Export Incentives

The Importance Export Incentives in India is very important for the exporter to be competitive In the world market. Various incentives are given by the Government to promote export form India. Export incentives schemes are procedures based. Exporter should be aware about various requirements under different scheme. Exporter also need to find out about the eligibility of the scheme for his exports. Incentives makes substantial difference in Costing. Objective

To make the participants understand with the Benefits and procedure of Export Incentives To familiarize the participants with various Incentives Involved in export.

For Whom The programme is for all exporters, CHA,Bankers, Financel managers, MBA and others dealing in International market Export Incentives in India Programme Content

Duty Drawback Advance Authorization Duty Free Import Authorization Export Promotion Capital Goods Scheme Served From India Scheme Vishesh Krishi and Gram Udyog Yojana Focus Market Scheme Focus Product Scheme

Export incentives are incentives provided by governments to increase the amount of exports that take place in a country. These incentives could come in the form of direct payments or they could come in the form of reduced taxes. Regardless of the type of incentive, the purpose of these export incentives is to make domestic products more affordable and competitive in the international market. In some cases, this type of incentive has led to disputes between countries because of differing opinions as to how much a country should help its products in the marketplace.

Many governments have offered export incentives over the years. A level of these incentives has varied from one situation to the next. In some cases, the incentives have amounted to huge subsidies by a federal government. The most common form of export incentives is a lowering of taxes. In this situation, the government will lower the amount of taxes due from the exporter. This allows the exporter of a product to lower the price of these goods and still make the same amount of profit. When this happens, the goods from that country sell quicker and, in turn, it increases the overall sales of the goods. By doing this, the government is hoping to make the product more competitive on the world marketplace.

Some countries are set up better than others to produce certain goods. When a government is at a disadvantage in producing a product, it may try to make up for it in other ways. Export incentives is one way the country can make up for being at a natural disadvantage to another country. When a government decides to issue export incentives, it can often lead to controversy between countries. One country might feel that another country helped out a little too much with its exports. In many cases, a smaller, developing country may not be able to compete with the subsidies provided by a larger nation. This puts the smaller country at a disadvantage and makes it more difficult for it to make its products competitive in the marketplace. When a dispute like this arises, it is often taken to the World Trade Organization. The World Trade Organization will step in and hear the arguments from both countries. If it is determined that one of the countries is in the wrong, the World Trade Organization can issue suggestions or orders to that country. The total gamut of Export Incentives are divided into 3 Groups A.DUTY REMISSION SCHEMES B.DUTY EXEMPTION SCHEMES C.PROMOTIONAL MEASURES DUTY REMISSION SCHEMES are scheme to nullify the duty/tax element in the exporting product whether on finish goods or on input products. There are 2 Schemes under the heading - Duty Drawback & Duty Entitlement Passbook Scheme (DEPB) Duty Drawback: It is a scheme to offset the duties and taxes on input in the export product. This is a scheme which is under the Ministry of Finance, Department of Revenue. Indian Customs is the authority and deals with Duty Drawback matter that monitors the Duty Drawback Scheme. Under the scheme there is an All Industry Rate (AIR) of Duty Drawback rates which has two options: Duty Drawback when CENVAT Not Availed & Duty Drawback when CENVAT Availed. The drawback rate is applicable is in line with the local duties / taxes which the manufacturer pays on its Inputs.

