreign Trade Policy (FTP) which is issued every five years and reviewed annually, and forms the basic policy framework for the promotion of exports and trade. The Department is also responsible for multilateral and bilateral commercial relations, special economic zones, state trading, export promotion and trade facilitation, and development and regulation of certain export-oriented industries and commodities.

              2. There are a number of offices that are attached to the Department to help in the formulation and implementation of trade policy. The Directorate General of Foreign Trade (DGFT) whose role has evolved from the prohibition and control of exports and imports to "facilitator" of foreign trade, formulates and implements the Foreign Trade Policy. The DGFT also issues authorizations to exporters and monitors their corresponding export obligations. The Directorate General of Anti-Dumping and Allied Duties (DGAD) is responsible for conducting investigations, where required under the Customs Tariff Act, into the amount of anti-dumping or countervailing duty to be applied if injury to the domestic industry is determined. The Tariff Commission was established in September 1997 to look at the impact of the tariff on domestic industry and export potential; in this regard it also looks at the inverted tariff structure of the Indian tariff and suggests remedial action. According to the authorities it has conducted studies on around 30 products during the last two years and suggested that there was an inverted duty structure in some of these cases.

              3. There are also a number of subordinate offices such as the Directorate General of Commercial Intelligence and Statistics (DGCIS), which collects, compiles and disseminates India's trade and commercial statistics; Office of Development Commissioner of Special Economic Zones; and autonomous bodies, notably the Coffee, Rubber, Tea, Tobacco and Spices Board which are statutory bodies responsible for the development of these crops; the Marine Products Export Development Authority, responsible for the development of the marine industry particularly exports; the Agricultural and Processed Food Products Export Development Authority (APEDA), which is responsible for export promotion of 14 agricultural and processed food products and the monitoring of the import of sugar; the Export Inspection Council (EIC) which carries out quality control of exports; the Indian Institute of Foreign Trade; and the Indian Institute of Packaging (IIP).

              4. The Department also has a number of public sector undertakings (PSUs) involved in international trade such as the State Trading Corporation of India (STC) responsible for trading agricultural products such as spices; the Minerals and Metals Trading Corporation (MMTC) which is responsible not only for trading in minerals and metals but also precious stones and fertilizers; and the Project and Equipment Corporation of India (PEC) which is responsible for trading in engineering and defence equipment and non-engineering items. Finally, 29 export promotion councils (EPCs) provide advice on export promotion and other functions outlined in the FTP.

2.2.2  Trade policy goals

              1. Increasing India's share in global exports remains the main thrust of the Government's trade policy goals. The main goal of the FTP 2009-14 was to make India a global player in world trade by doubling its share of global trade by 2020. This was to be achieved through fiscal measures such as tax incentives, credit for export schemes, institutional changes, rationalization of procedures, diversification of export markets and increased market access, including through regional trade agreements. The FTP is announced every five years and reviewed and adjusted annually. The new FTP for 2015-2020 was released on 1 April 2015. Its goal is to make India a significant participant in international trade and to raise India's share of global exports from 2% to 3.5% by 2020. This is expected to be achieved by providing a sustainable and stable policy environment for foreign merchandise and services trade; linking rules, procedures and incentives for trade with other recent initiatives such as "make in India", "digital India" and "skills India"; promoting the diversification of India's exports by assisting key sectors to become more competitive; and creating an architecture for India's engagement with key regions of the world.7 The acceleration in exports is expected to be achieved through exemption and remission of indirect taxes on inputs for producing final export products, imports of capital goods at concessional rates of duty, and by stimulating services exports and focusing on specific products and markets.

              2. Despite this focus on increasing exports, India continues to use trade policy as a means to regulate domestic supply and to address short-term objectives such as containing inflation and fluctuations in commodity prices. Thus export taxes, minimum export price, as well as adjustments to import duties, are used on an ad hoc basis through a notification by the DGFT. During the period under review for instance, exports of onions, sugar and potato were subject to changing minimum export prices to regulate domestic supply of these products. Export prohibitions on edible oils have been extended on an annual basis since March 2008 with some exceptions introduced on 8 June 2013.8 Onions are a particularly sensitive item and export prohibitions and minimum export prices are used liberally to control exports. For instance, exports of onions were banned on 29 June 2012.9 Exports of onions were then permitted but subject to a minimum export price of US$650 per metric tonne on 14 August 201310 which was increased to US$900 per metric tonne on 19 September 201311 and US$1,150 per metric tonne on 1 November 201312, before being reduced to US$800 per metric tonne on 16 December 201313, US$350 per metric tonne on 19 December 201314 and to US$150 per metric tonne on 26 December 201315, and then removed on 4 March 2014.16 Minimum export prices of US$500 per metric tonne were then reinstated on 2 July 201417, and reduced to US$300 per metric tonne on 21 August 2014.18 Similarly minimum export prices and/or export prohibitions are used periodically for other agricultural products such as potatoes, rice, sugar and pulses. During the period 3 July 2009 and 31 March 2013 export restrictions were placed on wheat flour and exports of cotton were subject to prior registration of contracts with DGFT. In February March 2014 the Government decided to provide a subsidy of Rs 3,333 per metric tonne (US$55), raised to Rs 3,371 per tonne for August September 2014, to sugar mills to export raw sugar of up to 4 million tonnes during the 2013/14 and 2014/15 marketing years.

              3. Import policy is also largely driven by domestic supply considerations. In the case of sugar for instance, import duties were lifted temporarily in 2012 to allow an increase in imports but reinstated at 10% in July 2012. Such frequent changes to policy are disruptive and reduce predictability in India's trade policy. In a report prepared on sugar policy, headed by the Chairman of the Economic Advisory Council to the Prime Minister on 5 October 2012, it was stated that "the export-import policy of the Government does not allow firms to have a long-term relation internationally and impedes the growth of the sector. The policies are unanticipated and create uncertainty for the firms. Also the short term cyclicality, which is largely a consequence of Government intervention, adversely affects the long-term strategic development of the sector".19 The authorities note that India's autonomous measures are occasionally taken to provide a stable and predictable policy regime for agricultural trade. In February 2013, some of the major processed and/or value added agricultural products such as wheat of meslin flour (HS 1101), cereal flours (HS 1102), milk products (HS 3501), butter and other fat derivatives from milk (HS 0405) etc. were exempted from export restrictions/bans.

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