Duty Drawback (DBK) Important Points:

Few Duty Drawback rates are subject to Value Cap, the same should be examined while calculatingDBKBenefit. The Payment is through Online NEFT/EFT mode hence registering IFSC Code with Indian Customs is mandatory

DEPB: Similar to Duty Drawback (DBK) this scheme aims to neutralize incidents of Custom duty on inputs used in export products.ADEPB Schedule/ list with rates is been published separately by Director General of ForeignTrade (DGFT). DEPB is a duty credit certificate useable to discharge payment of duty against any imports. DEPB is transferable and hence can be sold to anyone and be used by any exporter or importer. DEPB is normally issued post payment is realized. However, recent changes allow Exporter to file DEPB application without Bank Realization Certificate (BRC). DEPB was announced to be ending on soon is at the moment on extension period upto 30.09.2011. I amnot aware if the same scheme will be available from 1 Oct 2011. DEPB Important Points:

It is not available for all products, hence exporter should confirm if the exporting product does haveDEPBbenefit or not. Online Application on DGFTWebsite is required to be made forDEPBScheme. Value Cap on FOB needs to be carefully looked at while computing the real benefit.

DUTY EXEMPTION SCHEMES: Like in Duty Remission Schemes where duty/taxes are first paid and then refunded by the various scheme. Duty Exemption Schemes makes the payment of duty/taxes itself exempted as goods are exported. There are two options for exporters which are similar to each other with little difference. The schemes are: Advance Authorisation & Duty Free Import Authorisation (DFIA) Advance Authorisaiton is one of the best and most popular schemes amongst all the manufacturer exporters. Advance Authorisation is a licence to import required inputs duty free to manufacture a product for exports. It is a Duty free Import licence for importing raw materials used in the export product without any payment of duty within 24 months with obligation to manufacturer and export the product manufactured within 36 Months. This Licence is Value and Quantity based licence. This means that there is restriction on value and quantity of Import. TheValue restriction is controlled by a simple working of 15% Value Addition between FOB Value of Exports and CIF value of Imports. The quantity restrictions is based on the wastage norms which is published in a notified volume called the Standard Input Output Norms (SION)

Advance Authorisation Important Points:

It is with Actual User Restrictions (thus it cannot be transferred) There has to be strict nexuses and corelation with the inputs imported and goods manufactured and exported. The Exporter needs to be Manufacturer exporter. If Merchant Exporter than supporting Manufacturer needs to be registered in theAuthorisation There are various variants of the Licence like Annual Advance Authorisation / IntermediateAdvance Licence etc. Discharge of Export can be through Physical Export or Deemed Exports

DFIA - It has the same ingredients and purpose of the Advance Authorisation scheme however with few modifications. DFIA is a transferable and hence is more suitable to Merchant Exporter than Manufacturer Exporter. However, when transferred DFIA will only be usable for payment of Basic Custom Duty. DFIA is restricted to only Items covered under SION. DFIA requires minimum value addition of 20% instead of 15% in AdvanceAuthorisation. PROMOTIONAL MEASURES: These are schemes which are specially designed to promote Export and support InternationalTrade. EPGC Scheme: Export Promotion Capital Goods Scheme (EPCG) is a scheme to facilitate the Import of Capital Goods at concessional rate of Import duty instead of normal duty. There is however Export obligation of 8 times or 6 times to be fulfilled in a period of 8Years or 6Years respectively to claim the benefit. Vishesh Krishi Gram Upaj Yojana (VKGUY): The scheme is introduced to incentivize the export of Agro Commodities, Fruits, Vegetables, and Minor Forest Products. The Scheme entitles you Duty Credit Script for export of specific Agro Products benefit from 3.5% to 10% of FOB value. [Refer Appendix 37A] Focus Product Scheme (FPS): The Scheme entitles certain specific products mainly which are labour intensive like Handicrafts, Leather, Footwear, Sports Goods, with additional benefit of2%or5% of the FOB Value in form of Duty Credit Script. [ReferAppendix 37 D] Focus Market Scheme (FMS): The scheme is helpful to exporters for to promote exports to new markets and countries which require more effort and marketing skills. The Duty Credit Script at 3% of FOB Value is available to exports to specified list of countries. [ReferAppendix 37 C] Status Holder Incentive Script: This is a new scheme for Status Holders who have not taken 0% EPCG Benefit or TUFS Scheme by Textile Ministry and require Capital enhancement. The Script entitles 1% Duty Credit Script of Total FOB Value for the previous year. The Script can

be utilized against Capital Goods Imports only. However there are restricted sectors which are not allowed to apply for this scheme. Served from India Scheme (SFIS): This Scheme is for Service Exporters and entitles for 10% Duty Credit Certificate of the total Foreign Exchange earned during the year from the Export of Services. It is to be understood that all the benefits have various requirements and procedure to claim it. Necessary instructions with regular amendments need to be checked by the exporter to claim the benefits and while exporting.
Exports are essential for any economy because all export activities generate employment within the country and result in earning of foreign exchange. It is more important for a country like India where foreign exchange outflow on account of imports is much higher compared to foreign exchange inflows on account of exports. In fact, as per current statistics of WTO for the year 2009, India ranks No. 3 in trade deficit behind US and UK. US is at first position with a trade deficit of USD 549 billion and UK at second with USD 129 billion and India at 3rd with USD 87 billion. More worrying is the estimate of Ministery of Commerce for the year 2010-11 which expects deficit to touch USD 135 billion. We therefore have no options but to increase our exports substantially for the health of our economy. Small and Medium Enterprises [SMEs] account for about 45% of the manufacturing output and 40% of total exports of the country. Apart from generating employment for approximately 59 million people SMEs have proved themselves as cost competitive manufacturers. When major developed countries are yet to come out of recession, India is expected to achieve 8.5% growth annually. The quality goods produced in India, therefore should be able to make their presence felt internationally. To support this, Government of India has taken many measures particularly to neutralise the Indirect Taxation and to boost cost competitiveness of Indian products and services. Most of these initiatives are announced by Directorate General of Foreign Trade [DGFT] under Policy framework known as Foreign Trade Policy [FTP]. The schemes announced under FTP form a significant part of strategy of export promotion. The schemes include exemption or neutralisation from Indirect taxes (Customs Duty, Excise Duty, Service Tax, etc.) on one hand and performance based rewards by way of duty credits on the other hand. The exemption or neutralisation is offered at pre-export or post-export stage to facilitate manufacturers and merchants to avail the duty exemption or neutralisation. For import or local procurement of inputs required for manufacturing of export products the following instruments are available under FTP. For import or local procurement of inputs required for manufacturing of export products the following instruments are available under FTP: a) b) Advance Duty Authorisation Free [AA] including Import Annual Advance Authorisation [DFIA]

Authorisation

These instruments offer exemption from payment of Customs/Excise duties on imports/indigenous procurement of inputs. Duty Entitlement Passbook Scheme [DEPB] and Duty Drawback [DBK] are instruments which offer duty remission or duty refund of input duties post-exports. These instruments neutralise the impact of central duty/taxes on inputs.

The

salient

features

of

these

instruments

are

as

under:

Advance Authorisation [AA] including Annual Advance Authorisation [AAA]: All inputs which are consumed for producing export product can be imported under Advance Authorisation. Export items for which advance authorisation is to be obtained should be covered under Standard Input Output Norms [SION]. If SION is not available, application on basis of self declared norms can be made. Exempts all duties - Basic Customs Duty [BCD], Additional Customs Duty or Countervailing Duty [CVD], Special AdditionalDuty [SAD], Anti-dumping duty and Safeguard duty. Subject to Actual User Condition. AA and materials imported under AA are not transferable. Minimum value addition [VA] of 15% is required to be maintained. AA is valid for a period of 24 months and export obligation is required to be fulfilled within a period of 36 months. AA can be obtained in cases where foreign buyer supplies all or few inputs on free of cost basis. By invalidating AA for direct import, authorisation holder can procure inputs from local market. This can be done by availing facility of Advance Authorisation for Intermediate Supply or Advance Release Order or Back-to-Back Letter of Credit, as the case maybe. Facility of AAA is allowed to Status Certificate holders like Export House, Trading House, etc. and all other categories of exporters having past export performance (in preceding two years). Entitlement in terms of CIF value of imports under AAA shall be upto 300% of the FOB value of physical export and / or FOR value of deemed export in preceding licensing year.

Duty Free Import Authorisation [DFIA]: DFIA can be availed for all export products having fixed SION. 20% Value Addition [VA] is required to be maintained. Unlike AA, DFIA is a transferable instrument subject to fulfilment of export obligation. All other provisions are similar to AA.

Duty Entitlement Passbook Scheme [DEPB]: DEPB is towards neutralisation of basic customs duty on the inputs. DEPB is duty credit instrument and therefore allows import of any permissible input irrespective of the fact whether the same input has been utilised in the export product or not. DEPB is, therefore, more flexible in nature. DEPB is transferable instrument. CVD and SAD can also be debited under DEPB scrip. DEPB rates are prescribed under the DEPB Rate Schedule. DEPB is valid for a period of 24 months.

Duty Drawback [DBK]: Duty Drawback in relation to the export of indigenously manufactured goods, means refund of duties paid on Raw materials, Component parts and Packing materials consumed in the production and export thereof.

These duties may be duties of Customs paid on imported materials and / or duties of Central Excise paid on indigenous materials. There are three types of DBK rates, which are o All Industry Rate of DBK Available to all exporters who export items covered by Drawback Rate Schedule. The rates prescribed under this category are based on determination of average incidence of duties suffered on inputs. o Brand Rate of DBK If All Industry Rate of DBK is not available, application for Brand Rate of DBK can be made. Here, the actual amount of duty suffered on inputs is calculated and then Brand Rate for that particular export item is fixed. o Special Brand Rate of DBK - Where all industry rate of DBK is less than 4/5th of the duties paid on inputs, exporter can apply for fixation of an appropriate rate of DBK for his specific product. Like inputs, capital goods can also be imported by payment of 3% concessional rate of duty or at absolutely NIL duty for specified sectors. The scheme is known as Export Promotion Capital Goods Scheme [EPCG] and offers technology upgradation on one hand and export promotion on the other.

Main

features

of

EPCG

scheme

are

1. Eligibility: Manufacturer exporters with or without supporting manufacturer/vendor, merchant exporters tied to supporting manufacturers and service providers can claim EPCG Authorisation. 2. Zero Duty EPCG Scheme Allows import of capital goods [CGs] at zero customs duty. Subject to fulfilment of Export Obligation [EO] equivalent to 6 times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 6 years reckoned from Authorisation issue-date. It is available to exporters of following sectors: o Engineering & Electronic Products o Basic Chemicals & Pharmaceuticals o Apparels & Textiles o Plastics o Handicrafts o Chemicals & Allied Products o Leather & Leather Products o Paper & Paperboard And Articles Thereof o Ceramic Products o Refractories o Glass & Glassware o Rubber & Articles Thereof o Plywood And Allied Products, marine products, sports goods and toys

However, this scheme is not available to the exporters who have availed the benefits under Technology Upgradation Fund Scheme (TUFS) administered by Ministry of Textiles and Status Holder Incentive Scheme [SHIS]. 3. Concessional 3% Duty EPCG Scheme: This scheme is available to all exporters for import of CGs at 3% customs duty. EO to be fulfilled under this scheme is equivalent to 8 times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 8 years reckoned from Authorisation issue-date.

EPCG Authorisation with a duty saved amount of Rs. 100 crores or more, export obligation shall be fulfilled in 12 years. However for agro units, and units in cottage or tiny sector, reduced EO has to be fulfilled, which is equivalent to 6 times of duty saved on capital goods imported, in 12 years. In case of SSI units, EO equivalent to 6 times of duty saved amount has to be fulfilled, in 8 years.

4. Import of Spares under EPCG Scheme: Spares, moulds, dies, jigs, fixtures, tools, refractory for initial lining and catalyst for initial charge can be imported under EPCG Authorisation, subject to EO of 50% of the normal EO, to be fulfilled in 8 years in case of 3% EPCG Scheme and 6 years in case of zero duty EPCG Scheme. However, C.I.F. value of import of the above spares etc. will be limited to 10% of the value of plant and machinery imported under the EPCG scheme.

5. EPCG for Annual Requirement: EPCG Authorisation for annual requirement can be issued, both under zero duty and 3% duty EPCG Scheme. Status Holders and other exporters having past export performance of minimum two years can opt for this facility. This avoids transaction cost on account of application fees and paper work.

6. Other important features of EPCG Scheme: EPCG authorisation can also be issued to the service providers, common service providers, and retail sector. Nexus between CGs and export product/service is required to be maintained. Average of past three years exports is required to be maintained by the authorisation holder.

Following categories of exports can be counted towards fulfilment of EO: Physical exports and Deemed Exports. Upto 50% EO can be fulfilled by export of other products manufactured by same company and group company, having EPCG Authorisation. Shipments made against Advance Authorisation, DFIA, DEPB, DBK, and reward schemes of chapter 3 can be used for discharge of EO. There are other categories such as royalty payment received in forex, forex earning towards R&D services and payment in INR for port handling services can also be counted for fulfilment of EO under EPCG Scheme. EPCG Authorisation Holders can source their CGs requirement from domestic market . For this, authorisation should be invalidated for direct imports endorsed in favour of local supplier. To promote investment in upgradation of technology of some specified sectors, DGFT introduced reward scheme for Status Holders. Under this scheme, incentive scrip @ 1% of FOB value of exports in the form of duty credit scrip is issued. The duty credit scrip is nontransferable and can be used only for import capital goods. Status holder who have availed benefit of TUFS and Zero duty EPCG scheme are not eligible for this scheme.

Specified sectors are

Leather Sector (excluding finished leather) Textiles and Jute Sector Handicrafts Engineering Sector (excluding Iron and Steel, Nonferrous metals in primary or intermediate forms, Automobiles and two wheelers, Nuclear reactors and parts and Ships, Boats and Floating Structures) Plastics Basic Chemicals (excluding Pharma Products)

India has emerged victorious in the recent recession, which started in the US and engulfed the whole world in a short span of time. India could be able to secure a respectable rate of growth of 6.7 per cent during 2008-09, which is the second highest in world after China. This was mainly because of the domestic-led demand of the Indian economy and stimulus measures initiated by the government at the fiscal and monetary policy levels. However, the exports of India suffered a great deal as a result of the sagging demand in the world economy in general and its main trading partners economies in particular. Except for the months of November and December, the previous months of the current fiscal year 2009-10 witnessed negative export growth rates. This in spite of the array of trade policy initiatives announced by the government under the Export-Import (EXIM) Policy 2009-10. These were incentive measures to promote exports. They mainly comprised extension of the Duty Entitlement Passbook (DEPB) scheme up to 2010, making the Export Promotion Capital Goods (EPCG) scheme more attractive, enhancing incentives for Export-Oriented Units (EOUs)/Special Economic Zones (SEZs), etc. Some product-specific and market-specific incentives, which were already in place, were also made more attractive. However, much more is desirable to promote exports not only in this crisis time but also for the long term. Though the World Trade Organisation (WTO) provisions have squeezed the policy space for the promotion of exports, still there are many WTO-compliant areas where the government can pay due attention.

The whole gamut of measures to promoting exports can be divided into two broad categoriesprice measures and non-price measures. The price measures are supposed to enhance the competitiveness at the price front, whereas the non-price factors give competitive edge in areas other than the price front. The former category includes devaluation of currency, all kinds of indirect and direct tax benefits to exporters etc., whereas the latter one comprises the upgradation of quality of product, fast delivery of consignment, post-sale services etc. The price factors are of short term in effect because they can be emulated easily by the competitor country in a short span of time. For example, if the government initiates the devaluation of the currency, which is the most popular measure at the price front, it would make exports competitive at the price front in the international market, unless the exports are not much import-intensive. This would be immediately increasing sales in the international market (supposing there

is the price elastic demand and enough supply of the product). However, having experienced the decrease in demand of their products, the competitor countries might also initiate the same measure neutralising its effect. So the effect of price factors can be easily neutralised in the short term by the competitor countries. As far as the non-price factors are concerned, they have long-lasting impact and cannot be matched easily by the competitor countries. For example, improving the export infrastructure, both soft and hard, to fast deliver export consignments would have a long lasting impact on the countrys exports. However, it would not be as easy as the price factors to be implemented, but once effected, they would have a long-lasting effect on exports, which cannot be easily neutralised by the competitor country. International transaction (export) faces many barriers. They can be broadly categorised under sub-headingstariff barriers and non-tariff barriers. The tariff barriers in general have come down substantially the world over under the multilateral negotiations of the WTO, regional trading negotiations and unilateral initiatives. Barring some countries, like the African ones, and some sensitive commodities, the tariffs have come down across all tariff lines and countries. The conventional non-tariff barriers, like quota, have also been scaled down a great deal. However, currently new non-tariff barriers decide the competitive edge of the country concerned. These include trade facilitation conditions of the country and capacity to meet sanitary, phyto-sanitary and technical standards, among others. One estimate suggests that one-third of the cost of international trade is attributable to transportation cost, which includes carrying goods from the production site to the exporters sea port or airport, meeting all documentation-related formalities, shipping/air cost and finally costs relating to taking the goods to consumers in importing countries. All these costs reflect in the price of ones exported commodity which, in turn, decides the competitiveness of commodity vis--vis the domestically-produced good and goods imported from competitor countries. Thus the trade facilitation cost is an important determinant of deciding the countrys competitiveness in the international market. The trade facilitation cost is even higher for the agricultural and mineral items, as the transportation cost is the positive function of weight. It is higher for the heavier goods than the lighter ones. (De 2010) Though in this crisis time, price factors might bring immediate respite for the exporters (supposing the competitor countries do not respond in a similar fashion), the non-price factors will have long-term effects and they cannot be matched easily by the competitors. Among the non-price factors, some of them can be easily implemented with relatively less effort and time. For example, soft infrastructure, including export and import procedures, can be improved with relatively less effort in the short run. Though the initiative to streamline the system has already been taken, still a lot more is desirable at this front. Indias trade facilitation index value constructed by combining three variablesprocedures to exports, days to exports and costs to exports is not comparable even with many ASEAN countries, leave alone the Western countries.

Trade facilitation (soft infrastructure) has been found a statistically significant factor affecting trade flow. In one World Bank study, it has been found that 10 per cent improvement in export custom procedures would enhance the export performance by 15.8 per cent and 17.1 per cent for the merchandise exports and manufactured exports respectively. (Broadman 2007) In the same way, an increase in internet services by 10 per cent in the exporter country would enhance the exports of all products and manufactured products by 1.9 per cent and 2.2 per cent respectively. (Broadman 2007) The sensitivity (elasticity) of Indian exports to trade facilitation is more than to the tariff rate as per the estimation of the gravity model carried out by the author. The soft infrastructure can be improved in the short run with some conscious efforts for better coordination of various agencies involved in trade and capacity-building programmes of the staff. E-trading/filing is still operating on papers, which can be made operational with less efforts in a short time.

Likewise, of late the capacity to meeting sanitary and phyto-sanitary standards for agricultural products and technical standards for other manufactured products is significant for exporting especially to the developed countries. Conforming to these standards is difficult mainly for the small scale industries (SSIs). Educating the businesses, especially the SSIs, about these standards and establishing testing laboratories and certificate-giving agencies would be helpful in this regard. Financial and technical assistance to the SSIs to upgrade their technology would also go a long way in this direction. The government is already doing work in this area. However, there is a need to intensify efforts in this crisis time.

The government can initiate the process of strengthening the institutional mechanism with these countries. For example, India does not have any operating regional trading bloc (RTB) with the African countries, though a few are in the process of negotiations. One regional trading bloc is being negotiated with the Southern Africa Customs Union (SACU) and another bilateral trading arrangement with Mauritius is in the process of negotiations. The IBSA, including India, Brazil and South Africa, is also in the pipeline. India has two preferential trade agreements with the Latin American countriesone, with Chile and another, with MERCOSUR. It is advisable to expedite the process of negotiations in Africa to operationalise these RTBs early and replicate the same process with the other countries of the continent on the basis of thorough research for the economic viability of the RTBs. The results of these initiatives might fructify in short to medium terms. One reason as to why Indian exporters do not prefer to export to these new markets from the South is that they do not have proper trade-facilitating financial institutions. Conducting international trade requires the involvement of banks in both the countries. There is a lack of institutional capacity in the financial sector in these economies. The Indian Government can

help these economies on this count as well. The EXIM Bank of India has already helped many poor countries in establishing their EXIM banks. These efforts can be further intensified.

The incentive schemes to promote exports should be designed in such a way which could generate the maximum growth of exports. The export items can be divided into two categoriesdynamic export items and non-dynamic export items. Dynamic export items are those which have been experiencing high growth rates for the last many years, whereas nondynamic ones are having low growth rates, though they may hold high shares in total exports. As per the four-level HS classification, the dynamic products the world over are only 125 items. Out of these dynamic items, India exports 40 items. In the last recovery time, these items played a significant role in reviving Indias overall export growth rate. This time also, these items are expected to record high export growth rates in the period of recovery. There is a need to focus on these dynamic products for the incentive schemes. For the medium to long term, the hard part of export infrastructure can be improved. These include improving inland roads/railway lines to ports, enhancing warehousing and cold storage facilities, improving port/airport capacity to handle export consignments fast etc. Another area which can be taken care of in the medium to long term is going for network production, which is the modern way of organising production. Of late, technological advances in information technology, logistics and production have allowed corporations to divide value chains into functions performed at different countries (based on comparative advantages) by either foreign subsidiaries or contract suppliers. These comparative advantages can stem either from the availability of some special raw material or availability of a certain kind of labour market. For example, as the product goes through many stages before it reaches the consumers as the final product, some stages require relatively low skilled labour, whereas other stages of production require semi-to high-skilled labour. Relatively less-developed countries have cheap low- and semi-skilled labour, whereas relatively developed countries have mediumto high-skilled labour. Thus a range of countries can be incorporated in the network production to cut the cost. There has been a rapid growth of intra-industry network trade in parts and components relative to conventional inter-industry trade of late. The countries of the North and ASEAN countries could be able to increase their competitiveness through this process. India can also follow the same strategy by engaging the South Asian countries, with which it has the South Asian Trade Agreement (SAFTA), and other countries. Regional trading arrangement is a facilitator for the network production, as components and parts can be traded without tariff and non-tariff barriers. India has also tried network production recently. The Indian tyre company, CEAT, is a typical example: it established an

export-oriented tyre plant in Sri Lanka to cater to its growing markets in Pakistan, Middle East and other countries. This will take the advantage of abundant resource of natural rubber available in Sri Lanka. This can be emulated in other areas also, especially relating to buyerdriven network production, such as food, textiles, furniture, etc. It is also possible in the services sector. Medical tourism is one such area. Back-up offices of Indian companies in other relatively less-developed countries (having low wage rate) with reasonable computer-skilled labour is yet another potential area. Medical tourism would increase directly services export, whereas the back-up office would give competitive edge to the main product lines on the price front in the international market.

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